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Category: Investment Professionals

Applicable Federal Rates

[ 0 ] January 15, 2014

Cheap Money is Still Here but It’s Getting More Expensive

Spectrum Financial Solutions, LLC Applicable Federal Rates

I sure hope that everyone is looking at the recent rise in the mid and long-term Applicable Federal Rates (AFR).  After languishing at historically low levels since October, 2011, these benchmark rates have finally started a northern movement over the past few months.  Where they will stop, I wouldn’t hazard a guess but I know that the opportunities that these low rates represent, while still very favorable, more than likely won’t see recent levels any time soon.

I have been preaching the advocacy of Intra-family lending at the mid and long-term rates for years.  It may be better than gifting of assets to children and heirs.  Consider these points:

  • No gift tax returns to file or gift taxes to pay
  • An income stream albeit marginal (mid-term rate for August = 1.63% and long-term= 3.16%)
  • An element of control
  • An interim freeze on asset growth for loaned funds
  • Return of your money at some later date
  • Retention of any unused unified credit
  • Flexibility

While intra-family lending is a potent wealth transfer tool, rising AFR’s also affect many other planning tools.  One such program that I use extensively is the charitable lead unitrust, which employs the mid-term AFR to calculate the Section 7520 rates and charitable lead income tax deductions.

The planning opportunity afforded by these rates remains formidable.  If the client has the financial wherewithal, desire to transfer wealth efficiently and/or has charitable goals, there is no time better than now to explore the options created by low AFR rates.

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Business Protection Help

[ 0 ] December 11, 2013

Spectrum Financial Solutions, New Jersey, Florida, business protectionDear Clients, Colleagues, and Friends,

Larry and Harold, best friends and business partners for the past 20 years, operate their successful company as an S corporation. They started with nothing and built their business from the ground up, working hard to increase profits through the economy’s ups and downs. Their partnership is truly an American Success Story.

THE GOOD DEED:

Four years ago, Larry’s younger brother announced he was getting married. Larry was ecstatic with his brother’s new wife and asked what he could give the happy couple for their wedding gift. When his brother asked if Larry would be willing to co-sign a loan for a house, Larry didn’t hesitate. That’s what a good big brother does, right?

Unfortunately, four years of recession left Larry’s little brother unemployed and struggling to pay his bills. Larry had no idea how dire his brother’s situation had become until he received a notice in the mail that the bank was foreclosing on his brother’s house, which was now only worth half its mortgage.

THE PUNISHMENT:

Because of the personal guarantee Larry gave the lender, the bank comes after Larry for the remaining debt. After all, Larry willingly co-signed for the loan, leaving him responsible if his brother defaulted.   Unfortunately, the bad economy also hit Larry’s pocketbook, and he doesn’t have the cash or personal assets to pay off the debt.

Luckily for the bank, Larry owns a successful business. Larry believes his business assets and cash flow are protected from his personal creditors. Unfortunately, that is not the case.   Larry’s attorney chose the wrong entity when he formed the corporation, not realizing that corporate stock can quite easily be seized by a personal judgment creditor.

How does that happen?

Once the bank gets a judgment against Larry and his brother, the bank then receives a Writ of Attachment, allowing it to attach the debtor’s personal property.  Under a Writ of Attachment, the bank can take over Larry’s shares of the corporation and force the company to liquidate its assets, which then go to the creditor as the new shareholder. The bank can also vote to remove the current management and run the business itself until it can find a buyer, all while keeping the operating profits.

In short, Larry will lose everything he worked so hard to build. It’s not good for Larry, his brother, Harold, or the business.

BY CONTRAST:

Paul and Steve’s lawyer established their company as an LLC, rather than an S or C corporation. Paul also co-signed for a relative’s loan, and the relative later defaulted.

Luckily, because his business was organized as an LLC, Paul’s judgment creditor’s right to seize the LLC interest is quite limited. In fact, state law only allows the creditor to obtain a Charging Order (CO) after securing the judgment, rather than a Writ of Attachment, because no Writ of Attachment is allowed for a LLC membership interest.

A Charging Order restricts judgment creditors to receiving future distributions from the debtor’s interest if and when such distributions are made by the manager. The judgment creditor is expressly prohibited from interfering with the business while it waits for the distributions to be made or the judgment to be paid. In fact, under state law, a judgment creditor that obtains a Charging Order is deemed to be an “assignee partner/member”. This allows the business to operate normally, without impeding the partners’ business decisions or personal relationships.

