Wealth Management

A Tax-Efficient Way to Enjoy Classic Cars and other Pricey Collectibles

A Flip-CRUT can help affluent accumulators long before the euphoria of a new acquisition (or sale) wears off

Key Takeaways:

  • Collector cars are considered tangible personal property. When the property is sold for a profit, owners must pay capital gains tax at a higher rate than for marketable securities.

  • Because they are so caught up in the fun part of acquiring, collectors often overlook various planning methods they can use to reduce tax liabilities prior to the sale.

  • A Flip-CRUT is a special type of charitable trust that is suitable for holding non-income-producing assets that will be sold at a later date.

  • At some point the trust converts permanently, or “flips,” to making regular payments just like a standard CRUT.



Collectors, especially car collectors, have been of interest to us for many reasons. Not only do they tend to be HNW individuals, but they also tend to be uniquely passionate and driven by their hobby (no pun intended). At a recent collector car auction, a rare Ferrari sold for $7.5 million in less than 10 minutes of bidding. In fact, at this particular auction site, 12 cars each sold for more than $1 million, while the auction average was more than $336,000 per vehicle—serious financial commitments for all sides of the transaction indeed.

However, when you take away the passion of the frenzied bidding and the joy of the new acquirer and the relieved seller, there is a personal economic impact that must be considered. Collector cars and other collectibles are considered tangible personal property. So when they’re sold for a profit, capital gains tax is owed by the seller. Tax at the federal level is 28 percent, while state tax varies depending on the residency of the seller. Because they are so caught up in the fun part of collecting, collectors and their advisors often overlook various planning methods they could have used to reduce taxes prior to selling.

Real-world example

As an example, let’s take the $7.5 million Ferrari. The seller purchased the car for $2.3 million and invested another $600,000 in a complete ground up restoration. That means that before selling costs his tax basis is $2.9 million and thus his capital gain was $4.6 million. A nice check to the federal government of nearly $1.3 million is now owed by the seller. He nets around $3.3 million, and life goes on.

However, let’s look at an alternative approach that might make this transaction much more favorable for the seller. Prior to the auction, our 63-year-old seller and his 61-year-old wife transfer the Ferrari to a Flip Charitable Remainder Unitrust (Flip-CRUT). A Flip-CRUT is a special type of charitable trust that allows non-income-producing assets to be placed in trust, and sometime later in the future after the asset is sold, generally the trust “flips” to a Standard Charitable Remainder Unitrust (SCRUT) and begins distributing income normally to the husband and wife who established it.

What are the consequences of this transaction for the seller? First, because the balance of the trust will pass to charity when the last of the sellers dies, there is a charitable income tax deduction available. The amount of the gift is based on the current value of the property, not on what it will be worth in the future. Because this is tangible personal property, the deduction is calculated on the tax basis of the contributed property, not on the full fair market value.

In this case, we know the basis was $2.9 million. This produces a charitable income tax deduction of a little more than $683,000. Even in the 35 percent income tax bracket, this will save almost $240,000 in income taxes. And, like other charitable deductions, our Ferrari seller has this year and the next five years to utilize the deduction on his income tax return. Next, there is NO capital gains tax due on sale. Flip CRUTs are exempt from income tax, and therefore the sale leaves the entire $7.5 million available for reinvestment. Ultimately, this will produce an income stream for our selling couple that will continue for their lifetimes. Income from a 6 percent payout trust, which was used for this example, begins at $450,000 per year.

If all goes perfectly, the Ferrari sellers will receive more than $12 million in income from the trust over their lifetimes. They’ll save more than $1.5 million in income tax and leave a charitable gift of close to $10 million to the charities they choose. They will also remove the value of the Ferrari or its sales proceeds from their estates. And while they have done that, they have also removed it from their children’s inheritance. That issue can be resolved if they so choose, normally with the purchase of life insurance outside the estate to replace the “lost” asset.

Conclusion

While collectors pursue their passionate assets, they and their advisors must position themselves in a way that allows the collector to be better-informed about the various choices that are available for the ownership and effective disposition of their collectible assets. This may mean millions of dollars to the collector over the course of a collecting lifetime.

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.

Why Couples Should Have a Financial Agenda Before Cohabitating

Make sure you have considered the financial, emotional and legal implications of "officially" moving in together before taking the plunge.


Key Takeaways:

  • The latest U.S. census data show there are now more nontraditional households in America than at any other time in our nation’s history.

  • Financial planning issues have never been more complicated for soon-to-be-joined couples—especially when one or both members of the couple are affluent.

