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Buying Notes with your Self-Directed IRA

Posted on: April 6, 2017 at 4:26 am, in

Buying Notes with your Self-Directed IRA

Now that you know the basics of a Self-Directed IRA, let’s dive into some of the leading trends in Self-Directed Investing. With all of the stock market uncertainty, investing in notes has become increasingly attractive using tax-deferred funds in your IRA or retirement plan. Notes can be a great option because the payment streams come into your IRA and in the final analysis, on a first trust deed, the worst case is that you own the property. Best of all, discounted notes can be purchased for pennies on the dollar.
Investing in real estate and notes is just like any other transaction that uses a third-party entity as the owner. Here are some rules to keep in mind when considering note-buying with your Self-Directed IRA:
  • The IRA owner cannot receive any benefit from the IRA or its assets. Specifically:
    • No living on the property.
    • No direct receipt of income related to the property. Income is only permissible when it is proportionate to the investment.
    • The IRA cannot deal with you or any disqualified persons. This includes parents, spouses, children, and some business associates.
  • Qualified plans assets, such as an office building invested in or by a plan, can have a certain part allocated to having you rent space for the purposes of the plan (we suggest consulting an attorney for more information).

How to get started buying notes with your self-directed IRA:

Once you’re ready to start investing, a direction of investment form must be completed when purchasing a real estate note. By utilizing an IRA administrator, you can guarantee your directions will be executed in a detailed and timely manner, assuring efficient transactions.
When a title or escrow company is involved, make sure that all instructions are provided for all documents in your account. Title or escrow companies may have additional requirements for your transactions than ours, so please be aware.
Your administrator must receive all loan documentation before funding can take place. Funding may not be initiated without a full loan package; this includes a trust deed and note, title insurance (if applicable), and appropriate vesting.
As your record keeper, your IRA administrator may receive payments directly from your payer as well as process loan payments. They also keep all original documentation for your convenience.
By investing in notes, you are investing in a tangible asset. By investing with your Self-Directed IRA, you are guaranteeing tax-free returns on those investments, making it a great alternative to the stock market. For more information on buying notes in your Self-Directed IRA, or any of the options available to you by Self-Directed investing, call us toll-free at 888-938-5872.
Take back control of your retirement and stop losing money to the fund managers. Contact us today!
888-938-5872

What is Self-Directed IRA Investing?

Posted on: April 6, 2017 at 4:25 am, in

Self-Directed Investing 101

The Self-Directed IRA industry is growing at a staggering pace and is expected to see over $2 trillion enter the market over the next few years. With over 45 million retirement account holders and less than 4% of those being held in nontraditional assets, the time to consider Self-Directed investing is now. The Investment Company Institute- the national association of U.S. investment companies, estimates that nearly $4.7 trillion in IRAs were held in the U.S. last year. Of this, an estimated $94 billion or a mere 2 percent are Self-Directed IRAs.

So, what is Self-Directed IRA Investing?

A Self-Directed IRA allows you to decide how to invest your retirement funds. Many people assume “Self-Directed” is a unique type of IRA. However, “Self-Directed” is not a type. Any IRA, whether it’s a Traditional, ROTH, SEP, or SIMPLE IRA can be self-directed.
Using your IRA to invest in non-traditional assets like real estate has been available to investors since 1974. You may be learning about this for the first time because large banks and brokerage firms don’t typically offer these investment options. You may ask – “Is this really legal?” The answer is yes. With the exception of life insurance contracts, collectibles, and stock in an S corporation, IRS rules allow all other investment types as long as they comply with the rules governing retirement plans.

Why Self-Direct?

Stock market volatility and the economy have many investors considering alternative assets for their retirement accounts. A Self-Directed IRA gives you control over your retirement funds by making tax-free investments in assets that you’re familiar with.

What Can I Invest in?

Below are some examples of investment opportunities available to you through your Self-Directed IRA:

Types of Self-Directed IRA Investments Allowable by IRS:
Residential real estate Tax Lien Certificates Precious Metals
Commercial real estate Equipment leasing Factoring
Undeveloped or raw land Livestock Accounts Receivable
Real estate notes Foreign currency Oil and Gas
Promissory notes Stocks ,bonds, mutual funds Structured Settlements
Limited partnerships Private placements
LLC and C-Corp Structured Settlements LLCs, LPs and C-Corporations

What are the Rules?

