What Many Don’t Get About Insurance

Need is always predicated on thoroughly understanding your objectives

Key Takeaways

  • The cost of funding estate taxes, without insurance, is substantial.

  • Insurance cash values are similar to owning a long-term bond portfolio with no mark-to-market risk.

  • The “invest the difference” argument holds up only if you are young.



I recently sat down with a very successful professional who finally acknowledged that he needed life insurance to protect the value of his company for his family. He is under 50 and recently bought some term insurance. He was now willing to discuss funding a larger permanent plan that would pay out if he lives to his life expectancy or beyond.

My client had the usual objections I hear from HNW clients and prospective clients. His first objection was typical of someone who is contemplating a large policy:

1. “Do I really need it?

2. “How should I pay for it?

3. “Why shouldn’t I just stick with term, since it is so much less expensive?”

 

These mental hurdles come up frequently, and any top insurance advisor is able to delineate the issues and help you through the maze of confusion that shrouds this decision. What is the best solution? Let’s look at the first big consideration--need. Some of you don’t care that much about what happens after you die. Others of you want every nickel to go to your family. Still others don’t mind paying some tax, but you want to preserve your best assets and heirlooms for your family. If your goal in estate planning is to preserve your estate for the benefit of your heirs, keep in mind that the cost of paying the taxes and fees from cash flow or liquidity is a form of self-insurance. You not only lose the use of your funds, but you also lose the future earnings.

The cost of funding estate taxes, without insurance, is substantial. Who is going to finance the tax if you don’t have the liquidity? What is it going to cost your family to get liquid? The cost of insurance is a mere percentage of the true cost of the tax. But if you are self-insured, you not only pay the full cost of the tax, but you also pay “taxes on the tax” as well as an interest cost. Self-insurance is not cheap. This is something you have to understand and believe. Do the math. The “invest the difference” argument holds up only if you die young.

 

You set the rules


Buying term and investing the difference is like trying to compare incomparable asset class returns. This is like saying, “My stock portfolio will beat your bond portfolio.” If we go by historic returns, then this is a true statement most of the time. But there have been a few times when bond returns did beat stocks, even with mark to market risks.

Just think this through carefully. When you invest this difference, where will you invest that sum of money? Will you invest it in fixed return assets, with little or no downside risk, or will you invest it in risky assets that are illiquid and have the potential for total loss? Are you going to buy growth stocks and hope the long-term bull market never pulls another 2008 nosedive?” To make this discussion academic, we need to compare similar asset classes with similar risks. Insurance cash values are similar to owning a long-term bond portfolio with no mark to market risk.

Conclusion

Ask yourself, “Are all your assets deployed in high-risk, low-liquidity investments, or do you own any liquid, low-return assets?” If it’s the latter, then ask yourself if you would rather own the bonds in a tax-free wrapper that provides long-term discounted dollars, or in a taxable world where you can lose 10 to 20 percent of the value if interest rates rise?

If you or someone close to you has concerns about their life insurance coverage, please contact us any time. We’d be happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The Power of Giving the “Right” Assets to Charity, Part 2

Don’t overlook real estate and privately owned business interests              

Key Takeaways:

  • Cash is always appreciated, but there are better assets to give charitably.

  • Charitable gifts of appreciated marketable securities can provide dramatically enhanced tax benefits.

  • Real estate and privately owned businesses may offer the greatest overall charitable tax benefits.

In Part 1 of this article, we explored how gifts of assets other than cash—primarily appreciated marketable securities--can provide a tax advantaged way to support the causes and organizations you believe in.

While many of you are aware that you can gift appreciated marketable securities in lieu of cash, the opportunities to secure these enhanced tax benefits are too often missed. Even more frequently missed are opportunities to give real estate and privately owned business interests prior to a sale. These assets often provide even greater tax-leveraged opportunities because the income tax basis for these assets is often lower than the basis of your marketable securities. Thus, there’s a greater built-in gain that is subject to tax upon sale.

For example, real estate that has appreciated in value and that has been depreciated over time will often have a very low income tax basis. A successful business that was started from the ground up may have little to no basis. So, while publicly traded stock worth $500,000 with a basis of $250,000 would generally be considered a good asset to give to charity, a gift of real estate worth the same amount ($500,000) but with a basis of $100,000 would provide even greater tax savings and leverage.

Of course, gifts of marketable securities are significantly easier to facilitate than gifts of real estate and privately owned businesses. And the timing of a sale of marketable securities is generally much easier to control and dictate than a sale of real estate or an interest in a business. However, in the right situations, the additional tax savings and leverage are well worth the extra effort and complexity. For many families, the bulk of their wealth may be tied up in their businesses or real estate investments, and they may not have a significant marketable securities portfolio from which to gift appreciated assets. In those situations, a gift of real estate or an interest in a privately owned business may be your only leveraged opportunity for giving from non-cash assets.

Conclusion 

Charitable giving in general--and giving non-cash assets in particular--can help you mitigate your tax burden significantly while doing more to support the causes you believe in. as always, check with your advisors and the intended recipients of your philanthropy before making your generous gifts.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Incentive Trusts

Tips for handling the transfer of funds from one generation to the next

Key Takeaways:

  • An incentive enables parents or grandparents to financially reward heirs for desired behaviors.

  • Make sure your trustee is fully aware of your trust’s intentions and how the funds should be distributed.

  • Incentive trusts allow you to transfer assets to the next generation in stages—rather all at once—pending the beneficiary’s ability to reach certain life milestones.



Sometimes parents want to leave funds to their children, but they are concerned that their kids may not be responsible enough to manage those funds. Other parents or grandparents wish to ensure that inherited funds do not cause the beneficiaries to become lazy, financially reckless, or unproductive citizens.

To address this concern, funds from trusts are often distributed in stages, such as one-third at age 30, one-third at age 35 and one-third at age 40. For other families, in which the children are already somewhat older, but perhaps the parent is not fond of the in-laws, the funds can be distributed at intervals such as 50 percent upon the death of the parent and 50 percent five years later but not exceeding a date later than when the child attains the age of 65.