  • Depending on how you and your spouse feel about your financial position, age and health, chances are estate plans, financial plans and other legal documents need updating.

Couples that are planning to move in together—whether young adults or seniors--should have a serious discussion with each other, as well as with their adult children, parents and financial advisors, who may be affected by their decision to cohabitate. They should also make sure they’re in sync with each other when it comes to personal, career, financial and family goals. Couples should also be very open about each other’s health status and any prior financial commitments they may have.

Here are eight key questions that soon-to-be-official couples should discuss before taking the next big step in their relationship:

1. What are each partner’s assets, liabilities and income? Make sure your partner can tell you ALL of the assets and debts they have in their name. They should be able to include everything if needed, along with a copy of the last two years’ income tax returns. Be honest about how much each other earns and about other sources of income (e.g., rental from a property or income from a trust fund).

Discuss debts in detail (how does each partner plan to pay them off?) and credit ratings. Bring up prior financial problems such as an inability to handle debt or a bankruptcy.

2. Does your partner want or need a cohabitation agreement? This may be a delicate topic, but you should address it head-on, especially if one partner has greater assets than the other.

3. How might wills, trusts and/or health care directives and powers of attorney be handled? Will each partner name the other as the primary beneficiary of their assets, life insurance policies and retirement plans? If there are children from a prior marriage, who will be the primary beneficiary? Who should be the one to take care of matters should something happen to either of them? If one partner has a larger estate, marriage may provide some estate-tax savings. Talk it out until you agree on what’s fair.

4. Does your partner have your same view about savings and retirement? Discuss attitudes regarding savings for the short term and the long term. Are they savers or spenders? If still working, when are you each planning to retire? What resources does your partner have for retirement, and how do they want to live those years?

5. How does your partner manage finances? Will he or she keep separate bank and investment accounts? Will you have only joint accounts, or have something in between?

If you use joint bank accounts or hold title to assets in each other’s names, then that can be used as evidence during a breakup that you had an “agreement” to divide all of your respective assets evenly. If your partner is certain that they want joint ownership of some assets, be sure an attorney drafts provisions in a written agreement specifying who owns what and what happens in the event of a breakup. The agreement should also provide guidance about handling money transfers to the other. Be sure the terms of a gift or loan are clearly stated to avoid misunderstandings later if there is a break up.

Who will pay the bills? How will expenses be divided? Will each partner do this equally or will those duties and obligations be based on income. Will one of you handle all of your financial responsibilities related to couple-hood? Will you and your partner invest together or separately?

Make sure to talk about your respective feelings toward debt. Is one you more comfortable than the other when it comes to taking on obligations? Does one of you view debt like the plague? If so, how will this be handled?

Be careful about having both of your names on a credit card. Will each of you be liable for what the other one charges. If so, your respective credit ratings can be at risk. Make sure your partner understands that if they decide to sign a joint credit card application, they should cross out the word “spouse” and substitute “co-applicant,” so you are not being presented to the world as a married couple.

6. What is your partner’s approach to financial risk? Is one of you a risk-taker and the other risk-averse? Can the two live together without driving each other crazy financially? Are you each willing and able to make changes as needed?

7. Does your partner have insurance? Find out how much and what kind of insurance each of you has. Are you both insurable? Can either of you qualify for any additional coverage through an employer?

With homeowner’s insurance, both of your will be on the policy if you co-own your residence. If only one of you is an owner, then the other needs to be named as an additional insured or must have renter’s insurance.

If each of you owns a car, the insurance company will want to issue two separate policies. That will cost you more because you won’t get a multiple car discount. If you decide to co-own each of your cars, determine the potential liability if one partner has a car accident. Find out how well you and your partner are covered if driving someone else’s car (including rental cars). Have an attorney cover the issue of ownership of the cars.

Each of you should have umbrella insurance to provide additional protection beyond the car and homeowner policies.

8. What names will each of you use on official financial and legal documents? Is either taking on the other’s last name? Be careful when one takes on the other’s name. Calling one’s partner a “husband” or “wife” or presenting oneself as a married couple can have serious consequences. Each of these actions may be used to support an argument for a division of assets and support payments if you break up.

Conclusion

An estimated 120 million Americans—including millions of unmarried couples that live together---do not have an up-to-date estate plan to protect themselves and their families. This makes estate planning one of the most overlooked areas of personal financial management. As there are many potential legal and financial traps with cohabitating, this may be an excellent opportunity for you and your partner to discuss your changing situation with a qualified financial advisor. The more you can keep your legal and financial house in order, the more you can enjoy the process of getting to know your partner better in a fulfilling and deeper way.