Prohibited Transactions. IRS rules forbid certain types of transactions in IRA accounts. Some examples are listed below:
  • Collecting management fees for your properties is also prohibited as it is a direct benefit for you, the account owner.
  • Collecting commissions on properties purchased through your IRA.
  • You may not buy, sell, or lease your real estate from disqualified persons.
  • All profits generated from an IRA owned asset must be paid back into the IRA and all expenses incurred by the asset must be paid by the IRA (they may not be paid with personal funds and reimbursed by the IRA).
  • Any debt used to acquire an asset in an IRA must be non-recourse. In other words, the IRA owner is prohibited from guaranteeing the note personally.
Disqualified Persons. IRS rules define certain individuals that are unable to participate in any transaction with your IRA:
  • Yourself
  • Your Spouse
  • Your Children
  • Your Children’s Spouses
  • Your Parents
  • Certain Business Partners
Additional Regulations. Here are a few examples of prohibited transactions using your IRA that you should become familiar with:
  • The property must remain in the IRA until distributed or sold to a third party.
  • Property owned within an IRA will not be able to take advantage of write-offs, such as depreciation or other expenses relating to the property.
  • All rental profits must be returned to the IRA.
  • When purchased, the property becomes an asset of the IRA.
  • If you are an owner, you may not lease to a disqualified person, or in any way have a disqualified person occupy the property while it’s owned by your IRA.
  • While an IRA owner cannot manage the property, they can hire a property manager or real estate broker to collect rent and maintain the property.
  • Neither the IRA owner nor his/her family members (siblings excluded) may have access to or utilize the property while it’s in the IRA.
  • Borrowing money from an IRA. IRA’s are prohibited from making loans to IRA owners as well as any other disqualified persons.
  • IRA owners are prohibited from using their IRA as collateral for any loan, as the amount they pledge as security will be deemed a distribution by the IRS.
  • Selling assets you already own to your IRA or to a disqualified person’s IRA.
  • Purchasing a property for personal use, either by the IRA owner and/or a family member.
  • Purchasing a property owned by a family member who is a disqualified person.
  • Lending money to a disqualified person.

So should I open a Self-Directed IRA account?

Self-Directed investing isn’t for everyone. For some, the idea of having total control of their investments is a daunting one. We recommend reviewing your investment strategies with your tax advisor prior to investing. For more information about what a Self-Directed IRA can do for you call us toll-free at (888) 938-5872.

Asset Protection in Pennsylvania: Is a Single Member LLC Enough?

Posted on: April 5, 2017 at 3:17 am, in

Many Pennsylvanians look to the almighty LLC to protect their business from personal debts and their personal assets from business debts, but they may be in for a surprise. Others, may not even be looking towards an LLC and could be making an even bigger mistake of holding their business as a sole proprietorship. Either way, Pennsylvanians can do a better job of protecting their assets.

The Sole Proprietorship

A sole proprietorship is just what it seems to be: a business owned by one person in totality. A sole proprietorship may be the worst way to hold a business, because running a business in this manner is like waving a $100 dollar bill at the Louvre in Paris; just not safe. Similar to owning a car, if you owe money to someone, they can take the car to pay the debt. If one has an accident with the car, the people who were injured can acquire other assets, for example assets in a savings account, to pay off the judgment in the lawsuit. In the same way, with a business owned solely, if one owes debt the creditor can go after the business assets. Additionally, if the business is sued, the plaintiff can attach personal assets. An LLC is by far a better choice, although not the best choice.

The Pennsylvania LLC

A Pennsylvania LLC offers better asset protection than a sole proprietorship for several reasons. First the LLC is protected from personal debts of the LLC’s owners. This means that if one of the owner’s are sued personally, the LLC is not required to pay the owner’s debt. The creditor may, however, attach any profits that the LLC is paying to the debtor. This is called a “charging order” [Zokaites v. Pittsburgh Irish Pubs, LLC, 962 A.2d 1220 (PA Super. 2008)] and is the only remedy available to creditors. So although the indebted owner will not lose his business, he won’t profit from it either. The reasoning behind this Pennsylvania law is that it protects the other owners of the LLC from having a creditor as owner with voting rights.