Parents and grandparents are typically concerned about education, morals and family values, business and vocational choices, and charitable and religious opportunities. In these types of situations, a parent or grandparent may want to establish what is known as an “incentive trust.” An incentive trusts allows the grantor of the trust to reward heirs for desired behaviors. Likewise, incentive trusts can be structured to penalize heirs for engaging in undesirable activities.

Common incentives

Incentive trusts may be used to provide extra support to the heirs who pursue advanced degrees or who focus on family life. For instance, the trust could be designed to provide enough income for an heir’s family so that only one of the two parents needs to work, thus enabling the second parent to stay home with the heir’s children until those children attain a particular age. There also may be a trust designed to provide funds to heirs who are committed to maintaining the family business, and additional financial support may be provided to beneficiaries who choose to work in lower-paying, but highly rewarding professions that help people, such as social service or teaching.

Finally, some family members may wish to encourage certain behavior in their heirs by requiring specific observances such as religious or charitable opportunities. So, if heirs are involved in a particular cause, such as missionary work, the trust fund will provide them with additional support for themselves and their families. And, they won’t have to worry about requesting additional funds from the trustee on a periodic basis.

When setting up an incentive trust, it is very important that the trustee is aware of the intentions of the grantor. Therefore, in addition to the usual provisions (such as having all income distributed with principal at the discretion of the trustee), the trustee should be given specific authority within the trust, and possibly even a letter of intent from the donor, explaining when and how much of the funds are to be distributed at any given time. It is also important to ensure that the trust does not violate any constitutional or public policy law or standard that would cause the trust to be in violation of a statute or regulation.

Conclusion

In short, it is easy to discuss the establishment of an incentive trust, but there are significant and complex legal, tax, and investment issues that also will arise when creating this type of document. Incentive trusts are not for everyone, and they should be used only in situations in which other types of trusts or investment vehicles are not appropriate. Always consult your advisors before setting up a trust. Contact us any time if you, or someone close to you, is interested in the possibility of setting up a trust to benefit future generations or causes you believe in.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

How Children Successfully Join Family Businesses

7 key considerations

Key Takeaways:

  • Have a family business constitution in place before your children join your business.

  • Make sure you allow your child to make and learn from their mistakes.

  • Have your child successfully work outside your business before letting them start work at your company.

  • Have someone besides you supervise and manage your children when they work for your business.

You have worked very hard to build a successful business. The dream has been to have children join you and continue the legacy that the founder started.

But, before you get excited, stop and think.  For many entrepreneurs, having children join their business is a true joy.  For others their children are an albatross. They wonder why they ever thought it was a good idea to have their children work in their business, much less take it over.

If you are thinking about having children join your business, here are some important considerations:

1. Make sure the next generation is competent.

You don’t want to be in a position in which you have to tell your own child that they can’t stay with the business.  Too often parents let their children join the business only to discover that their children add zero value to the enterprise—and sometimes even subtract value.

A business is not a place where you provide social welfare for a child.  Next Gen must be able to add to the value that the business provides to its clients and customers.

2. Make sure the next owners (your children) have experienced life outside of your business.

The best way to ensure that your child is competent is to make sure they’ve worked successfully outside of your company.  You don’t want to have your child join your company as their first “real” job.

One of the most important rules you can adopt in your business is to require your child to earn at least one promotion while working outside the family company.  This way, someone else can handle their early career training and make an objective decision about how competent the child is.

3. Have a real job for your child.

After your child has proven him or herself outside your business, you’re in a better position to have them join your company. But, suppose you don’t have a job that fits their skills and experience?

This is not the time for you to make up a job for them.  Make sure your child holds on to the outside job until you truly have a job that fits their skill set.

When it’s time to bring a child into your business, make sure they’re not joining  at a level higher than the job they had outside your company. You never want to have to tell a child that they aren’t unwelcome in the family business after an unsuccessful debut.

4. Think about your compensation policy for your children well in advance.

Too often I see children overpaid or underpaid. Either way it’s a big mistake. Make sure you have a firm salary policy in place. If you do, it’s important that you pay children comparably to what non-family members earn for similar jobs.

If your children are overpaid, then non-family employees will find out and they’ll resent it.  If your child is underpaid, he or she will find out and resent you for it. You’ll have some uncomfortable family dinners as well.

5. Never have your children report directly to you.

Part of supervising an employee is correcting his or her behavior and work. This is not something you want to do with your child.  Let’s face it; you have a history with your child around discipline and it’s often not a very positive one.

Even though you have policies that work well for non-family members, it’s rare that those policies work for family members when they’re coming from a parent.  When a non-family member supervises your children, you’ll likely avoid hard feelings that result from having to reprimand a child for their workplace behavior or performance.

6. Remember, Next Gen will run your business differently than you did.

I’m hoping that you successfully integrate your child into the business. Now it’s time for you to transfer real responsibility to your child. Just know that your child is going to approach problems and opportunities differently than you do.  This means their approach to solving these issues will also be different, and in many cases, better than how you would do it.

You’re going to want to look at the results your child’s methods produce.  You need to let your child make mistakes and you need to be there to help them learn from those mistakes. 

Think about how you learned on the job.  I bet you made plenty of mistakes along the way.

7. Successful transitions come with a process.

I like to see family businesses develop what I call a “family constitution” for joining the family enterprise.  Your family constitution doesn’t have to be complicated.  In fact, it can be as simple as the bullet point list below:

  • Have your child achieve a certain level of education.

  • Have children work outside the family business for at least two years.

  • Make sure your child has earned at least one promotion from a non-family business before joining yours.

  • Don’t start your child in the family business at a level higher than they had at their last non-family business.

  • Pay your child at the same scale that you would pay a non-family member for a comparable job.

  • Have your child’s direct supervisor be someone who is not in your family, especially you.

  • Have a system in place for accepting and learning from your child’s mistakes.

  • Let your child do things their way once they have proven themselves-- unless their idea will truly put your business at high risk.

