Advisory Resource Group

A Great Combo: A Like-Kind Exchange with a Structured Sale

The combination of a 1031 Exchange, or rather a Like-Kind Exchange, and installment sale is a clever way to craft an exit strategy that can defer taxable gain, plus allow the Seller to transfer non-taxed dollars into another like-kind property. 

The installment sale portion is typically used when seller financing is needed, and it works well for this situation.  However, by utilizing the Structured Sale program, this method has a broader application and becomes a great strategy for many individuals.  By using this combination a Seller can:

1. Take some cash at closing
2. Exchange for a like-kind property of lesser value, and
3. Use the structured sale to avoid boot at closing and receive a guaranteed income stream

There's just a lot of flexibility to accommodate a variety of situations.  Download Structured_Sale_Likekind_Combo.pdf  to read the entire article for a better understanding of how this works, also included is a numeric example.

Disability Insurance: The Importance of Own Occupation

Disability insurance is vital in protecting one of our most valuable assets, our ability to earn an income.  Individuals usually get their coverage through group plans, but in most cases this is not sufficient.  For many independent contractors, an individual plan is needed in order to have any type of coverage.  And, for professionals who rely on fees or commissions for income, being "out of the game" for any length of time due to illness or injury can be financially detrimental.

When choosing a disability policy it's important to get an "own occupation" plan.  In other words, you want disability insurance that will pay a monthly benefit if you can't perform the material and substantial duties of your current occupation.  Many plans are limited to only cover "any occupation" that is within reason of your education and experience. 

Also, there are some plans that will offer a reduction in the total benefit if you return to work, but your gross income has been reduced from your prior adjusted gross income before the disability occurred.  This is great for those of us whose income relies on being "out selling" and if we're gone for an extended length of time it may take awhile to get back on pace.  This feature can help cover the gap.  For more information contact us.

Estate Taxes: ILIT as a Solution

This is a continuation of my previous posting titled "Estate Taxes: The Sometimes Forgotten Expense" where I tried to highlight the impact estate taxes can have on inherited assets.

An Irrevocable Life Insurance Trust (ILIT) is a great solution and a necessity for many estate plans.  In summary, the life insurance is used to cover the estimated estate taxes and costs, or essentially replace wealth, as it is an instant asset upon death that also receives a step up in basis exempting the proceeds from income tax.  However, life insurance proceeds, like any asset, can still be included in the taxable estate which is why the irrevocable trust is created and used to transfer/keep the asset (life insurance policy) out of the owner's estate, relieving it from any tax.

Once a trust is established, the trustee should obtain the needed life insurance, and then funds are given to the trust to pay the required insurance premiums.  The owner may also transfer an existing life insurance policy to the trust, but if this occurs, the insured must live 3 years or more to avoid inclusion of insurance proceeds in his or her estate.  Also, because it is an irrevocable trust, proper planning should occur to avoid or decrease any gift tax.

A qualified estate planning attorney is needed to assist with the proper establishment of an ILIT, but it is also important to have a knowledgeable insurance professional to fund the ILIT with the proper insurance policy to fit the specific need.  CrailHuntly can help and if you do not already have an estate planning attorney, an independent ARG attorney member can assist.

Estate Taxes: The Sometimes Forgotten Expense

There is a lot of focus on alleviating the tax burden for individuals that are selling appreciated assets, but what about the tax burden for those individuals that don't sell?

There is a step up in basis of the property for the heirs upon the owner's death, resulting in no capital gain or depreciation recapture, but that's not the whole story.  Estate taxes and settlement costs, especially for wealthy individuals, can significantly dilute the inheritance value and in many cases create a financial burden for the heirs, especially if assets need to be liquidated to cover the tax liability.  And, if an asset is not easily marketable for sale, individuals could be left searching for other means to cover the costs.

Currently, the estate tax tops out around 50% not including additional settlement costs, all of which increase with larger estates. There is a current estate tax exemption of $2 million, increasing to $3.5 million in 2009 and unlimited in 2010 and revert back to $1 million in 2011.  For many this exemption will not be sufficient.  So what can people do?  First, it's important to consult a qualified estate planning attorney to assess your needs and depending on your situation he/she may recommend a trust funded with life insurance, otherwise known as an Irrevocable Life Insurance Trust (ILIT), as a solution. 

So to not make this section too long, I've written a sequel titled "Estate Taxes: ILIT as a Solution" and briefly describe the use and benefits of this great planning tool.   www.crailhuntly.com

Creatively Bridging the Price Gap

Individuals involved with the sale of appreciated assets are familiar with the occurrence of a common scenario- a price gap.  Very rarely do buyers and sellers come to the negotiating table with the same numbers (asking price vs. offering price).  Sometimes it may greatly impede the sale of the asset, creating frustrations for all parties involved.

There is a new tool being used with the sale of appreciated assets called the Structured Sale.  In some cases, it can help bridge the price gap between buyer and seller.

The reason is because the buyer's payment obligation is the present value of the on-going installment payments to the seller. The length of payment deferral and the payout duration will directly influence the spread.  I have put together an example of how this works, which you may download below.   

The Structured Sale is not only just a benefit to a Seller, but a tool that can be used to help facilitate the transaction for all parties- this is much more valuable than just an end product.

Download Bridging_The_Gap.pdf 

For specific questions please contact CrailHuntly.

What is Business Continuation/Succession Planning?

What is business continuation/succession planning?  As a business owner and advisor myself, here is my answer.