A number of organizations, including The Financial Awareness Foundation, have excellent resources about estate planning for non-traditional couples.

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 Generous Business

How you can use your business as an engine for generosity

Key Takeaways:

  • Giving interest in a business may enable owners to double their current cash giving, while dramatically reducing their tax liability.

  • Most business owners are not aware they can give a portion of their business to charity.

  • Giving an interest in a business generally has no adverse impact on the owners’ lifestyle, cash flow or capitalization of their business.

  

Hundreds of successful business owners throughout the country are discovering unique ways to use their businesses as engines for generosity. Take the Kuipers, for example.

Bill and Katrina Kuiper own and operate a pharmaceutical distribution company. The company produced about $1 million of net profit last year and was recently valued at $10 million. The business has grown by double digits from its inception 12 years ago, and it’s expected that the company’s performance will continue for the foreseeable future.

The Kuipers are a generous family that gives approximately $100,000 annually to various charities. In addition to supporting their local church, they are actively involved in local charities that support their city’s homeless community, and they have a deep passion for combating human rights abuses globally—especially human trafficking. They also give very generously of their time.

Considering their healthy annual income, Bill and Katrina live a relatively modest lifestyle. They live exclusively on the $200,000 salary that Bill receives from the company. Because of the high growth prospects the business has enjoyed from its inception, Bill has always reinvested most of his profits in the business. However, reinvestment has limited the Kuipers’ capacity for charitable giving. They would love to give more, but they simply lack the available cash resources with which to do so. Or so they thought.

Make charitable intentions go further

A savvy advisor recently shared a strategy with the Kuipers that allows them to increase their annual giving dramatically, even doubling their current cash giving, by using their most valuable financial asset—their business.

The Kuipers’ learned that they could gift a relatively small interest in their business each year to secure the maximum charitable deduction allowed under existing tax rules. Taxpayers may generally deduct up to 50 percent of their income each year through charitable contributions. If a gift is made in the form of a noncash asset such as a business or real estate, the charitable deduction is limited to 30 percent of income.

So the Kuipers’ decided to make a charitable gift of an interest in their business equal to $300,000, 30 percent of their business’s $1 million income. Based on the value of their business, this represented a gift of a 3 percent interest ($10 million divided by $300,000).

The gift was intentionally made to a donor-advised fund for two primary reasons:

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1. Because a donor-advised fund is classified as a public charity under the tax rules, Bill and Katrina receive a full fair-market-value deduction for their gift. Had they made a gift to a private foundation, their deduction would have been limited to their income tax basis in the business—which is quite low in comparison to the value of the business.

2. The donor-advised fund provides a mechanism allowing the Kuipers to make a single charitable gift but ultimately support numerous charities, as the donor-advised fund is merely a conduit to the end charities that the Kuipers support. Once the donor-advised fund receives cash—either from annual distributions of income from the business or proceeds from an eventual sale of the business—Bill and Katrina can then grant that cash from their donor-advised fund to any number of charities that they recommend.

Because Bill and Katrina are in the highest marginal tax bracket (45.6 percent combined federal and state), their gift provided a $300,000 charitable deduction saving $136,800 in taxes. The business interest gift increased their total annual giving from 10 percent to 40 percent of their income.

However, the Kuipers had an additional 10 percent of income that could still be offset by charitable contributions. Their advisor suggested they take a portion of the income tax savings that they had just realized from the business interest gift and make an additional cash gift that would be sufficient to use their remaining 10 percent deduction capacity. So Bill and Katrina made an additional cash gift of $100,000 from the $136,800 of tax savings. The additional cash gift also provided a charitable deduction, saving $45,600 more in taxes and taking their total giving to the maximum deductible amount, 50 percent of income.

The giving strategy described above had no adverse impact on Bill and Katrina’s lifestyle or on the capitalization and cash flow needs of their business. In fact, their cash flow actually increased due to the tax savings they realized. Despite the fact that the Kuipers gave $100,000 of the tax savings to charity, at the end of the day they still had $82,400 of additional cash flow from making these gifts—$36,800 after $100,000 of the initial tax savings from the business gift was made in the form of cash, plus $45,600 in tax savings from the subsequent cash gift.

Combining a vacation and mission

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Most of the $82,400 of increased cash flow was reinvested in their business. However, they did use a portion of it to fund a two-week combined vacation and mission trip to Africa that had an unexpected, transformational impact on their lives. In addition to experiencing the beautiful sights and sounds of Africa, including an unforgettable safari, they had a unique opportunity to meet their ”adopted“ daughter, 9-year-old Christina, whom they’ve supported for years through a child sponsorship program with an international charity that combats child poverty. The Kuipers’ trip marked the first time in over 12 years that Bill had taken a full two-week reprieve from the demands of running a successful business.

