tax deductible savings

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.

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.

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.

Can Volatility Predict Returns?

Here is a nice article provided by Dimensional Fund Advisors: 

Do recent market volatility levels have statistically reliable information about future stock returns? We examine historical data to see if there have been differences in average returns between more volatile and less volatile markets, if a strategy that attempts to avoid equities in times of high volatility adds value, and if there is any relation between current volatility and subsequent returns.  CLICK HERE TO READ MORE:
 
Can Volatility Predict Returns.pdf



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.