It is the planning required that facilitates the disposition of a business interest or ownership transfer in the event of disability, death or retirement.  In other words, it's planning designed to ensure that the business continues according to the owner's wishes, including appropriate compensation to specific heirs and beneficiaries.

The types of plans implemented are commonly referred to as Buy/Sell Agreements.  However, there is not a "one size fits all" plan that's available.  There are several ways to configure these plans depending on the type of business entity and particular ownership interest.

Examples are: Entity Purchase Agreement; Cross Purchase Agreement; Trusted Cross Purchase Agreement; Key Person Buy-Out Agreement; "Wait & See" Buy/Sell; Stock Redemption.

I plan on writing another piece where I'll briefly describe each one.  In the meantime, if you don't have a plan, get one, and if you do, it's a good idea to make sure it's up-to-date.  Lastly, it's important to have a qualified attorney draft the agreement.  For questions you may contact me.

What is a Structured Sale?

A Structured Sale is a new tax management program that allows sellers of appreciated assets to invest before tax proceeds vs. after tax proceeds and control the receipt of such proceeds, thus the payment of taxes. 

It works by enabling sellers to construct the transaction, or a portion of, as an installment sale, but still keep it a cash transaction from the buyer to protect against future buyer default.  Rather than relying on the buyer to make future payments, the buyer transfers payment obligation and the cash to make those payments to a third party assignment company who then invests those proceeds in a secure tax deferred annuity designed to mirror the payment stream established in the installment sale agreement.

The Structured Sale is in full compliance with the tax law.  This program is based on Section 453 of the Internal Revenue Code; and the ability for a buyer to transfer his/her payment obligation to a third party is supported by two Revenue Rulings 75-457 & 82-122 .

The Structured Sale provides the flexibility to structure any amount of the sale that qualifies as an Installment Sale under Section 453 IRC.  Therefore, it can be used as the foundation of an exit strategy and work extremely well for those individuals looking to cash out from their asset on a tax favored basis and receive a guaranteed income stream for a period of years.   You may click here to download a presentation on the program.

Investment Security: Getting More Attention

In the May issue of Advisor Today, a financial services publication (www.advisortoday.com), there was an interesting excerpt based on a recent study from the Spectrum Group (www.spectrum.com).  The study focused on affluent investors, individuals with a net worth of $5 million or more.

The point made was that these individuals are looking for more safety in their investment portfolio.  The study recorded findings that "43 percent of wealthy respondents said they were looking for a guaranteed rate of return for their investments,.....which may reflect the aging of this population and the overall investing environment."  Interestingly, this number has increased from 38 percent in 2005 and 29 percent in 2003, according to the article.

I have not seen the entire study.  I visited Spectrum's website to try and retrieve the data, but the complete report is very costly.

My takeaway is that advisors need to stress the importance of strategies that catter to the risk-averse, while still providing sufficient returns to justify the management expense.  It is this belief that furthers my convicition for solutions like the Structured Sale, fixed annuites, and wealth managment that focuses on the clients needs not the institutions.

Protect Your Sale Proceeds

The Structured Sale program, which is a tax management strategy, can provide a layer of asset protection for the Seller.  Since the Seller receives guaranteed periodic payments according to the installment sale agreement from the third party assignment company, he/she never has constructive receipt, thus doesn't own anything.  In other words, the Seller does not have control of the sale proceeds until he/she actually receives a payment; and then it's still only for the amount received, not the balance due.  Therefore, if anyone wanted to sue for assets, the monies held by the assignment company could not be included in the lawsuit.

For Example:  Tom sells a property and uses the Structured Sale for $1,000,000 of the sale proceeds.  As part of the agreement he is to receive $125,000 each year for 10 years (the $25K is interest). The Buyer transfers the on-going payment obligation and $1 million to a third party assignment company, who then invests the proceeds in a specially designed annuity to match the agreement.  Tom is contractually guaranteed to receive $125,000 per year, but he doesn't own the annuity, the assignment company does, and he doesn't have access to the $1,000,000, only the $125,000 payment stream. 

A year goes by, things are going well, and suddenly Tom is served with a lawsuit by a past associate for $500,000 in damages (you can make up the reason and the outcome).  The point is that Tom's sale proceeds within the Structured Sale are not his property and should be protected from the lawsuit.  It's another great advantage of the program.  Since I am not an attorney, this is not intended as legal advice and individuals should consult an independent legal advisor. 

Private Annuity Trusts are out; what's in?

The Private Annuity Trust (PAT) was an effective tool that enabled sellers of appreciated assets to defer taxes due for a number of years.  Last Fall, actually on October 18th 2006 to be specific, the IRS proposed regulations ending the use of PAT's as a tax deferral vehicle.  Download the proposed Regs. (it's good bedtime reading).

So what options are left? Charitable Remainder Trusts, 1031 Exchanges, Tenents-in-Common (TIC's), traditional installment sales (which the IRS specifically "OK's" in the proposed regs), and the Structured Sale are all viable options, each having respective advantages.

For those individuals that were planning on using a PAT, the Structured Sale provides many of the same tax deferral benefits and is proving to be an effective solution worth reviewing.  It is by no means the only tax deferral strategy one should consider.  Other strategies are available and may fit a particular situation better.  That said, the Structured Sale may become the preferred method used with exit planning strategies.  The reason you ask?  Well if you didn't then I'm still going to answer.  Because it creates a flexible means to defer taxes and guarantee a rate of return on the proceeds (important for retirees) and can also provide a level of asset protection; a combination of attributes that is hard to find.  Contact CrailHuntly for information.