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:

http://www.mercurynews.com/ci_5898867?source=rss&nclick_check=1#recent_comm

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
savegainstax@gmail.com

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

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
savegainstax@gmail.com
760-917-0858

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

How to Know What to Share and With Whom

It goes without saying that one should not divulge personal information to strangers. With all of the identity theft going on in this crazy world, one can't be too careful.

However, there are times when sharing the information necessary to help yourself, your company or your family is not only practical but crucial.

If you are going to go to a CPA to do your taxes, they need to know your complete financial picture to do their job properly. If you hold back information, you are the one who gets hurt.

If you go to an attorney for legal counsel, you must disclose the facts as you know them so they will be able to do their job properly.

When seeking capital gains tax advice and counsel, it is important to know what legal structures are in place and how the sale of your asset will affect the rest of your financial picture. I have the same responsibility as your CPA and Attorney as far as confidentiality and protection of your personal data. Without the proper numbers, I can't provide you with accurate solutions.

I do not replace your CPA and Attorney. I work with them to be sure your interests continue to be taken care of even after the sale of your asset.

So, instead of having your current advisors tell you not to disclose any information to someone they or you don't know, let's all get to know each other so everyone is on the same page.

Any CPA or Attorney with your best interest at heart will take the time to have a conference call and put any of their concerns to rest.

In my opinion, it is the advisor who will not take the time to investigate the specialist trying to help their client protect his or her financial future that is doing the ultimate disservice and whose motives should be questioned.

Paula Straub
760-917-0858

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

Things That Make Me Go "Huh?"

Sometimes I just have to shake my head and chuckle.

I get alerts for news articles and press releases that concern capital gains so I can keep up on what everyone is doing and publishing.

Today there was a Press Release put out by one of the larger Structured Sales companies. The title had something to do with How Older Women and Widows were now inquiring about the Structured Sales Concept for 1031 Exchanges.

That was confusing enough, as the two are mutually exclusive. Farther down in the article they did mention the Structured Sale was in lieu of further 1031 exchanges.

Then they gave an example. One might think they would use an example of an older woman as the article title implied, but they used a daughter selling her Dad's second home to pay for his medical nursing care.

The daughter was "brought to tears" by the concept of her dad getting 10 years of payments totaling 300K (however, no mention was even made of the amount at time of sale for comparison).

Then came this sentence: "A traditional 1031 exchange would require the capital gains tax be paid in the year of sale."

This is what made me say "Huh?". A traditional 1031 exchange means you get to defer all capital gains taxes until you stop exchanging and sell outright. Is that what they really meant to say? Is it just me they confused?

Besides, the example was for a sale of a "second home" that didn't even qualify for a 1031 exchange in the first place!

I really feel sorry for people who are facing a capital gains tax dilemma for the first time. With so much contradiction in articles, press releases and general information on the subject - how is a novice supposed to know truth from inaccuracy?

When doing research it's a good idea to write down anything you find that is puzzling or contradictory. The correct answer is easy to find if you know where to look and a good advisor can prove their responses without back peddling.

Paula Straub
760-917-0858

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

Case Study Of What Not to Do

I recently had a call from a real estate agent who was in a panic. She had an 82 year old client who had called her in tears. Here is what had happened.

The client (I'll call her Susan Seller) had engaged the real estate agent (Rita Realtor) to sell an investment property for her in the Spring of 2006. Rita did exactly this and collected her commission without asking any questions about what Susan would do with the proceeds. Susan had approximately 280K in gains.

Susan took the check from escrow and placed it in a 6 month CD. She had never sold property before and was unaware of the tax consequences.

When the 6 months were nearing an end, Susan called Rita back and asked her to look for another investment property for her that was in the price range of her last sale.

Rita found a property for her in early 2007 and collected another commission, still not ever discussing the funds involved. Susan used the entire amount from the last sale, plus the interest from the CD and about 10K of her savings and purchased the property outright.

The second week of April Susan went to her accountant to do her 2006 tax return. The accountant told Susan she would owe upwards of 80K in capital gains tax, recaptured depreciation and extra income tax from the CD earnings.

Susan didn't believe that was possible because she hadn't spent a penny of the earnings except on the new property. Since she had employed Rita for both the sale and the new purchase, she believed that Rita would have mentioned the tax problems since Rita was aware of what she was doing.

So, Susan was furious and called Rita to see if there was some sort of mistake. Susan no longer had the money to pay the 80K tax bill. It never crossed Rita's mind to talk to her clients about what effect their sales and purchases could have on their taxes. Rita didn't know herself.

I gave Rita the bad news that Susan didn't have any choice but to pay her taxes. She will have to take out a loan either against her personal residence or the rental. This means the rental income that she was counting on to support herself will be used in good part to make payments on the new loan.

The extremely sad part of this story was that all of this could have been totally avoided by either doing a 1031 exchange or structuring the sale to minimize the tax burden. At the very least, Susan could have kept the proceeds in an account until the tax return and paid her tax consequences with the cash on hand.

Rita Realtor just lost herself a client and you can bet Susan Seller will be telling everyone who will listen about her bad experience.

All Rita would have had to do was ask a simple question when helping Susan with her first sale. She could have asked Susan what her plans were after the sale, informed her that she should talk to someone who could explain the tax consequences and options available because they may be significant if not handled properly, and given her the name of someone who could help.