Bill and Katrina are planning to continue this pattern of giving each year. Another benefit of this strategy is that their wealth, as represented by their business, will actually increase over time. That’s despite giving additional gifts in their business. Because their business is growing at double digits each year, and because they are gifting an interest in their business of only 3 percent each year, the value of their retained ownership continues to increase. At the same time, the Kuiper’s charitable giving has increased dramatically, to 50 percent from 10 percent of their income.

Conclusion

The Kuipers’ greatest joy comes from witnessing the lives that are touched and transformed by the charities with which they partner. The business-interest strategy they’ve implemented has enabled them literally to double their support for their charitable endeavors. That’s because their current cash giving has correspondingly doubled as a result of giving a portion of the tax savings generated from their business-interest gift. The Kuipers are also excited about the fact that at some point in the future, when their business is sold or liquidated, very significant additional assets will be available to support the charities they care about. This is a result they had never imagined possible until a creative advisor shared with them how their business could be a powerful engine for greater impact and generosity.

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.

Incorporating Philanthropy into Your Financial Plan, Part 1

Smart giving strategies for every economic climate


Key Takeaways:

  • As record numbers of boomers approach retirement age, their focus shifts to distribution of assets rather than accumulating wealth.

  • Affluent millennials look for ways to have impact rather than just give away dollars.

  • Do your homework before you give.

  • A Donor Advised Fund (DAF) is a perfect giving tool for all economic climates. Sock away money in the good years, and give from it in the lean years.

The latest Giving USA data shows that charitable donations rose for the fifth consecutive year to nearly $360 billion—passing its pre-recession peak and likely to continue the upward trend.  Researchers indicated that another recession could hurt giving slightly, even though the number of aging boomers coming into liquidity events should offset a downturn to some extent.

As more and more boomers turn 65 every day, the focus shifts to distribution of assets rather than to thinking solely about accumulation of wealth. Giving is a function of individual capacity, which too often is a perception rather than an actual quantified ability.

Giving is not just for boomers and retirees

More and more wealthy younger people are giving generously earlier in their lives. Are millennials really more charitably inclined than boomers and Gen Xers, or are we just hearing more about the good deeds of extremely wealthy tech entrepreneurs?

Experts on philanthropy say that millennials have a more overt concern about the world around them. The problems of the world are very much “front and center” for them because of the Internet and its social media outlets. That said, millennials look for ways to have impact rather than just give away dollars.

Is charitable giving really tied to the economy and financial markets?

Many experts believe there is a tremendous linkage between levels of giving and the types of giving and investment and economic cycles. Charitable giving rises in good times, and, sadly, falls when times are tough. A study of charitable giving during recessions since 1967 found that giving during recessions dropped by slightly more than 1 percent on average, while it rose significantly during the good years. This poses a serious dilemma for charities that don’t have endowments to help cushion the drying up of charitable giving during the lean years. It also creates strategic challenges for family foundations and individual philanthropists who during the lean times see greater need in the human services arena.

We know of one family that was faced with having to reduce its commitment to environmental causes during the economic blizzard of 2008-09. As the family’s wealth and its foundation capital recovered dramatically post-crisis, they are giving even more today they did prior to 2008 to environmental causes they support.

As for good and bad years in the economy, a Donor Advised Fund (DAF) is a perfect tool. Sock away money in your good years, and give from it in the lean years. For donors approaching retirement, the same logic applies. Fund the DAF during your highly taxed working years, get the deduction then, and in your retirement years, make gifts from the DAF. For those who are more technically minded, or if you are the owner of a closely held business or commercial real estate, gifting such property to a DAF can be a smart move. Such transfers can be part of a business exit plan if you have philanthropic goals and want to become more involved in your community post-exit.

How can people of means to have a more “balanced portfolio” of giving?
The most effective philanthropy needs to be driven not by balance but by three things: head, heart and mind. And not necessarily in that order.

Giving to arts and culture has always been strong. People strongly support a wide range of causes that they’re passionate about--and there is some status assigned to supporting the arts. Giving to human services is a challenge with program effectiveness and real change. While arts received larger portions of giving, a balanced portfolio is generally not advised. Much of the giving research indicates that depth, not width, is advisable for donors. More impact can be achieved, more data evaluated by narrowing focus.