Pennsylvania and the Single Member LLC

But what if there is only a single member of an LLC. A lot of people don’t want to give up part of their business, even to protect it. Well, in a single member LLC, all bets are off [In re Albright, No. 01-11367 (Colo. Bkrpt. April 4, 2003)]. There aren’t any other owners to protect, so a creditor may well be able to take over the ownership of an LLC to satisfy the debt or judgment. This type of LLC probably doesn’t protect much better than a sole proprietorship.

The Better Asset Protection Choice in PA

So what is the better asset protection choice? Don’t own the business directly at all. Keep working for yourself, but don’t own the business. It’s not as confusing as it sounds. Change the sole proprietorship to an LLC owned by a proven and properly drafted, executed and funded irrevocable trust such as the Ultra Trust. Many believe that an irrevocable trust is for estate planning and has nothing to do with a business. Well, an irrevocable trust, drafted in the correct way, can be an excellent vehicle to hold an LLC to add another layer of protection. An irrevocable trust is like a safe at the bank. The LLC goes into the trust and is owned by the trust. Whenever the ex-owner wishes to access funds, they get paid from their job as the manager of the business or they drive up to the teller (trustee) and ask for assets. The teller (trustee) then gives out the assets. When a creditor drives up to the teller window and asks for assets, the teller (trustee) says, “No way. Get out of here.” The creditor has no recourse because the debtor (the ex-owner) doesn’t legally own the business anymore. The trustee is under instructions to stop paying if there is a lawsuit, a divorce or in the case of severe debts. The LLC is safely tucked inside the trust and the ex-owner is safely outside the trust. Similarly, if the LLC falls on hard times, the creditors can try to “pierce the corporate veil” but will only make it to the trust, not the ex-owners personal assets.

Bonus Benefits of Irrevocable Trusts

As an added bonus, there are estate planning benefits. If the LLC is an asset that is growing, then placing the LLC in an irrevocable trust could save thousands of dollars of estate tax for your heirs. This is how it works. The owner owns a business that is worth $100,000 when placed in the trust. Because it is already owned by the trust, and $100,000 is well below the gift tax exemption, no gift tax will be paid. Now, the business grows to an $8 million business. The ex-owner dies and the trust passes the $8 million business to the beneficiaries that he chose in the trust instrument. Because the trust owns the LLC and the trust is the entity passing the LLC to the heirs (whom already had and interest when it was worth $100,000), the LLC is outside of the estate and not subject to estate tax.
Keeping with the added bonus theme, the trust doesn’t have to end at the ex-owner’s death. Unlike a will, a trust is its own entity and can carry on many years past the death of the ex-owner. In a will, the assets are “given” to whomever a person chooses or the will creates a trust. With a pre-existing irrevocable trust, assets are held with instructions to “give” the asset at any given time or under any given circumstances that the ex-owner can imagine. A trust could hold the business and give out the proceeds to the ex-owner’s children a little at a time or hold back payment should a child develop a substance abuse problem or get a divorce. The trust could continue on until the statutory end or it could end when a child reaches a certain age. All the while, the assets are safe from the creditors of the children.
In Pennsylvania, as in all states, A sole proprietorship is not the way to go. An LLC alone can help with asset protection somewhat, but one of the best asset protection strategies to hold a business in Pennsylvania is to combine an LLC with an irrevocable trust. Not only will the protection increase 10 fold, but one gets the added bonus of skipping estate tax when passing the asset to heirs. If one wants to keep their business firmly rooted in the keystone state, an irrevocable trust with and independent trustee is a great choice for any sized business.
Not all trusts are created equal – find out what makes the Ultra Trust Better

How My Client Saved $500K This Year on His Income Taxes

Posted on: March 8, 2017 at 1:09 am, in

With the Favorable IRS Determination Letter to Prove it

For those that have ever thought that they pay too much income taxes, this might be the most important post they ever read.