It is also important to note that under federal income tax law, the “assignee partner/member” is required to report all of the LLC’s income (whether or not actually distributed by the LLC to the member). This is known as “phantom income”.   Because of phantom income, a judgment creditor will want to think twice before seeking to get the Charging Order registered against the LLC interest of the judgment debtor, as illustrated below.

Years ago, one of our clients was sued by a creditor and the creditor secured a Charging Order against our client’s LLC interest.  Under Rev. Rul. 77-137, we advised our client to send the judgment creditor his K-1 each year.  The creditor would not settle for less than the full amount of the judgment plus its fees and expenses of collection.  By the 3rd year under the Charging Order, the LLC sold a property that produced a capital gain of $2.4M.  The debtor’s LLC interest represented 90% of the total LLC, so pursuant to the IRS Ruling, the holder of the Charging Order was sent the K-1 representing 90% of the taxable capital gain, or $2.1M of taxable income.  Shortly thereafter, the creditor settled the outstanding debt for 10% of the original amount of the debt.

As I have been known to say:  The judgment creditor got KO’s with the CO.

THE SOLUTION:

The take-away from this lesson is that if one has the choice between operating their business as a Corporation (C or S) or an LLC, the LLC provides many more important options to consider. If you already own a C or S corporation, you can convert it to an LLC and elect to be taxed as a C or S corporation, as the case may be.

Despite the additional paperwork and costs, had Larry known about this choice, he would have gladly opted for this kind of business entity.

Don’t let a good deed punish what you’ve worked so hard to achieve. If you would like to know whether your corporation might qualify for this important benefit, contact us and we will gladly evaluate your situation for you.

We hope this helps.

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TONY SOPRANO’S ESTATE GETS “WHACKED”

[ 0 ] October 2, 2013

Spectrum Financial Solutions, New Jersey, Florida, James Gandolfini's WillThe cost of being penny wise and pound foolish…

Actor James Gandolfini, who made the mobster Tony Soprano a household name, suddenly died in June of a heart attack at the age of 51.  News quickly morphed from sadness over his untimely death to shock over his seemingly ill-conceived estate plan, namely, his will, which was so poorly drafted that up to 80% of his assets are rumored to be subject to a 43% estate tax.

Here’s irony for you:   While Gandolfini’s iconic Soprano’s character spent his life running from the government, the actor who played him on TV made the government his primary beneficiary.

I don’t think he did it on purpose.

According to news reports, Gandolfini had an estate worth an estimated $70 million at the time of his death. Looking at the way he bequeathed his assets, Gandolfini’s estate will pay about $30 million in taxes, most of which will come from the shares he left his wife and newborn child, due in cash within nine months of Gandolfini’s death.

Yes, you read this correctly.  Over $30 million owed in taxes on a $70 million estate.  Due in nine months.  Cash.

Many of you are probably asking, “With all of Gandolfini’s money, he could have bought the best estate planning money can buy.   How could this have happened?   How will his beneficiaries fund that kind of tax bill without an asset fire-sale or life insurance policies?”  The answer is that they can’t.  Estate planning experts believe his estate planning was ill-conceived at best and an utter disaster at worst.

So what went wrong?

If you go online and do some research on the Gandolfini will, you will find dozens of articles outlining what lessons can be learned from his advisors’ estate planning missteps. The articles outline tips for tax avoidance, the benefits of life insurance and trusts, the wisdom of consulting foreign counsel regarding property disposition in foreign countries, providing for real estate upkeep in wills, and the pitfalls of leaving huge, unequal chunks of money to young children from blended families.  Digging deeper, you may even find the one article where Gandolfini’s estate lawyer himself denies pretty much everything that’s been written about the Gandolfini estate. 1

But one thing remains true…

Regardless of how much Gandolfini was worth when he died and to whom his estate was distributed, close examination of the will itself reveals a poorly designed estate tax plan.

No matter which news report you believe, the debate surrounding Gandolfini’s will imparts us with two very important teaching moments: 

1.)    Hire The Best Estate Planning Team You Can Afford

If you have a significant estate (say north of $10M) and invested more for the car you drive than your estate planning, you can expect that your estate, like that of Gandolfini’s, will likely get “whacked” with unnecessary lawyer’s fees, probate administration fees and death taxes when you die–in the 40% to 50% range–what a waste.  Worse yet, during your lifetime, your assets will be exposed to potential financially ruinous lawsuits. Why go with a “coach” style estate plan when you will save and protect so much more by upgrading to a “first class” comprehensive estate plan?