We know from the world of business how critical sustainability is to long-term success. Why should it be any different within the realm of charity? It’s imperative that philanthropists and foundations look critically at the sustainability of the organizations and projects they are funding. Failure to think “sustainably” creates a great risk charitable dollars won’t have as much impact or as lasting an impact as the giver might hope.

Purposeful philanthropy is the art of thoughtfully, intentionally and purposefully integrating the passion, spirit and commitment of philanthropy into the fabric of your family system. When you encourage each member of your family to participate in giving that honors the individual values and interests of your family members, there is an almost inevitable balancing that will occur in the grant-making and giving process.

A good next step for a donor hoping to be more strategic and impactful in giving would be exploring a Community Foundation and books such as, Inspired Legacies by Tracy Gary or Give Smart by Tierney and Fleishman.

Philanthropy is not necessarily about giving away to charities. It is about having impact. It is about the sustainability for your children and grandchildren of the world you live in. It is about the recognition that every dollar you invest is impact investing because it is impacting something.

Conclusion

In Part 2 of this series, we will discuss charitable tools, techniques and philosophies that you can use today to add value to your planned giving 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.

Eye On Money September/October 2019

We invite you to check out the new issue of Eye On Money! Inside are articles on:                                       

529 education savings plans. Do not miss this one if you want to help your child, grandchild, or other loved one save for college!

Starting a retirement plan for your business. There’s still time to set one up for 2019 if you act soon! Here’s a rundown of the types of retirement plans available to businesses and self-employed individuals.

Social Security retirement benefits. Check out this article for five things you should know about Social Security before you begin receiving retirement benefits.

What to do before and after a disaster strikes your home. These financial tips can help you prepare for a disaster and deal with its aftermath.  

Also in this issue, you can learn about exchange-traded fund (ETFs) and revocable living trusts, take an armchair tour of China’s Sichuan Province, find out about some special exhibitions and events planned for this fall, and test your knowledge of sports venues.

Please let us know if you have questions about anything in Eye On Money.

Eye on Money September/October 2019

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.

Robert Merton and the Effect of Time on Portfolio Choice

Finance theorists are, as everybody knows, unworldly people who scarcely tie their shoelaces, still less change a car tire. Robert Merton confounds this stereotype. As he talks amiably at the London office of Dimensional Fund Advisors (he is the firm’s “resident scientist), you sense that here is a man who could fix a flat in no time. He would probably deliver a cheerful lecture on the importance of the correct tire pressure while he was tightening the wheel nuts.

Click here to read more:

Robert Merton and the Effect of Time on Portfolio Choice

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 Traveling by Cruise Ship Can Increase Your Business Deductions

Understanding the subtle intricacies of business travel deduction rules can help you save thousands of dollars. Tax the quiz.


Key Takeaways:

  • The money you spend on business travel is deductible as long as it’s used to carry out a business activity.

  • Money spent during business travel on personal activities, by contrast, is not deductible.

  • However, the normal allocation of business travel costs between business and personal expenses is not required for business travel on a cruise ship, that’s outside the 50 states for seven days or less.

  • Result: Turning a jet business trip into a cruise may not only be more relaxing, but may also make your entire trip deductible.

 

NOTE: All rules and deductions discussed in this article are accurate as spring 2019. However, always consult your tax advisor when planning to take deductions for business travel.

Situation

All the effort that your client, Ty Tannick, has spent chasing prospective billionaire client Lou Sitania is about to pay off. But before signing on the dotted line, Lou wants Ty to pay him a visit at his home in the U.S. Virgin Islands. It’s a long way from home. But doggone it, if landing a big client means leaving chilly Boston to travel to the Caribbean in mid-February, it’s a price Ty is willing to pay. So Ty books a five-day cruise to St. Thomas and brings his wife. Upon arriving in St. Thomas, Ty stays in a hotel for two days while holding meetings with Lou.

In preparing his tax return, Ty allocates the time he spent on the trip as 30 percent business, 70 percent personal.

Question

What, if anything, can Ty deduct for business travel costs?

  1. 100 percent of his total costs.

  2. 30 percent of his transportation costs and 30 percent of his costs for food and lodging.

  3. 100 percent of his transportation costs and 30 percent of his costs for food and lodging.