Conclusion

I’m hoping that you’ve successfully brought your child into your business.  Years will have passed and you know that it’s time for you to let go and have your child take over. This will be a challenging time for you.  You’re going to need to learn how to let go.  You’re going to need to find a compelling next chapter in your life.  You’re going to have to let your child be his or her own person.

Successfully transitioning your child can be an incredibly satisfying experience.  Have a system and stick with it.  You’ll be glad you did.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is Your Business Still the Right Entity Under the New Tax Rule? Part 2

More tips about determining the right corporate, partnership or other structure that’s best for your business—and where you are in life.

Key Takeaways:

  • The legal structure of your business operations can have a significant impact on your annual income tax and estate planning.

  • When you and/or your heirs expect to be at or near the maximum income tax rates, you will generally want to leave appreciated and appreciating assets in the taxable estate, rather than transfer them prior to death.

  • In general, assets with the potential to appreciate in value should not be placed into an S or C Corporation.

As many of you know, The Tax Act of 2017 created a host of changes and considerations for successful business owners in their families. There are six widely used business operating structure. In Part 1 of this article we discussed Sole Proprietorships (Schedule C), Limited Liability Companies (LLC) and Limited Partnerships. Here will take a closer look at the other three entities: General Partnerships, Subchapter S Corporations and Subchapter C Corporations.

4) General Partnership

The rules are similar to LLCs and Limited Partnerships discussed above, except that all of the partners will generally have more liability exposure.

The partners are subject to self-employment taxes on most of their allocable K-1 income, other than certain rental real estate/passive/investment/portfolio income. As noted above, Partnerships are eligible for the potential 20 percent deduction against Qualified Business Income.

Estate and Gift Tax – See Limited Partnership discussion in Part 1 of this article.

5) S Corporation

An S Corp is generally the least costly and easiest type of entity to set up and operate. Like an LLC, income and losses flow to shareholders, and tax is generally paid at the owner level rather than at the entity level.

One of the biggest tax breaks in this type of structure is that the S Corp shareholders can take a portion of the profits as distributions rather than as W-2 income, and payroll tax savings ranging from a minimum of 2.9 percent to 15.3 percent can be achieved.

Company-level debt does not factor into member tax basis here. Distributions must parallel the S Corp’s stock ownership. Shares can only be owned by U.S. resident individuals and certain trusts. S Corps have many restrictive rules and care must be exercised in keeping distributions in the exact proportion as stock ownership. Also, S Corps with excess passive income from rents, royalties and investments can lose their S Corp status. Further, an S Corporation may have no more than 100 members. As noted above, S Corporations are eligible for the potential 20% deduction against Qualified Business Income.

Estate and Gift Tax – Unlike in an LLC, when an S Corp shareholder dies, his or her heirs will only receive a revaluation in the “outside ” basis in their corporate shares – not on the underlying S Corp assets. This is also an issue for any potential buyers of the entity. This can create significant income tax problems for your heirs. Furthermore, complexities of retaining S Corp status can occur if an ineligible owner comes into the mix – e.g., an ineligible trust or nonresident alien.

6) C Corporation

C Corps are similar to S Corps with respect to the reasonable cost of formation and operation. The big difference between S Corps and C Corps is that C Corps pay tax at the entity level; however, the 2017 Tax Act dramatically dropped the C Corp rates to a flat 21 percent. C Corp shareholders will still pay taxes on W-2 earnings and certain dividends and other distributions made from the C Corp– making them vulnerable to the highly tax inefficient “double taxation.”

It is important to note that “personal service” businesses such as attorneys, doctors, accountants and consultants can operate as C Corps. Unlike the pre-2018 rules, the 2017 Tax Act will allow Personal Service Corps (PSC) to benefit from the new 21-percent rate on retained taxable income, rather than the maximum individual rate imposed under the old rules.

An unlimited number of shareholders are allowed and the C Corp can generally choose any tax year-end. Most other entities are generally limited to calendar year-ends.

Estate and Gift Tax – Similar to S Corps, a negative characteristic of C Corps is that upon the death of an owner, there is a revaluation of only the stock, not the underlying assets. Lack of restrictions on ownership make C Corps more flexible from an inheritance standpoint.

Conclusion

Congrats on building such a successful and rewarding business enterprise. Make sure you and your advisors evaluate specific facts and changing life circumstances to make sure the goals you have for yourself, your family and your heirs remains on track under the new tax landscape.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will I Get a Step-Up in Basis for this Inherited Property?

Receiving inherited property often comes with a tax advantage: receiving a step-up in basis.  Whether you are receiving property from a spouse or family friend, you may be eligible to minimize future taxes by taking a step-up in basis. Read on to see if your inherited property qualifies:

Did you inherit property from your spouse?

If the inherited property is from your spouse and you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin), then both halves of the property receive a step-up in basis as long as at least half is included in the decedent’s gross estate (full step-up in basis to FMV).  If you don’t live in a community property, skip to “Is the property an IRA, 401(k), pension, annuity, or irrevocable trust?” question.

Did you or your spouse gift the property to the decedent within one year before their death?

If you answered “yes,” then your original basis is carried over, and you will not receive a step-up.  If not, move on to the next question.

Is the property an IRA, 401(k), pension, annuity, or irrevocable trust?

If you answered “yes,” then you will not receive a step-up in basis.  If not, you will likely be eligible for either a half or full step-up in basis. 

Receiving a step-up in basis can potentially save you thousands of dollars in taxes. Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best tax strategies for your inherited property, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Matrix Book 2019

Check out this video from Dimensional:

The Matrix Book is a unique a tool for seeing decades of returns and telling stories about investing. In this video, Joel Hefner explains how a globally diversified approach can help investors stay on track toward achieving their long-term goals.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Three Questions to Answer Before You Purchase Life Insurance

Life insurance can be an extremely important, even essential, part of your financial plan. One of its most attractive aspects for many individuals and families is the death benefit of the policy—the money that the insurance company pays out in the event of the insured’s death.