That might have been one of Mr. Gandolfini’s biggest mistakes, and it’s going to cost his family time, money and privacy.  Most successful people understand they must upgrade their advisors as they increase their personal wealth but, unfortunately, not all.  Because professional fees for tax planning are generally tax deductible and therefore subsidized by Uncle Sam, it just makes good sense to hire the best tax advisor you can afford.

The knowledge required to protect significant estates is a totally different skillset than drafting an average will.  An experienced team of advisors can deftly navigate complicated business interests, multiple properties (sometimes in foreign countries), blended families, spendthrift trusts, life insurance plans, and the like.   Hiring an estate planner who has experience with such issues can prevent an estate from falling into tax pitfalls or from being ravaged by lawsuits that a less sophisticated advisor might not catch.

2.)    Get Out of Your Own Way

Know enough to know when you don’t know enough.

Mr. Gandolfini’s estate lawyer goes on record to indicate that his client made his own decisions, despite possible advice to the contrary.

This happens all the time.  Let me give you my own example.

I recently recommended a course of action to a client for a comprehensive estate plan with asset protection that would cost between $50,000 to $75,000 in legal fees to shelter millions of dollars in estate taxes and place protective “firewalls” around his assets in case of a future unforeseen lawsuit. He initially balked at the cost, but when he saw the amount of money his estate would save in taxes at his death, my client was smart enough to realize that you “get what you pay for.”

At our final planning meeting, I outlined all the “what if” concerns he had about his estate.  There were a lot, as his estate was highly complex. I took careful time to explain how each of his “what ifs” was addressed by my recommendation. He realized that the large upfront costs were nothing compared to knowing that his estate would save millions down the road. His assets would be protected from future potential lawsuits, his kids would be discouraged from fighting over the money by certain forfeiture provisions, and his legacy will be protected for decades to come.

The lesson here for clients is to clearly communicate all goals and concerns, then let your advisors get to work and trust that they have your best interests at heart.  And, importantly, don’t be penny wise and pound foolish.

Remember that while good advisors know that the client is the boss and will follow their instructions to the letter, great advisors know their client wants the best advice money can buy.  Great advisors work to achieve their client’s goals, even if it takes extra effort to get there.  Great advisors would never let the government become your primary beneficiary.

Don’t let your estate get “whacked” like Big Tony’s.  What kind of estate plan do you have: “Coach” or “First Class”?

Spectrum Financial Solutions, New Jersey, Florida, James Gandolfini

Spectrum Financial Solutions, LLC located in New Jersey and Spectrum Financial Solutions, LLC located in FL have been assisting individuals and businesses with their financial challenges for over 30 years.  Do you need to know about Privately Financed Universal Life Insurance located in FL? Call us today. Family Legacy Unitrust Edge located in NJ has been created to help families establish lifetime legacies in a unique manner that simultaneously addresses social and family needs. Applicable Federal Rates located in FL affect many of your planning tools.

George Klahre

10110 SE Osprey Pointe Dr.

Hobe Sound, FL 33455

732-450-9530

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I am Rich!?

[ 0 ] September 4, 2013

Spectrum Financial Solutions, LLC I am rich?

Written by George Klahre

In a recent TIME Magazine article, it was reported that UBS had surveyed thousands of investors to come to the conclusion that if you own investible assets of $5,000,000 or more, you likely feel that you are wealthy.  Great news, right?

On closer inspection of the numbers, of those polled, fully 40% of the respondents felt that they weren’t rich with $5,000,000 of investible funds in their accounts.  And what about those with lesser balances in their accounts?

Clearly, wealth is a relative term and not only applies to financial assets, but also to other forms of wealth…health, family relationships, meaningful work or service, philanthropy, etc.  Today, let’s just focus on boring old money.

It has become staggeringly clear to this writer that most of us don’t feel nearly as financially comfortable as we would like to be.  Further, us baby boomers are approaching that time in our lives when, if we haven’t done so already, we start thinking about retirement years, life expectancies well into our 80’s and how are we going to afford us for the next 25-30 years…or longer.

And then there’s that thing called a legacy….