  4. Zero percent since the trip isn’t deductible business travel.

Answer

  1. Ty can claim deductions for 100 percent of his total costs (subject to the daily deduction limits for cruises).

Explanation

There are two kinds of deductible costs you incur when you travel on business:

  1. Business-day costs: the costs of sustaining life during a business day, including meals, snacks, drinks, cab rides and lodging; and

  2. Transportation costs: the costs of traveling to and from a business destination.

You normally have to allocate expenses between business and personal activity and can deduct only the former. But this scenario illustrates an important exception: Deductions for business travel expenses are not subject to the normal allocation between business and personal activity when you:

  • Travel to a destination outside the 50 states and the District of Columbia;

  • Travel for seven days or less (not counting the day of departure); and

  • Goes via a cruise ship.

Ty’s trip meets all three of these conditions. He could (and should) have deducted 100 percent of his total travel costs; therefore, A is the right answer.

Why the Wrong Answers (above) Are Wrong

If you answered B above—30 percent of his transportation costs and 30 percent of his costs for food and lodging—then you are wrong. That’s because deductibility of business transportation costs varies depending on two factors:

Factor 1. U.S. vs. Foreign Travel. IRS regulations distinguish between two kinds of business travel for purposes of deductible transportation costs:

  • Travel inside the 50 United States; and

  • Travel outside the 50 United States.

Ty’s trip to St. Thomas clearly qualifies as travel outside the U.S.

Factor 2. Length of Trip. For business travel outside the U.S., you must look at how long the trip lasted to determine deductibility. The key question: Did you work at least one day and travel for seven days or less, not counting the day of departure?

  • Seven days or less foreign travel: If the answer is YES, you can deduct 100 percent of the cost of your direct route transportation costs of getting to and from the business destination.

  • Seven days or more foreign travel: If the answer is NO, then you only qualify for a 100 percent deduction if you pass the 76/24 test; that is, if you spent more than 75 percent of the days on business, not excluding the day of departure.

Ty did, in fact, work at least one day and travel for seven days or less. So his direct route transportation costs are 100 percent deductible.

If you answered C to the question at the beginning of this article—100 percent of his transportation costs and 30 percent for food and lodging—then you are wrong as well. That’s because Ty’s food and lodging costs are also 100 percent deductible. As we explained earlier, Ty’s transportation costs (i.e., the costs of the cruise) are 100 percent deductible. But we also said earlier that food, lodging and the other costs of sustaining life during a business day must be allocated between personal and business purposes. So what gives?

If Ty had traveled to St. Thomas by airplane, he’d have to allocate his food, lodging and other life-sustaining expenses 70/30 and deduct only 30 percent. The reason he can deduct these costs at 100 percent is because he traveled by cruise ship.

Think about it. When you pay for a cruise, your costs include not only the transport, but meals, lodging and other costs of sustaining life (assuming, of course, these items aren’t broken out as part of the cruise’s cost). In essence, these costs become part of the costs of transportation. So if transportation is 100 percent deductible, then so are the meals, lodging and other life-sustaining costs associated with it!

The moral: In addition to being more pleasurable than flying—at least for many people—traveling to a business destination by cruise ship can significantly increase your business travel deductions.

If you answered D to the question at the beginning of this articleZero percent since the trip isn’t deductible business travelthen you are wrong again. That’s because the mode of transportation doesn’t determine deductibility. In other words, you can claim business travel deductions regardless of whether you travel to and from your business destination by car, plane, train or boat.

However, deductions for business travel by cruise ship are subject to luxury water-travel daily deductions limits.

Conclusion

The costs of business travel are deductible. But the rules are complicated and significant limitations apply—like the requirement that you allocate certain costs between business and personal use. So it’s essential that you and your financial advisors know the rules about business travel deductions.

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.

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.

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.

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.

Am I Eligible for Medicare Part A & Part B?

The Medicare program can provide healthcare for elderly or disabled individuals at a greatly reduced cost.  Medicare Part A covers hospital insurance, and Part B covers medical insurance.  Read below to see if you are eligible for Medicare.

Are you a US citizen and age 65 or older?

If you are under 65 and are not disabled, then you are not eligible for Medicare Part A or Part B.  If you are under 65 and disabled you may be eligible for Medicare benefits.  If you are over 65 and not disabled, move on to the next question.

Are you entitled to Social Security benefits (you have 40 work credits; about 10 years of work history)?

If you answered “yes,” you will be eligible for Medicare Part A & Part B.  If not, then you may still be eligible, depending on your spouse’s eligibility for Medicare and several other factors.

If you’ve made it this far, there is a good chance you are eligible for Medicare Part A & Part B.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about planning strategies that incorporate Medicare, 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.

Get a Home Equity Line of Credit Before You Really Need It

Get a Home Equity Line of Credit Before You Really Need It

It’s especially important to establish your line before you retire

By Robert J. Pyle, CFP®, CFA, AEP®

Key Takeaways

  • When used intelligently, home equity lines of credit (HELOCs) can be excellent cash flow management tools.

