Wednesday, October 31, 2007

Bottom Line – Installment Sale Through a Foundation – Part V

So far, I have addressed some of the ins and outs of the 1031 exchange, the Charitable Remainder Trust, the Structured Sale, and now will do the same for the Installment Sale Through a Foundation.

There is no one particular strategy that is right for everyone, and it behooves you to work with someone who can review your whole financial picture and needs so that you can compare and contrast all of your options and find the right one or ones for you.

The Installment sale through a foundation works with pretty much all highly appreciated assets. Currently, there is only one foundation set up to handle this transaction though I predict more will follow suit over time. This strategy had been in the works for over a year to handle the disposition of C-Corps, but was put into full swing in January 2007 following the removal of the Private Annuity Trust for tax deferral by the IRS in October 2006.

A Charitable Bargain Sale is performed by a 501C3 Charitable Foundation and the asset is purchased by the Charity at a discount from Fair Market Value. The Charity then sells the same asset at fair market value to your buyer and receives the proceeds in cash.

The amount of discount is your donation to the charity, which launches a charitable deduction for you to reduce your taxable income for up to a total of 6 years, or until the deduction granted has been fully used up. If there are taxes due for depreciation recapture or due to forgiveness of debt, this deduction will reduce the amount owed at time of your next tax filing. There will also be partial forgiveness of capital gain and depreciation recapture on the amount donated.

The charity then enters into an installment sale agreement with you, the seller, to pay back the remainder of the money over time in installment payments with a fixed interest rate on those monies between 5.5 and 6%. The remainder of the capital gains tax due is paid only as received as in the Structured Sale and is spread out over many years.

Your actual tax deduction will be greater than the original contribution, as there is a projected deduction added for an additional contribution at the end of the contracted payments. Any interest earned in excess of the interest paid out to you will go to the charity once the installment agreement has been satisfied. The charity provides a letter of explanation regarding the deduction to the IRS at time of close and to you for your records.

Since you have an installment contract with the foundation, if there is a need to amend the terms in the future, as long as both parties agree and any penalties for early withdrawal are accounted for and paid, the contract can possibly be amended or canceled. Please note, although circumstances may warrant such an act, it is almost always better financially to stick to the original terms.

So, what you need to address is how much will it cost to set up? How is my money invested and protected? What if something happens to the foundation? Are there any ongoing fees? Do I have legal representation? Do my heirs get any monies left over if I pass away before the installment agreement has been satisfied?

Because your monies are invested and segregated with a large insurance company in a commercial annuity product with a principal guarantee there is little risk of loss, as is the case with the Structured Sale. Since here the annuity is not annuitized, it allows for a higher interest rate payout and more flexibility.

It is always a good idea to compare each vehicle side by side for your unique situation. The bottom line should be safety, tax minimization and overall return. The whole idea is to keep as much of your proceeds as legally possible and to do it with as little risk as possible.

It is just as imperative to work with a professional who understands the ins and outs of each strategy and can explain the pros and cons of each. If you don’t know the right questions to ask or what answers to expect, you may not fully understand what you have committed to and it will be too late to change your mind.

This is where I can be of most help.

Paula Straub
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at

Wildfire Aftermath

I just want to take a moment to thank everyone who sent their good thoughts my way during the recent fires here in San Diego. It worked because my home was spared despite spending three days with my bags packed and on standby evacuation status.

Many others weren’t as fortunate and are faced with the inordinate task of getting their lives back on track after losing everything they own.

A tragedy such as what happened throughout Southern California will have some far reaching impacts that most don’t think about.

Those who lost businesses no longer have a source of income but may still have outstanding business expenses to deal with. Those who lost homes with mortgages still have those payments to make as well as the cost of alternative living arrangements.

Those with properties for sale in affected neighborhoods will no doubt be forced to reduce asking prices or hang onto them for years.

Many will face foreclosure or bankruptcy. Insurance often does not cover all the expenses which arrive and it takes a long time to rebuild.

Real estate is a great investment in most cases and should be part of any portfolio. If you are house rich and cash poor any act of nature can upset your financial and retirement plans. And, yes, it Can happen to you.

Ask any of the people affected by these fires if they’d rather have a guaranteed income stream still arriving every month at this point or a paid up home which has just been demolished. I know what my choice would be.

Paula Straub
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at