 

But navigating the life insurance landscape can be tricky—and people often make costly mistakes. Three of the biggest we see regularly:

 

  • Buying too much—or too little—insurance due to a lack of understanding of their true financial needs

  • Paying for life insurance using a less-than-ideal method or executing that payment method poorly

  • Misunderstanding life insurance’s purpose and the reasons for having it

 

In order to make smart life insurance decisions, there are three questions you need to ask yourself and answer.

Click here to read more:

Three Questions to Answer Before You Purchase Life Insurance

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Do I Qualify for Social Security Disability Benefits?

Social Security can provide benefits long before you are at Full Retirement Age (FRA) if you are disabled.  In order to qualify for Social Security disability benefits, you must have paid into Social Security (typically 10 years, but situations can vary).  Read on to see if you qualify for disability benefits.

Are you legally blind?

If you answered “yes” and earn less than $2,040 per month, you may qualify for full or partial benefits.  In order to see what your potential benefit might be, you must apply.  Wage earners who make more than $2,040 per month will not qualify for any benefits.  If you are not legally blind, move on to the next question.

Do you make more than $1,220 per month?

If you earn more than $1,220 per month, you will not be eligible for Social Security disability benefits.  If you earn less, move on to the next question.

Did you pass the “Recent Work Test” and the “Duration of Work Test”?

If you passed the two aforementioned tests and have been limited in your ability to do basic work (lifting, sitting, walking, or remembering) and are unable to perform gainful employment, you may be eligible for Social Security disability benefits.  You will have to apply to know for sure.  If you did not pass the tests, move on to the next question.

Are you a widow or surviving divorced spouse of a worker?

If you answered “yes” and are between ages 50 and 60 and your disability started within 7 years of the spouse’s death, you may qualify for benefits.  You will have to apply for benefits to see what your benefit might be.  If you answered “no”, then you will not qualify for any disability benefits.

 

Collecting Social Security disability benefits is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Elite Wealth Planning

What it is and why it matters

Elite wealth planning often plays a key role in the lives of today’s highly successful individuals and families—as well as those who are on the path toward great financial success.

 With that in mind, here’s a closer look at just what elite wealth planning is—how it works and how it can potentially have a powerful impact on your life as you seek to build, preserve and protect your wealth.

The key elements of elite wealth planning

Before we can see what makes elite wealth planning so special, it’s important to understand the various planning strategies that make up the core of most elite wealth planning efforts.

Click here to read more:

Elite Wealth Planning

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Mutual Fund Landscape 2019

Each year, Dimensional analyzes returns from a large sample of US-based mutual funds. Our objective is to assess the performance of mutual fund managers relative to benchmarks.*

This year’s study updates results through 2018. The evidence shows that a majority of fund managers in the sample failed to deliver benchmark-beating returns after costs.

We believe that the results of this research provide a strong case for relying on market prices when making investment decisions.

The global financial markets process millions of trades worth hundreds of billions of dollars each day. These trades reflect the viewpoints of buyers and sellers who are investing their capital. Using these trades as inputs, the market functions as a powerful information-processing mechanism, aggregating vast amounts of dispersed information into prices and driving them toward fair value. Investors who attempt to outguess prices are pitting their knowledge against the collective wisdom of all market participants.

So, are investors better off relying on market prices or searching for mispriced securities?

Mutual fund industry performance offers one test of the market’s pricing power. If markets do not effectively incorporate information into securities prices, then opportunities may arise for professional managers to identify pricing “mistakes” and convert them into higher returns. In this scenario, we might expect to see many mutual funds outperforming benchmarks. But the evidence suggests otherwise.

Across thousands of funds covering a broad range of manager philosophies, objectives, and styles, a majority of the funds evaluated did not outperform benchmarks after costs. These findings suggest that investors can rely on market prices.

Let’s consider the details. Download the full report here:

Mutual Fund Landscape 2019

*In the study results, “benchmark” refers to the primary prospectus benchmark used to evaluate the performance of each respective mutual fund in the sample where available. See Data Appendix for additional information.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The Uncommon Average

May 2019

“I have found that the importance of having an investment philosophy—one that is robust and that you can stick with— cannot be overstated.”

—David Booth

The US stock market has delivered an average annual return of around 10% since 1926.[1] But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 Index had a return within this range in only six of the past 93 calendar years. In most years, the index’s return was outside of the range—often above or below by a wide margin—with no obvious pattern. For investors, the data highlight the importance of looking beyond average returns and being aware of the range of potential outcomes.


[1]. As measured by the S&P 500 Index from 1926–2018.

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TUNING IN TO DIFFERENT FREQUENCIES

Despite the year-to-year volatility, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, and 10 years in the US market. The data show that, while positive performance is never assured, investors’ odds improve over longer time horizons.

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Conclusion

While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. By thoughtfully considering these and other issues, investors may be better prepared to stay focused on their long-term goals during different market environments. 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The Index Bogeyman

Over the last several years, index funds have received increased attention from investors and the financial media. Some have even made claims that the increased usage of index funds may be distorting market prices. For many, this argument hinges on the premise that indexing reduces the efficacy of price discovery. If index funds are becoming increasingly popular and investors are “blindly” buying an index’s underlying holdings, sufficient price discovery may not be happening in the market.

But should the rise of index funds be a cause of concern for investors? Using data and reasoning, we can examine this assertion and help investors understand that markets continue to work, and investors can still rely on market prices despite the increased prevalence of indexing.

Click here to read more:

The Index Bogeyman

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Lessons from the Matrix Book, 2018

Check out this video from Dimensional:

The Matrix Book is a unique a tool for seeing decades of returns and telling stories about investing. In these videos, Joel Hefner shows how the Matrix Book can illustrate some of the tradeoffs associated with investing as well as how investors can improve their chances of having a successful investment experience.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Is Your Business Still the Right Entity Under the New Tax Rule? Part 1

What you need to know about corporations, partnerships and other structures under which you do business

Key Takeaways:

  • There are six widely used business operating structures. Each has pros and cons depending on the owner’s income and estate planning options.

  • Choosing the right legal form for your business is critical for both legal and tax purposes

  • The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) made significant changes that should be factored into your entity choice.


