CrailHuntly

Protect your Sale Proceeds: It might be your largest and most vulnerable asset

Upon the sale of a business or property, the Seller is left with two very important decisions: What do I do with the sale proceeds? And, how do I protect those sale proceeds? This writing will focus on the second question.

While the asset was owned it probably had a layer of asset protection, through a corporate veil and/or insurance. However, once the owner sells, he/she has turned a hard protected asset into liquid vulnerable cash. Thus, if the seller were to experience any type of litigation, those sale proceeds are now a very easy target. There are several ways to protect and shelter these monies, some more complex and onerous than others. The use of fancy trusts can provide a means, but there is also a simple strategy that can offer additional economic benefits outside of the protection.

The Structured Sale program, which is a tax management strategy, can provide a layer of asset protection for the Seller.  Under this arrangement the Seller receives guaranteed periodic payments according to the installment sale agreement from the third party assignment company.  Therefore, the Seller 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.  If anyone wanted to sue for assets, the monies held by the assignment company (those utilizing the structured sale) 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. 

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, find someone you trust (ask a friend or associate who they use).

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