Don’t despair.  Planning now can alleviate fears and concerns.  I have worked with clients and their advisors over the years and the opportunities that the legal, investment and financial communities can access may work wonders in addressing the questions of the future.  Maybe time spent with your advisors now can enhance your “wealth”…both financial and otherwise.

 I would love to chat with you if you or your client thinks it makes sense.

George Klahre

Spectrum Financial Solutions, LLC

Spectrum Financial Solutions, LLC located in New Jersey and Spectrum Financial Solutions, LLC located in FL have been assisting individuals and businesses with their financial challenges for over 30 years.  With an emphasis on partnering with the right professional, we offer technical help and  specializations to meet your every need. Retirement Planning in FL, Tax Planning in NJ and Estate Planning in NJ are our successful hallmarks.

Need to know about Privately Financed Universal Life Insurance in FL? Call us today. Family Legacy Unitrust Edge in NJ has been created to help families establish lifetime legacies in a unique manner that simultaneously addresses social and family needs. We’d like to make sure you know more. Applicable Federal Rates in FL affect many of your planning tools.

732-450-9530

George Klahre

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If you are a one trick pony, it better be a very good trick

[ 0 ] July 10, 2013

Spectrum Financial SolutionsWhy are we doing this now? And…What do we hope to achieve?

 

“If you are a one trick pony, it better be a very good trick”

 

I was on a plane yesterday morning organizing my day and this thought came to mind. Whether it is original to me (which I doubt) or not is irrelevant but I do thank the author, who I think probably exists or existed, for a thought that I feel is very applicable today.

On some level, aren’t we all “one trick ponies”? Those of us in the financial community often times master one discipline, become experts in that field and build careers around that expertise. While that can be rewarding and, in most cases, leads to lasting and meaningful relationships with our clients, mightn’t we become monochromatic at times and, perhaps, limit our ability to provide global solutions to issues facing our clients in an ever-changing world?

My sense is a resounding YES!

In my career, I have had the good fortune of working with some of the brightest and most creative minds in the legal, accounting, planning, financial advisory and insurance professions. To a person, those individuals reached the apex of their fields by not limiting their thought process to one discipline. Their secret, if that’s what it is, is that they have broad knowledge of the myriad alternatives facing their clients and integrate the best of those approaches into cogent plans of action…they have an interdisciplinary world view.

The challenge…time

When we have to plan weeks or months in advance for a lunch date, it is clear that we simply do not have enough time to access information that may potentially make us better at our professions, not to mention improve our personal lives. I receive, as you do, hundreds of emails each week with the “next great idea”. I simply don’t have the time (or patience) to read them all, especially when the likely end result is a solve-all-problems product pitch.

What I want and haven’t been able to find is a site that provides snippets of meaningful information that I can review and digest in 5 minutes. If the content is something that I can use or want more information on, I want a link to pursue the area further. I want information that is broader than one industry or product. I want access to the best and brightest professional thought. And, I want an archive that I can use as a resource for the future.

The Plan

I propose the design and building of a site (do I dare use the word blog?) that will periodically publish a concise, thoughtfully created inter-disciplinary letter aimed at us. I anticipate input from a variety of guest professionals and encourage you to share your expertise, should you wish to do so. My hope is that we can develop a nexus of information that will help us all be better at what we do, create better solutions for our clients and do so with a minimum investment of time.

What’s in it for me?

During my 35+ year career, I have morphed from investment advisor to financial planner to what I am today…I design and implement customized, inter-disciplinary life insurance programs for wealthy clients and their advisors. Should the information contained on the site lead to consideration of a life insurance solution, my colleagues and I would be honored to advise you.

Additionally, the broad base of information that will be published will afford me the opportunity to better advise my clients of alternatives in the marketplace, which may benefit you.

Spectrum Financial Solutions, New Jersey, Florida,

Spectrum Financial Solutions, LLC located in New Jersey and Spectrum Financial Solutions, LLC located in FL have been assisting individuals and businesses with their financial challenges for over 30 years.  Do you need to know about Privately Financed Universal Life Insurance located in FL? Call us today. Family Legacy Unitrust Edge located in NJ has been created to help families establish lifetime legacies in a unique manner that simultaneously addresses social and family needs. Applicable Federal Rates located in FL affect many of your planning tools.

George Klahre

10110 SE Osprey Pointe Dr.

Hobe Sound, FL 33455

732-450-9530

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