As many of you know, The 2017 Tax Act made significant changes to the tax code. Most significantly individual tax rates have dropped and now cap out at 37 percent (vs. prior 39.6 percent). Here are some of the other highlights:

  • The C Corp tax rate has decreased from 35 percent to 21 percent

  • Flow-Through entities and Sole Proprietors are generally eligible for 20 percent taxable income reduction which results in a maximum tax of 29.6 percent (vs. 37 percent) on up to $315,000 of Qualified Business Income.

  • Estate and gift tax rates have decreased from 45 percent to 40 percent (but only on net assets exceeding $11.18 million per spouse for 2018 – nearly doubling the prior exemption). However, most of these provisions will sunset in 2026, making long-term planning even more important – and challenging.

One of the most common questions we get from clients and friends is: “Which legal structure should is best for my new or existing business? My standard answer is: “Well, it depends on your specific facts.”

There are a multitude of legal, tax and operating issues to consider, and one size certainly does not fit all. The general choices for operating a business include the following:

1.     Sole Proprietorship – Schedule C

2.     Limited Liability Company (LLC)

3.     Limited Partnership

4.     General Partnership

5.     Subchapter S Corporation

6.     Subchapter C Corporation

There are also other legal entities that may be worth investigating for certain operations, including trusts, cooperatives and joint ventures in unincorporated form.

Following is a general summary of the pros and cons of the most common forms of operations and how structure may impact income tax and estate tax planning.

1) Sole Proprietorship

This is by far the simplest form of doing business and requires very little in the way of startup costs. While legal liability exposure is highest in this form, owners can still have employees, pay themselves a W-2 and fund various benefits in a Schedule C business. As noted above, Sole Proprietors are eligible for the potential 20% deduction against Qualified Business Income, with limitations phased in once taxable income exceeds $315,000 per taxpayer (not available to certain “specified service businesses”).

Estate and Gift Tax – Upon the death of the owner(s), the legal entities’ business and personal assets will transfer to trusts or heirs as outlined in the taxpayer’s trust and estate documents. Various minority and marketability discounts available to other legal structures are not available in a Sole Proprietorship.

2) Limited Liability Company (LLC)

LLCs are by far the most popular form of doing business for a variety of reasons, including limited legal liability for other members’ bad behavior, as well as flexibility in modifying the tax structure as your business plan evolves. There are various federal elections available to treat the entity in a variety of ways for tax purposes – see IRS Form 8832. The remaining discussion assumes a Partnership election is made.

Taxable income and losses (as well as credits) flow through to LLC members (and retain their “ordinary” or “capital” character) and member tax basis is adjusted. In addition, both partner and third-party loans can increase member tax basis. Also, moving assets and members in and out of the LLC is generally easier from a tax perspective than it is for a Corporation. As noted above, LLC’s are eligible for the potential 20 percent deduction against qualified business income, with limitations phased in once taxable income exceeds $315,000 per taxpayer (not available to certain “specified service businesses”).

Estate and Gift Tax – The most significant estate tax advantage associated with operating as an LLC that’s taxed as a Partnership is that upon the death of an LLC member, both the “outside” tax basis in the LLC units inherited and the tax basis in the assets held by the LLC on the date of death will be revalued to their fair market values. This offers a very significant advantage to your heirs when the LLC has increased in value during your lifetime. As discussed later, this “step-up” in basis of the underlying assets of an LLC is not afforded to either S Corporations or C Corporations.

3) Limited Partnership

A Limited Partnership must still have a General Partner (GP). LPs are generally not subject to self-employment tax on their K-1 income as is the case with most GP and LLC members. As noted above, Partnerships are eligible for the potential 20 percent deduction against Qualified Business Income.

Estate and Gift Tax – The value of the general and limited units will vary much more than the LLC units, based on the specific partnership terms.

Conclusion

An LLC or Limited Partnership generally provides you with the most flexible lifetime and post-mortem planning opportunities for your business. But you and your advisors must fully evaluate your specific facts and options based on the type of business operations you own and your overall estate plan. It is not uncommon for successful owners to have a variety of entities to achieve the most beneficial operational and income/ estate tax results. In Part 2 of this article we will discuss the other three common entity options: General Partnerships, Subchapter S Corporations and Subchapter C Corporations.

If you or someone close to you has concerns about the tax implications of their business structure, please don’t hesitate to at 303-440-2906 or schedule a call by clicking here.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

6 Keys to Comprehensive Personal Wealth Planning, Part 1

Key Takeaways:

  1. Accumulating wealth for retirement needs.

  2. Doing appropriate income tax planning.

  3. Planning for the distribution of the estate.

  4. Avoiding guardianships.

  5. Preparing for long-term health care costs.

  6. Protecting assets.

 

This article is the first in a series designed to help you and your advisor implement appropriate financial, estate and asset protection planning, regardless of your age, assets or income.

Personal and Wealth Planning Needs: 6 Keys

Everyone, regardless of their age, health, marital status, assets and income, should understand the six key planning needs for protecting themselves against personal, legal, tax and financial issues.

1. Accumulating Wealth for Retirement Needs

We all retire at some point in time. Retirement is when wealth accumulation normally tapers off and we begin to consume our accumulated assets in order to fund our retirement needs. Never overlook the importance of retirement income planning because, if ignored, retirement, aging and income cash-flow needs can significantly erode your wealth. Life insurance statistics show that a 50-year-old now has at least an even chance of living to 110!

Assuming an average retirement age between age 60 and 65, many of you realistically face the prospect of living 30 to 40 years AFTER your working life (i.e. wealth accumulation phase) has ended. In estate planning, we often talk about preserving wealth and passing it on to the next generation. But given the demographics of aging, inflation, health care needs, etc., it is easy to have your wealth run out before you do.

2. Appropriate Tax Planning Should Always Be Considered

You face a multitude of state and federal taxes (along with income tax issues and wealth transfer tax issues), which must be addressed at each stage of life as well as at each stage of the planning process.

3. At Some Point We All Die

It is critical that you have appropriate estate planning documents in place, including wills, trusts, appropriate beneficiary designations, guardian designations and more.

