Wednesday, May 16, 2007

Clients Lose Millions With Qualified Intermediary

I got an alert on an article today from San Jose, CA. The subject was a Qualified Intermediary that somehow absconded with millions and millions of dollars in clients 1031 exchange funds.
Here is a link to the entire article:

These are people who have been in business for a long time. It seems almost impossible to believe this can happen, but it shows that you need to know what questions to ask before entrusting your funds to anyone. It comes back to- how do you know what to ask if you don’t know?

Shopping for the lowest cost QI is acceptable if you are comparing apples to apples. Here are some basic questions.

1. Is my money held in a separate account that you cannot access except for the exchange transaction?

2. Are you insured and bonded?

3. Do you pay interest on my money while you hold it?

4. What assurances do you have in writing that if something happens to your company my money is still intact and not accessible to you to secure loans directly?

5. If your doors close tomorrow, is my money protected and available to complete my transaction on schedule?

The article doesn’t say how the money was invested such that the owners could borrow against it or not have the funds segregated and able to be drained.

There are many great Qualified Intermediaries out there, but some bad apples as well.
Make sure to arm yourself with the knowledge that your proceeds are safe and that your exchange will not be disqualified with late payments or heaven forbid lost altogether by unscrupulous owners!

Paula Straub760-917-0858

Fill out a Qualification Questionnaire to see if you qualify to save capital gains tax.

Tuesday, May 15, 2007

Case Study of Company Stock Sale

This is a case study of how a Charitable Installment Bargain Sale can be used to minimize taxes on the sale of company stock held in a company 401K plan.

A 60 year old gentleman had a large amount of company stock in an old 401K plan with his former company. He had left several years ago, but kept the stock in his old plan.

Now he is ready to retire, but if he rolls the stock into a traditional IRA and sells it, he will pay ordinary income tax on the entire amount.

His cost basis in the stock is 70K. The stock value is now worth over 1 million dollars. He has other income, but not quite enough to maintain his lifestyle. Any distribution would be taxed at about 37% between state and federal taxes. That's almost 40 cents on the dollar that would go to Uncle Sam.

So, here is a solution that makes a lot of sense.

He has a one time shot, since the stock is in a 401K plan, to pay ordinary income tax on his cost basis and get the stock out of the plan. This means that for about 26K (income tax on 70K) he now has control of his stock.

When he sells the stock, he will pay capital gains tax on the sale instead of ordinary income tax. So now, his tax rate drops to 24% vs 37%. That is great in and of itself, but there is more.

This gentleman is at a point in life that he needs to protect his principle and not leave it open to the fluctuations of the stock market. He doesn't need it all at once, but needs a steady, reliable stream of income for his retirement.

Through a Charitable Installment Bargain Sale, he is able to get an immediate tax deduction to lower his income for the next 6 years (and also offset most of the tax immediately due on the cost basis of his stock), and he is able to get a partial forgiveness of the capital gain forever as well as a guaranteed income stream for either 20, 25 or 30 years. He pays the remainder of the capital gains tax in small amounts as he receives the payments, and the bulk of the money continues to earn interest for him.

As always, there are specific IRS rules to be followed and each case is unique. A complete review of your total financial picture should always be done to determine the best plan for you.

Paula Straub

Fill out a Qualification Questionnaire to see if you qualify to hang onto your capital gains.