  • Contrary to what you might have heard, the interest on HELOCs remains tax deductible when used to pay for home improvements.

  • Don’t wait until you’ve left the workforce to establish a HELOC. Even high net worth individuals can have trouble qualifying when they no longer show employment income.

We’ve been trained most of our lives to treat debt as evil and interest rates as the devil’s work. But, sometimes well-managed debt can provide substantial flexibility and leverage as you pursue your financial and life goals. Demonstrating that you can handle debt responsibly can also boost your credit rating.

If you are a homeowner in good standing, a HELOC can be a very powerful tool for consolidating credit card debt, paying for home renovations, a wedding, a new car purchase, unexpected medical expenses, auto or home repair, even college tuition. Despite the Fed’s recent hikes in interest rates, the rate you are likely to pay on a HELOC will be far lower than what you’ll pay on credit cards, auto loans, student loans, etc.


The key is to finance your big-ticket expenses without depleting your rainy day funds or cashing out stocks or other assets and incurring capital gains taxes—and possibly pushing yourself into a higher tax bracket, especially if you’re retired. HELOCs check all the boxes.

Many folks hope to have all their debt paid off before retirement. But a HELOC can be a very effective tool for managing your cash flow and account withdrawals in retirement.


Just make sure you obtain a HELOC before retiring

Many retirees are shocked to learn they don’t have enough monthly income to meet their bank’s debt ratio (debt/income requirements) when applying for a HELOC or home equity loan. Also, underwriting criteria for these so-called second mortgages has tightened up considerably since the last recession. Most lenders don't look at your assets; they only look at income and credit scores. In addition to retirement benefits (e.g., social security), you may have to provide proof of other income -- enough to make the loan payments. 

 
Don’t believe me? We once had a self-employed client with a $4 million net worth and he and his wife still couldn’t qualify for a HELOC or other type of second mortgage.

Why shouldn’t I just get a home equity loan?

As mentioned earlier, HELOCs and home equity loans are types of “second mortgages” secured by the equity you have built up in your primary residence. Generally, the choice between the two types of credit depends on your intended use for the money and your time frame for repayment. For instance, if you have a set amount in mind for a specific expense such as a wedding, a new septic system or new roof--and you have no further foreseeable expenses--then a fixed rate home equity loan makes sense. However, if your needs are more open-ended—say, a major home renovation that will span a year or two, or to supplement a child's college tuition each year for the next four years--then the more flexible HELOC could be the better option.

Put in article.png

Unlike a convention loan with a fixed payment schedule, a HELOC allows you to pay down as much of the outstanding principal as you want when your cash flow is good, but only requires you to pay the minimum amount of interest when and no principal when cash is tight. Further, you can pay down the entire outstanding balance (draw) at any time during the duration of the loan term (typically 5-10 years)—and later tap into your line again as life circumstances change.

I’m sure those of you who are business owners understand this concept well.

Why should I pay “all that interest”?


That’s a refrain I often hear from clients and prospects. For example, say you have $300,000 in a taxable account, and you are debating whether to use $60,000 of this money for a major house remodel or get a HELOC. If you use the money from the taxable account, you could potentially have capital gains. If you get a HELOC, you could pay off that expense gradually and keep a lot more of your money fully invested—while deducting the HELOC interest from their taxable income if you can itemize. The typical answer for not choosing a HELOC is because most people don’t want to be paying “all that interest.”

We take a different approach when looking at interest. First, we look to see if you can write the interest off. Then we look at the average rate of return on your portfolio. If your portfolio has been averaging the same or more than the after-tax cost of the loan, then we recommend you go with the loan.

EXAMPLE: Let’s take a $60,000 loan at a 5 percent interest rate. If you can earn a 7-percent return on your portfolio, that 2-percent spread in your favor translates into $1,200 more in your pocket every year that you have the loan.

 

I know what you’re thinking: “I thought the interest on HELOCs isn’t deductible anymore (post Tax Reform).” Actually, it is as long as the funds are being used for home improvements.
(See Example 1 below).

put in article 4.JPG

Conclusion

If you or someone close to you has concerns about their cash flow and expense management needs, 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.

How Private Client Lawyers Can Create Exceptional High-Net-Worth Practices in Today’s Challenging Environment.

If you are a private client lawyer in the Front Range of Boulder and Denver, CO and you want to make a lot more money, you should continue reading this article.