Mike was a doctor in Texas. He made a lot of money, but he worked his butt off to earn it; with 20 years of schooling, 3 years in residency, and sometimes working 90-100 hours a week, giving up half to a government that was going to waste it on a bridge to nowhere really irritated him. About 48% of the $1.1-1.4M 1099 income he made went to pay taxes and because of it, he practically had an anxiety attack when he had to write those $100,000+ checks to the IRS every quarter.
He lived in a gorgeous 7,000 square foot house, both him and his wife drove luxury cars on top of his Ferrari, Maserati, and Range Rover fun cars and his kids went to private schools, but he only spent about 150,000-175,000 per year on their lifestyle. That meant that he was paying taxes on about $1-1.2M of income that he didn’t really need.
His colleague, Chris, told Mike about us after helping him with a similar circumstance. After a 30-minute conversation to understand his situation, we presented Mike with a few income tax-saving options such as oil and gas exploration, the creation of a non-profit foundation, the charitable remainder trust, and a customized retirement planning cash balance strategy. He decided that the retirement planning cash balance option made the most sense for him and his family.
Our actuary put together a plan based on his goals. He contributed an average of about $1M to a Super 401k, Pension Cash account, 401h, and COLA retirement accounts. In about 3 years he had accumulated a bit more than $3.2M and saved $1.5M in taxes.
He told me “Rocco, I was either going to give the $500K to the IRS or I was going to give it to my myself into my retirement account – it was a bit of a no brainer.”
“I was practically getting a 100% return on my money immediately because I’m putting about double into my retirement account then I would have been able to. So now, I am not making 4-8% per year on the $500K retirement account that I would have had before, but now I am making 4-8% a year on the entire $1M. It means that the retirement account grows exponentially faster. It would have taken me 5-6 years to accumulate a retirement account of more than $3M before.”
To say that he appreciated our suggestions, was a bit of an understatement. But he was not alone:
Joe in New Jersey who ran a carpet installation business averaged net income of about $500-700K per year. We approached his situation in a similar fashion as Mike and he saved about $250K per year from his tax bill while amassing a $3.5M retirement fund in 5 years.
John on Long Island who had a real estate business netted about $500-600K a year. We were able to save him about $200K a year in taxes.
Ross lived in between New York City and Miami running a Herbalife distributorship and he averaged between 900K-1.1M net income and we used the same strategies to defer him and his wife about $350K in taxes as well.
Finally, Ron in Boston was a dentist as he was able to knock off $100K from the check that he wrote Uncle Sam as well.

Problems and Misconceptions

The problem is that when most people think about retirement planning, they are thinking about SEP account, Standard 401k, Standard IRA, or a Roth IRA.
For those making more than $250K a year, the maximum amount they can contribute with these plans is so tiny (typically a $18-59K contribution only results in tax savings if $9-25K) that it hardly helps them make a dent at all if their tax bill gets into the $200-400K range, so many don’t even bother.
The most frequent response I get when I talk to high earners about making small changes to their planning that save them up to $500,000 a year …is “….Is that legal? I have a CPA and he takes all the deductions possible. How come he hasn’t showed me something like this before?”
And one would think that your CPA would offer the best tax advice to save on taxes, right?
Yes, a CPA may know about the accelerated depreciation benefits of Section 179 or the intricate details of how to expense mileage on your car travel, but most CPA’s don’t know anything about many of these loopholes available to their business and 1099 clients, nor are they incentivized by the $5-10K they’re paid every year to find those special loopholes.
Are they really going to take a risk in making a mistake or the time to learn something new in the middle of tax season on something they are not experts in, in order to save you a few extra dollars. Not likely.
My name is Rocco Beatrice and I hold a CPA, MBA, MST (Master’s Degree in Taxes). I am the Managing Director at Estate Street Partners. In business for more than 30 years, we have an A+ with the BBB, are a member of the National Ethics Association, and have helped more than 4,100 families protect and save more than $4.3 Billion.
While I’ve been quoted on ABC, Fox, or CBS about how business owners and 1099 employees just don’t take advantage of their biggest tax loopholes, I don’t tell you that to impress you. I tell you that because I want you to know that these are not necessarily new ideas, but they work 100% of the time and are part of the IRS tax code… and I have several Favorable Determination Letter’s from the IRS to prove it!
A few years back congress passed the Pension Protection Act and your accountant may not be aware of how these changes can dramatically change your tax bill – most accountants are not.

The Secret

So what is the secret to increasing limits on cash balance retirement plans like this? The secret is that when you get a pension actuary to approve a customized plan, the limits can be as much as 20 times higher than the standard off-the-shelf plans. The IRS relies on the actuary’s number and if they bless the plan, you are golden. Our actuary has created more than 5,000 plans like these over his 46 year career so you can trust you’re getting the best experience in the business.