Real estate sales persons and brokers don't have to be tax experts, but if they take that one extra step to show they have their client's best interest at heart, they will earn the respect and appreciation of their clients and never put themselves in the position of having to explain why they never disclosed the tax consequences on a sale.

I guarantee this is a lesson Rita Realtor won't soon forget!

Paula Straub
760-917-0858

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

Is Gifting Real Estate A Good Idea?

I receive a lot of questions regarding gifting real estate as a means to pass along property prior to death and remove it from the estate.

In theory it sounds good, but in many cases it does not accomplish what the giftor intended. Here are some things to consider before taking any action.

1. When you gift real estate the person receiving the property inherits your tax basis and /or depreciation taken. So, if you paid 100K for the property and it is worth 500K, the recipient will owe taxes on 400K when they sell.
2. If you are giving the gift to remove property from your estate, you have to realize you may have to pay gift tax. You have a maximum of 1 million dollars to give during the course of your lifetime without paying gift tax. Once that amount is exceeded, it is you who will have to pay the tax on each gift. (There is an annual amount of 12K that can be gifted to any one person without counting against your maximum lifetime gift amount)
3. If you are trying to remove property from your estate so you will qualify for State or Federal assistance for medical care or a nursing facility, there is now a 5 year look back period. This means that if you didn't give the property away at least 5 years prior to when you need to qualify for assistance, they count it as if you still have the money and you won't qualify. This is to prevent individuals from wiping out their estate for the express purpose of qualifying for government aid.

Of course, there are times when gifting does make sense. It really depends on the individual situation and goals. Before doing anything you might later regret, consult with a professional who can explain the ins and outs. It is very possible the desired results can be attained using a different approach.

Paula Straub 760-917-0858

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

Red Flags to Beware of From Your Advisors

Tax time is drawing near. Never is the desperation more apparent than this time of year when panic sets in as April 15 (or 17th in 2007) fast approaches.

I estimate 4 of every 5 phone calls and emails are from those filling out tax returns and learning of the exact amount of taxes they have due. Many panic from having had no guidance prior to the sale of their asset in the previous tax year, but just as many are irate due to having had bad counsel.

In almost all cases, the amount they have to pay is much greater than they anticipated or were told. Most don't have the excess funds readily available and are desperately trying to find a way to defer their tax burden now due.

So, I've compiled a list of some of the most frequent scenarios I hear and where the initial problem started, often due to bad or inaccurate advice.

Consider these red flags if you find yourself selling an asset, and at least seek a second opinion before proceeding if you are told something similar.

1. From financial advisors: "Just pay your taxes and give me your proceeds to invest. I'll get you double digit returns and you'll be ahead in no time".

2. From Attorneys: "Let me evaluate the situation. That'll be 10K for my research and recommendation." No doubt the solution will be some sort of expensive trust or other fee for service plan and additional fees will be required to implement it.

3. From CPAs or other Tax Professionals:

• There is no solution but to pay your taxes
• You'll only have to pay 5% capital gains tax or at the most 15% so why consider anything else? The tax rates will never be lower (not usually true and due to lack of knowledge on how to calculate capital gains)
• I don't have time to research that plan. I'm just too busy.

4. From anyone you go to for advice:

• Either "I know all about that and it's not not a good idea" (without a solid reason why or without being able to explain the strategy in question), or "I've never heard of it so it must be a scam of come sort" (again without being able to explain why)
• "My Uncle Milt had a bad experience with the IRS. It's better to just take the hit and not have to deal with them down the road" (Problem usually totally unrelated and caused by other source of bad advice)
• "If you just take the lump sum up front you'll be in control of the money and you can do whatever you want with it. You can take that trip or invest it in the stock market"

5. "Whatever idea someone else presented to you is not right. This (whatever they are selling) is the only way to go. There's no use even discussing it further - you'll be sorry if you don't do what I'm offering you. There is no need for all parties to get together and talk. The other party is full of it"

Now, here are some of the things you want to hear from an advisor:

1. I haven't heard of this plan, but I'd be interested to know more. If it makes sense and is better for your situation I'm all for it. It may even be something I can use to assist other clients in the same dilemma.
2. I believe my plan is better for you. Let's set up a conference call with all parties and discuss the advantages of each so you can hear both sides and make an informed decision.
3. I'm not familiar with this. Do you mind if I contact the other party and find out more about it so we can make an informed decision?
4. Here are a list of questions I have concerning what you have shown me from the other party. If they can be answered to my satisfaction I will feel comfortable recommending the plan.

It is hard to know who to go to for advice and who to trust. I can usually tell if someone has my best interest at heart by how they answer my questions and how they use facts to support their proposal versus just blowing hot air or invoking fear for no reason.

If a professional has a plan they feel is in the best interest of their client, they will have no problem explaining and comparing the benefits of an alternate proposal. If all parties can hear both sides simultaneously, the party will the superior plan will become apparent.

Everyone can always stand to learn something. Anyone who thinks they know it all is usually the most ignorant. Just my two cents.

Don't let yourself be scrambling before next year's tax return and wishing you had done more before the sale to lessen your tax bill. It will be too late.

Paula Straub

760-917-0858

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