4. Avoiding Guardianships

Unfortunately, because of age, accident or illness, we all face the prospect of being unable to take care of our own finances or to make our own health care decisions. Therefore, proper documents need to be put in place NOW to allow someone else to make appropriate decisions on our behalf.

5. Long-Term Health Care Costs

Because of health and aging, everyone faces the prospect of financing long-term health care needs, including the possibility of assisted living and full skilled-care living. These costs can be financially devastating if they are not planned for.

6. Asset Protection Planning

Everyone should be concerned about protecting their wealth from divorcing spouses, lawsuits, family problems, business problems, taxes, creditors and predators that can ruin your long-term financial health. Failure to address any of these needs can result in significant financial loss and the accompanying emotional, psychological and family issues that all too often accompany the onslaught of life’s problems.

We can’t fight the aging process. We can’t prevent the unexpected events that impact our quality of life. However, proper planning and documentation can go a long way toward creating peace of mind when we have put in place the appropriate planning for financial, legal, tax and healthcare issues that are bound to occur during your lifetime.

Getting started

Regardless of your age, health, assets and income, everyone needs a well-drafted “financial durable power of attorney” and an appropriate advanced medical directive. Advanced medical directives normally include healthcare powers of attorney, living wills and more. If you are unable to attend to your financial, personal care or health care matters because of age, accident or illness, no one can make these decisions for you unless the decision making has been specifically designated in writing. 

Financial durable powers of attorney cover assets, income and dealings with other financial matters and government agencies. Advanced medical directives deal with personal care and medical issues, including surgery, placement, medication, assisted living, full skilled-care decisions and end-of-life decisions.

If you do not have these documents in place, unfortunately these decisions will have to be made under a court-supervised process known as a “guardian of the person” (for personal care and medical issue decisions) or a “guardian of the estate” (for financial matters). Guardianships are expensive, personally intrusive and perhaps the worst way to manage any of the decision-making processes.

The proceedings can be very traumatic and expensive. Guardianships of an estate or the person are easy to avoid if the appropriate documents are put in place.

Conclusion

A final word of caution: Be careful about using simple, generic estate planning forms. Simple forms often ignore many of the issues that will have to be made throughout the course of your lifetime. Many of the decisions that may be critically important to your family need to be specifically designated in the documents. Take the time to get your affairs in order while you are still in your prime health and income producing years. You’ll be glad you did.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Exit Planning for Business Owners

You’ve poured your blood, sweat, tears (and personal savings) into building a successful business. Congrats! You are considered a leader in your community, and you enjoy a sense of personal achievement that no corporate, government or non-profit employee could ever have. But there comes a time when taking some chips off the table—if not all of them—starts to sound appealing.

Most folks imagine you are quite wealthy by now but are you? Sure, you skimped on salary in the early years and didn’t put as much into your retirement account as you could have. But that shortfall will come back to you in spades after you sell, right?

With a median sale price of $225,000 for business, one can infer that only a small fraction of small business owners can cash out with enough money, so they never have to work again.

In fact, more than one-third of business owners (34%) have no retirement savings plan according to Manta, an online resource for small businesses owners. According to Manta data, many owners don’t feel they make enough money from their business to save for retirement. Others feel the need to tap all their savings to keep funding the business and don’t have enough left over to put toward retirement. More concerning, almost one in five owners told Manta they plan on using the expected proceeds from selling their business to retire on.

Supercharge your retirement savings especially if you’re in your 40s, 50s or 60s.

At a minimum, you should set up a 401(k) plan. If the plan is a “safe harbor” plan, then you should be able to contribute the maximum $19,000 a year to your 401(k)--$25,000 per year if you’re over age 50.  (A Safe Harbor 401k plan allows employers to provide a plan to its employees and avoid the annual testing to make sure the plan passes nondiscrimination rules. In this type of plan, employers contribute a minimum required amount to the employees to avoid testing. A non-safe harbor plan involves expensive annual compliance testing.)

Typically, if you make an additional profit-sharing contribution to employees, you should be able to max out at $56,000 a year, or $62,000 if over age 50. If this is still not enough to put you on track for your retirement goals, you can start a cash balance plan and contribute up to $200,000 a year or more to your retirement savings, but this requires an even larger employee contribution. See my article about Cash Balance Plans.

The exit planning process starts 3-5 years out

Rare is the owner who receives a buyout offer out of the blue that’s simply too generous to pass up.
You don’t just wake up one day and decide to sell. You don’t just pace a “for sale” sign on the door outside your offices and expect buyers to line up. It’s going to take some planning and spit and polishing beforehand….just like selling a house or a car. Research shows most owners don’t come close to getting an offer that’s commensurate with what they think the value of their business is. In fact, surveys indicate that one of the biggest deal breakers for prospective buyers of a business is the sloppy record keeping of the owner. It is critical to keep great financial records, so the buyer knows what they are purchasing. In addition, you should have audited financial records.

An AES Nation survey of 107 corporate attorneys three fourth (77%) of them said failing to prepare companies financially was a common or very common problem for business owners. AES Nation says that the three most important ways owners can prepare for a sale are:

1. Improving the balance sheet. This means being more effective with cash management and receivables and getting rid of non-performing assets.

2. Addressing the cost of funds. This means getting the right loan covenants and maximizing working capital.

3. Getting audited financial statements. This reduces the likelihood that you, the entrepreneur, will have liabilities after the sales closes.

I recently gave a presentation to a group of CPAs, and they told me one horror story after another about business owner clients who try to sell their businesses without telling their CPA beforehand. Even worse, the CPA doesn’t hear about the planned sale until the frantic owner calls with a last-minute question on the way to the closing. That is NOT the time to ask your CPA questions or to seek advice. You really need a professional team to strategize with before the sale. I’ll talk more about the kinds of specialists you need in a minute.