The Cherry On Top

And the cherry on top is that up to 33% of your contributions to a cash balance plan can be put into the ultimate in retirement accounts very few have even heard of…the 401h.
The 401h is better than the 401k, IRA, Roth IRA – really anything out there. Why? Because they offer a 100% tax-deduction on contributions, it grows capital gains free, and there is no tax on the money when it’s taken out … if used for medical “related” expenses.
And with couples over 55 expected to spend more than $460K on medical related expenses during the remainder of their life span according to AARP, not even including nursing home costs, tax-free “medical expenses” is a huge benefit. The 401h covers a huge variety of items including medical insurance, insurance deductibles, Lasik Eye Surgery, Personal Trainers, Spa Facilities, Usage Fees for Facilities, dentures, dental fees, nursing home care, and on and on and on…there is a list of literally hundreds of things it can be used for.
Believe it or not, the tax year is only weeks away from ending. If these strategies seem intriguing, then there’s not much time left because once the clock turns midnight on December 31, the carriage turns into a pumpkin and we will be forced to start planning for 2017. Since everyone procrastinates, imagine how impossible will be to get anything accomplished in December.

Getthing This Done

So how does one get this done? Just tell your CPA that you are interested these tax strategies. If they aren’t familiar, then we can help them get up to speed quickly. Yes, we’ll work with your CPA. Typically, we can review your situation in a 15-30 minute consultation. We then have our actuaries present a proposal. If it makes sense to you, your accountant with our guidance can help you execute the plan.

The Catch

So what’s the catch? The catch is that while one never pay taxes on the 401h money when used for medical expenses, with the Cash Balance plan or Super 401k accounts one will need to eventually pay taxes when they take the money out. But wait a second. Right now, we are paying 40-60% in taxes on money that we don’t immediately need. We are living on $100-200K per year.
By the time retirement comes around, there is likely going be a much lower tax bracket because you’re only going to take out what is needed to spend and we could avoid the FICA, state tax and Obama tax altogether. You might even live in a lower tax state like Florida or Texas with zero income tax.
Interested in these strategies? First ask your CPA about them. If he is not familiar, or does not want to go it alone, we can help. Contact Rocco Beatrice at rvbeatrice@ultratrust.com or (888) 938-5872.

Top Growth Stock Mutual Funds to Invest in Over a 10 Year Horizon

Posted on: March 8, 2017 at 1:08 am, in

Man in rowboat rowing to view of mutual fund island of cash.

If you are like most of us, you want to invest over the long haul, buying the best mutual funds to invest in and not have to worry about it. Most people automatically make an assumption that growth stock mutual funds will provide the best returns over the long run. Often times this is a poor assumption, but in our research we found the best mutual funds to invest in were, in fact, growth stock mutual funds, but let us not forget, retirement investing is for your long term retirement goals, so you want to make the most of every dollar you put in there, so you can have enough money to retire… maybe even retire early.

Kiplinger puts out a great list of best performing mutual funds to invest in (10 years). They actually look at the best mutual funds to invest in during the last year, the last 5 years, 10 years and 20 years, but let us not digress. Their analysis is purely from a statistical perspective; e.g. which funds averaged the best returns. No doubt that it might be fun to take a look at the best mutual funds to invest in for the last year. Here one will often find growth stock mutual funds that had large investments in some of the highest-appreciating stocks and “got lucky.” The true testament comes for the funds that can endure and consistently outperform year in and year out through full business cycles. A full business cycle being about 5-7 years on average. (we will later explain how we define a full business cycle)

Best Growth Stock Mutual Funds to Invest In

Large company stock funds over last 10 years. Data through June 30, 2016. Source: Morningstar, Inc.
Large company stock funds over last 10 years. Data through June 30, 2016. Source: Morningstar, Inc.

Therefore, since our time horizon for this analysis is 10-15 years, we are most interested in the best performing mutual funds (10 years) over the long run. Those mutual funds to invest in which, don’t just get lucky one year, but have the skills to “get lucky” year in and year out selecting their stocks and getting out at the right time as well. Most growth funds often have a year of outperformance and maybe even 2 or 3 years. One would suggest that their outperformance really goes from “getting lucky” to actually having real talent with stock picking. However, the most skilled managers of growth stock mutual funds do it year in and year out in up markets and down markets.
By selecting the 10-year timeframe to focus our attention on, we’re looking for those best performing mutual funds to invest in that actually have gone through a major market down-turn like the one that occurred in 2008 when the S&P500 was down 37%. 2008 was one of the most painful periods for most people in their 401K. How did these funds perform during the most painful period in recent history? Did those growth stock mutual funds outperform the S&P500 during the tough years as well? Or were they susceptible to the same dips that the stock market tends to have at least once every business cycle?
Critical Big Picture Fact:
Since the year 1900 there have been 19 recessionary periods. That is one recessionary period every 6.1 years on average. The last one occurred in 2008/9.
Each one of these recessionary periods resulted in a 20%-80% loss in the S&P 500. Currently, we are 8 years from our last recessionary period.

