Wednesday, June 13, 2007

Is 960K a Lot of Money to Write a Check For?

Occasionally I have a case that gives me pause. I have to wonder at what point loss of money is no longer important to some.

I’d like to hear some opinions from my subscribers. After you’ve read this article, if you would, drop me a quick email to and let me know how you decide how much is too much to pay in taxes- assuming you have a solid alternative.

My recent discussions were with a son regarding the sale of his family business. His parents were the only stock holders so they made the final decision. They were in their early 70s and about to retire. Both are in good health.

The business had a gain of about 3.2 million dollars and the tax bill was going to be approximately 960K. Real estate was involved, so recapture of depreciation was also an issue.

The son was concerned about losing that much of their profits, so he was doing some research on how they could minimize their tax burden. Any way we looked at it, it behooved them to do something rather than nothing. Their options were all very good.

To make a long story short, the parents decided they would just sell and pay the taxes due. Granted, paying taxes is everyone’s right and Uncle Sam will be very happy to receive close to one million dollars in a nice lump sum. (I just wish it was put to better use once collected)

Although 2.24 million (after taxes) is certainly a grand profit, I can’t help but think the 960K tax bill is way to much hard earned money to part with. Here are some thoughts that keep me in a quandary.

The parents had more than enough to live comfortably with the after tax proceeds. But, since they have children and grandchildren, it would mean a much larger legacy for their heirs if they paid less in taxes and left more at their passing.
If they didn’t care about their heirs, what about earmarking that money for a charity with a good mission? It could have made a significant contribution towards disease, poverty, spiritual enrichment, global warming, etc.
The after tax money still has to be invested somewhere. Their intent was not to begin long term real estate accumulation or gamble in the stock market at their age. If placed in taxable investments with principle guarantee for safety, this means a fairly low interest rate, and what they need to live on is taxed at ordinary income tax rates when withdrawn. So, why not have spread out the tax burden, and be taxed at mostly capital gains tax rates vs income tax rates and increase their lifetime income as well?
This money is still also in their taxable estate. It is subject to creditors, medical expenses, and possible estate tax when they pass.
Even keeping out a large lump sum and reducing the taxes due on it with a tax strategy and spreading out the taxes on the remainder over a number of years would make a lot of sense.

My only conclusion is that to some individuals, once they have a certain amount of money, paying a large tax really doesn’t seem that burdensome. To me, no matter how much I have accumulated, I don’t see myself paying close to one million dollars if I have a valid alternative. I bet Donald Trump or Warren Buffet would agree.

Drop a line and let me know if, in the same situation above, you would have paid the 960K and have been done with it, or if you would try and keep as much of that working for you for as long as possible.

Is there really a point where money doesn’t matter?

I’ll keep a tally and send out the results in a future email.

Paula Straub

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