CrailHuntly

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.  The exemption then reverts 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

Protect Your Most Valuable Asset with Disability Insurance

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.

What is the Structured Sale?

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

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.

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, owned by a major insurance 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 Seller, as beneficiary, receives the guaranteed payments from the insurance company and only pays a pro-rata share of tax on each payment.

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 .

You may click here for more information on the program.

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.