Preparing your business for sale—don’t wait until the last minute

In addition to getting your cash flow and financial statements in order, it’s very important to manage your human capital, too. Nearly three fourths (72%) of lawyers surveyed by AES Nation said it was very common for owners to forget to prepare their key personnel for the transition to new ownership. Your key employees are among the most valuable assets you can offer to new ownership. Make sure you have employment contracts in place that incentivize key personnel to stay with the company. You also need non-compete and non-solicitation agreements.

According, to Sheryl Brake, CPA/CGMA, CVA, CEPA of Encompass Transition Solutions, LLC, “The biggest mistake that business owners make when planning to sell their business is not beginning the process early enough.  The ideal time to start the process is 3 to 5 years before they actually want to transition out of their business. Beginning the process early gives the owner ample time to educate themselves, identify their options, and prepare the business for sale so that they maximize the value of the business and exit the business on their terms and their timeline.”

 

Avoid seller’s remorse

According to AES Nation, approximately half of business owners are unhappy after the sale of the company. To maximize the value of your business, you must improve the balance sheet, address the cost of funds, enhance the profits and make yourself “operationally irrelevant.”

One of the best books on business operations is called The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It by Michael Gerber. This book walks you through the steps from starting a business, growing a business and running a mature business. Until you can take a three-week vacation from the business and still have the enterprise run smoothly without you, all you really have is a demanding job. You don’t have a great business.


Don’t give your windfall to Uncle Sam


Selling a business is not all about getting the best price. It’s about maximizing the amount of money you and your family pocket after the sale is completed and what you do with that wealth—including planning the next chapter in your life.

According to an AES Nation, about 85 percent of business owners have not taken steps to mitigate taxes before the sale of a company. One way to lower your tax hit after selling is to utilize a “freezing trust.” This is a trust that passes on the value of your business to your children or grandchildren free of estate tax. I can tell you more about this technique when we meet.

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The general idea of a freezing trust is to gift some of your company stock to a trust and to sell more of the stock to the trust for a promissory note. When you gift the company stock to the trust and sell the company stock to the trust for a promissory note, you are getting the assets and future appreciation out of your taxable estate. When you sell the company, the value of the shares in the trust escapes estate taxes.

Your life v2.0

One of the hardest parts of retirement is deciding how to spend your time in your post-working retire. It’s even harder for successful business owners whose personal identify, values and reason for getting up in the morning is so intertwined with the business. Again, this process must start three to five years (not months) before you plan to sell. Some owners retire completely. Others stay on with the business in an advisory capacity. Others go back to work in another position—some even start a brand-new venture.

Don’t be a DIY when it comes to your exit

While it’s hard for many entrepreneurs to think they can’t sell their own business—who else knows it better? —countless studies show this is not a good idea. Selling a business successfully requires special skill sets that even your CPA and attorney often won’t have, let alone you.

You need a strong team including a CPA with experience in business transactions and possibly an investment banker. According to an AES Nation survey of corporate attorneys, nearly 92 percent strongly recommend using an investment banker if your business is valued between $1 and $10 million and almost all surveyed attorneys recommend using an investment bank if your business was valued at over $10 million. In fact, nearly half of surveyed attorneys (41.1%) recommended using an investment banker even if your business is valued at less than $1 million.

Conclusion

If you or someone close to you is considering selling their business, please don’t hesitate to contact me. I’d be happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

The Power of Giving the “Right” Assets to Charity, Part 1

You can donate appreciated marketable securities to your favorite causes in lieu of cash —don’t miss out on the tax benefits you deserve.

Key Takeaways:

  • Cash may be the worst asset you can give charitably.

  • Charitable gifts of appreciated marketable securities can provide dramatically enhanced tax benefits.

  • Real estate and privately owned businesses may offer the greatest overall charitable tax benefits.

 

Charitable gifting of non-cash assets can be especially advantageous in high-income-tax states such as New York, Vermont, New Jersey, Oregon and California.

What is the single biggest mistake that generous and affluent people make when it comes to planning their charitable giving? Giving exclusively in the form of cash.

When it comes to charitable giving, most people think about writing a check or dropping some cash in the Salvation Army’s red kettle at Christmas. This mindset can be unfortunate—and costly. Non-cash assets can be a much better way to give.

First, there are generally enhanced tax benefits to giving certain non-cash assets such as marketable securities, real estate and privately owned business interests, thus enabling you to pay less in taxes and/or give more to your favorite charities and causes.

Second, non-cash assets are where the majority of your wealth probably resides. According to IRS statistics, of all the giving that is done in the United States each year—about $380 billion—80 percent of all giving in the U.S. is simply made in the form of cash. That means only 20 percent of gifts are made in the form of non-cash assets, much of which include tangible personal property such as clothing, appliances, books, etc. that are gifted to organizations such as the local Goodwill.

That’s a huge lost opportunity.

However, if we look at the cumulative composition of wealth owned by families, cash represents less than 10 percent. Therefore, much of the wealth comprising the other 90 percent provides excellent opportunities for charitable giving, but too often is never considered.

Why cash is not king

As mentioned earlier, cash is often the least advantageous asset to give charitably. True, you generally receive a charitable income tax deduction, which may significantly reduce your tax liability. But, certain types of appreciated non-cash assets—such as marketable securities, real estate and privately owned business interests—may provide double tax benefits by securing the same or similar charitable income tax deductions, and helping you avoid capital gains tax that would otherwise be triggered upon the sale of such assets.

A charitable gift of cash is eligible for a charitable income tax deduction against ordinary income tax rates up to 60 percent of your adjusted gross income (AGI). This can be a very significant benefit and incentive for you to give charitably. For example, you can save up to 37 percent on cash contributions to charities for federal tax purposes and may save additional taxes at the state level. In high-income-tax states, with rates as high as 13.3 percent (California), the highest-income taxpayers may be paying almost 50 percent of their income in combined federal and state taxes. In such situations, you may essentially be receiving a matching dollar-for-dollar contribution from the federal and state governments for your charitable contributions. For every dollar you give, you save as much as 50 cents in taxes.

Clearly, our federal and many state tax codes provide generous incentives and benefits to taxpayers who are generous.