Have you ever wondered why some attorneys are so much more successful than the rest? Do you ever consider what these private client lawyers are doing that you are not doing? This article reviews the strategies that successful private client lawyers who make more than $1 million per year are using to excel in turbulent times.

I’d love to share some of my proven tips and best practices with you when we meet.

When I first start to work with private client lawyers, I find that they are usually highly intelligent and extremely hard working—but not enjoying the level of success they feel they are capable of at the moment. They sense there are significant opportunities to build extremely lucrative practices by serving HNW (High Net-Worth) clients well, but they are uncertain about how to start on the right path.

To that end, there’s a great book called EXCELLING IN TURBULENT TIMES: How Private Client Lawyers Can Create Exceptional High-Net-Worth Practices in Today’s Challenging Environment. Our research partners at AES Nation wrote the book. We have them on retainer. I would love to give you a copy of this book when we meet. The book is chocked full of HNW client opportunities and best practices that can enable you to achieve tremendous professional and financial success. You will learn how to become exceptionally wealthy while doing a remarkable job of serving your clients well—yes, it’s possible to do both! If you would like to schedule a call right now, please click here. I will share with you empirical and ethnographic research about top private client lawyers and combine it with our deep knowledge of HNW clients. As part of this journey, I will share hard-learned lessons from other types of elite professional such as wealth managers, multi-family offices, CPAs, risk professionals and more.

Click here to Read more:

How Private Client Lawyers Can Create Exceptional High-Net-Worth Practices in Today’s Challenging Environment

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 Avoid the Social Security Windfall Elimination Provision?

The Windfall Elimination Provision (WEP) applies to Social Security recipients who have their own retirement savings as well as a pension from an employer who did not pay into Social Security.  The purpose of WEP is to disallow for the collection of full Social Security benefits when a retiree has retirement savings and a pension from employers who opted out of Social Security (commonly local government).  Read on to see if you could have your Social Security benefits reduced by the Windfall Elimination Provision.

Have you worked for an employer that did not withhold for Social Security (such as a govt. agency)?

If you have not, then the WEP does not apply to you and will be eligible for full Social Security benefits.  If “yes,” then move on to the next question.

Do you qualify for Social Security benefits from work you did in previous jobs?

If not, then you will not be subject to the WEP.  If you have, move on.

Are you a federal worker in the FERS retirement system and first hired after 12/31/1983?

If you are a federal worker who meets the conditions outlined above, you will not be subject to WEP.  If you are not a federal worker or are a federal worker and do not meet the above conditions, you may be subject to the Windfall Elimination Provision.

The Social Security Windfall Elimination Provision is complicated and has a large influence on your retirement situation should it affect you.  Check out this flowchart to learn more.

If you would like to schedule a call to talk the Social Security Windfall Elimination Provision to see if it affects you, please give us a call at 303-440-2906 or click here 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.

Can I Delay the RMD from the Traditional IRA I Inherited?

Traditional IRAs allow the owner several tax advantages: it allows for an upfront tax deduction as well as tax-deferred growth.  Upon withdrawal of funds, the account owner is taxed at ordinary income rates. Inherited IRAs require the new account owner to begin taking withdrawals over their lifetime regardless whether or not they need the funds.  Why?  Because Uncle Sam wants to collect his share.  Here are some potential strategies for delaying RMDs from Traditional IRAs as long as possible.

Are you the beneficiary of a Traditional IRA from someone other than your spouse?

If you inherited a Traditional IRA from a spouse, you are likely able to delay taking RMDs until you reach 70.5 years of age.  Check out our “Should I Inherit my Deceased Spouse’s IRA?” flowchartIf you inherited the IRA from a non-spouse, move on to the next question.

Did the person pass away before their Required Beginning Date (April 1st, the year after turning 70.5)?

They have reached their Required Beginning Date

This allows you two options: electing the “5 Year Distribution Rule” or taking RMDs based on your life expectancy using the IRS Single Life Expectancy Table.  The “5 Year Distribution Rule” means all assets must be out of the account at the end of 5 years.  You could withdraw all funds immediately, spread them out over the 5 years, or take them all out just before the end of 5 years.  Keep in mind you will need to pay ordinary income tax on the whole amount distributed. 

If you take RMDs based on your life expectancy it will spread out the tax burden.

They have not reached their Required Beginning Date

You will be required to open an Inherited IRA and take RMDs based on your life expectancy according to the IRS Single Life Expectancy Table.  Depending if the deceased had satisfied their RMD for the year of their death, you may be required to take one this year.

If you’ve made it this far, you may be able to delay the RMD from your inherited IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for delaying RMDs from Inherited IRAs, 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.