However, even greater tax benefits can be secured by giving certain appreciated assets instead of cash. Consider a taxpayer in the highest federal income tax bracket (37 percent) in a state with a 5 percent income tax rate—a 42 percent total tax rate. He’s considering making a $250,000 charitable gift in support of a charity that is building a hospital in Africa. If he simply writes a check for $250,000, he’ll save $105,000 in taxes.

The power of giving marketable securities to charity

Now, instead of writing a check, suppose he selected some of his most highly appreciated stocks from a marketable securities portfolio, gave the stock to charity, and then took the cash he otherwise would have given to charity and repurchased the same stocks (or different investments if desired). If the stocks selected were originally purchased for $100,000, upon sale he would recognize $150,000 in capital gains. Taxes owed upon sale would include a federal capital gains tax of 20 percent, a state income tax of 5 percent and the Obamacare tax on net investment income of 3.8 percent for a total tax rate of 28.8 percent. On $150,000 of gain, this amounts to a tax liability of $43,200.

However, by giving the stock to charity and allowing the charity to sell the stock, the $43,200 of taxes otherwise due upon the sale would be completely avoided. He would receive the same charitable income tax deduction of $105,000 as he would have by giving cash.

So, a $250,000 cash gift would have cost him $145,000 due to the tax savings from the charitable income tax deduction, while a $250,000 gift of appreciated marketable securities would cost him only $101,800. He would save $43,200 more in taxes by simply giving stock instead of cash. The charity ends up with the exact same amount of funding, though some of you may decide to give some (or all) of this additional tax savings to charity as well—for which you will receive an additional charitable deduction. It’s important to keep in mind that gifts of non-cash assets to public charities are deductible up to 30 percent of the giver’s AGI, compared to cash, which is deductible up to 60 percent of AGI (50 percent if a giver makes a combination of both cash and non-cash assets). Of course, gifts exceeding these thresholds may be carried forward to future tax years for up to five additional years.


Conclusion

Charitable giving in general, and gifts of non-cash assets in particular, can help you mitigate your tax burden significantly while doing more to support the causes you believe in. In Part 2, we’ll explore the value of giving real estate and privately owned businesses.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Well-Traveled? Don’t Get Tripped Up by Taxes, Part 2

More cross-border issues for you and your advisor to remember for next tax season or extension time

Key Takeaways:

  • While total global income must be reported on the relevant lines of the 1040, some forms are specific to global tax reporting.

  • Form 8938 relating to foreign asset reporting is now in its second year.

  • PFIC reporting—Form 8621 for all foreign mutual funds and private equities held by U.S. residents and citizens—is slowly becoming important.

  • You must also declare your financial interest in foreign entities via Form 5471.

 

As we discussed in Part 1 of this article series, if you are a U.S. resident or U.S. citizen (whether NRI, PIO or OCI), you must pay taxes in the U.S. on all of your global income. Here we’ll look closer at the important forms that apply to you.

Foreign assets reporting—Form 8938


Form 8938, Statement of Specified Foreign Financial Assets, must be filed along with the income tax return.

Experts agree that Form 8938, which has been around for half a dozen years, will become a significant tool for the IRS to identify the scope of international tax noncompliance of a given U.S. taxpayer. This form requires a taxpayer to disclose more information that connects various parts of a taxpayer’s international tax compliance, including the information that escaped disclosure on other forms earlier.

Schedule B is a typical example where you may have failed to report foreign financial accounts. Moreover, Form 8938 is far more detailed and asks the opening date of a certain financial account. This can become a tricky situation if you have held a foreign account for a significantly long period of time–and haven’t disclosed it in earlier returns.

What must be reported in 8938?

Foreign financial assets that must be declared in Form 8938 include shareholdings, mutual fund holdings, insurance policy holdings, pension plans and bank balances abroad.

Specified foreign financial assets do not include physical assets such as gold and real estate. However, if you own gold is held in the form of ETFs, it should be included as a specified foreign financial asset.

Tip: Form 8938 is exhaustive and requires you and your tax advisor to enter detailed values of financial assets. Make sure you get in touch with your overseas bankers or financial companies to gather this information ASAP.

PFIC reporting—Form 8621

 

The U.S. has a peculiar reporting requirement for all foreign mutual funds and private equities held by its residents and citizens. In the U.S., these funds are considered “passive foreign investment companies” (PFICs). According to PFIC rules, any notional gains from a mutual fund or private equity fund holding must be declared every year, and tax must be paid on such notional gains.

If you fail to comply, your gains on sales will be treated under the “excessive distribution” option, which is also the default method. Suppose you did not make any election on PFICs and, throughout the holding period, did not complete Form 8621 for PFIC holdings.

Let’s say you held the PFIC units for, say, 10 years and did not receive any distributions during those 10 years. In the year of sale, let’s say you made a gain of $100. In the year of sale, gains will be distributed over the past 10 years, that is, $10 per year. It will be treated as though you did not pay tax on $10 per year, and hence in Year 10, must pay tax for each of these years plus interest on the delay. Essentially, this default method kicks in at the year of sale.

Tip: If you own foreign mutual funds, collect information such as opening and closing values. If dividends were paid, gather that information as well. It can be a long, drawn-out exercise. The sooner you begin the better.

Declaration of financial interest in Indian entities


Forms 5471 and 8865 are triggered when a U.S. resident, citizen or green card holder has financial interest in foreign corporations or foreign partnerships. So if you have a stake in an overseas company, or are a director or officer of foreign company, you may need to file Form 5471 (for companies) or 8865 (for partnerships) and declare the interest. There are certain conditions that apply to both forms. What is important is that the penalties are very high. There is a penalty of $10,000 for each year for failing to file the form.

Another form, the 926, was also introduced a few years ago. Form 926 captures information on any transfers of property or funds by a U.S. taxpayer to a foreign corporation.

Conclusion
As I mentioned at the beginning of this article series, foreign income compliance is becoming increasingly important to the IRS. As the Foreign Account Tax Compliance Act (FATCA) gathers steam, opportunities to come into compliance without facing harsh penalties will start to diminish. So the sooner you and your tax advisors act, the better.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.