The top 5 best performing mutual funds (10 years) illustrated have all had returns that have averaged over 11%. We can tell you this is great, but not as great as some tactical private wealth management funds that we have learned about.
What is the difference between a tactical private wealth management fund and a mutual fund?
A tactical private wealth management fund and a mutual fund both invest in underlying securities such as stocks, bonds, mutual funds, and ETFs and they both offer sector-type fund options (dividends, real estate, municipal bonds, etc.). The biggest difference is that most mutual funds, as detailed in their prospectus by law, typically have to be fully invested regardless of how poorly the market is doing. Every mutual fund defines this slightly differently, but it tends to mean they are required to have be invested by a minimum of 80% of the assets in the underlying stocks/bonds they are investing in. That means that when the market is going down, the mutual fund must keep 80% of all of their assets invested in the market regardless, as stated by rule 35D-1 under the investment Company Act of 1940. Rule 35d-1 restricts a mutual fund manager from liquidating and protecting your money during downturns in the market because they must stay 80% fully invested. This does not necessarily mean the mutual fund manager is a poor stock/bond picker, but rule 35D-1 simply prohibits them from selling securities in a down market to protect your money. This is one of the dirty little secrets of the industry.
Through our research, we found that tactical private wealth management funds do not operate within the same guidelines and restrictions of rule 35D-1. Tactical private wealth management funds offer investors more flexibility to sell the market.

The Best Growth Stock Mutual Funds to Invest In: Is There Something Even Better?

The key point here is that there is no trigger for the mutual fund manager to get out. They are relying on you to sell the mutual fund or your broker to sell for you. The only problem is that your broker gets paid only when you are fully invested in the mutual funds. If s/he takes your portfolio to cash, s/he just cut their own salary. I don’t know too many people that would proactively decide to cut their own income. Therefore, a broker telling you “sell everything” to protect you from losses in the market rarely occurs.
When there is a big loss in your portfolio, your broker will typically tell you that you need to ride the ups and downs of the market because over the long run, stocks offer larger returns than most other asset classes. And your broker would be right over a 50-100-year period, but if you’re nearing retirement (5-10 years) or are already in retirement, you may not have the luxury of taking significant losses in your retirement account during these times. If you were planning on retiring in 5-10 years and you lost 40% of your retirement, you may be changing your plans to retire in 15-20 years. If you don’t love your job, then that could be a real slap in the face.
Our research indicates that tactical private wealth management funds are different.
Tactical private wealth management funds have the ability to get out of stocks/bonds in the blink of an eye. They typically use models that warn them when the markets are looking unstable or shaky in an attempt follow market trends. In uncertain times, they have the ability to get out of stocks and go to cash until their models tell them that all is clear and they are safe to invest again. Many of them have a great track record of avoiding major market disasters and because of it, their overall returns typically outperform Kiplinger’s best performing mutual funds (10 years) through a full market cycle.

Never Forget Warren Buffet’s Rules of Investing

Warren Buffet rule number 1 and number 2

If you recall the famous quote by Warren Buffet. There are 2 rules to investing money. Rule #1: Never lose money. Rule #2: Never forget rule #1.
The quote is obviously cute and silly on the surface, but it has a much deeper meaning.
The reason is math.
When you lose principle in any investment, you need to make more than what was lost just to get to break even. If you lose 40% in year 1, then make 40% the following year, you don’t get back to even – do the math.

For example, if Joe had $500,000 invested in the stock market and he loses 40%, he is left with $300,000. If he made back 40% in year 2, his nest egg would only increase to $420,000. In order to get back to $500,000, he would need to earn a return of 67% just to get back to breakeven. **These calculations are not including inflation or distributions you are taking to support your retirement needs.**
When you avoid big losses, the returns take care of themselves. That is why tactical private wealth management funds are typically so much better than even the best growth stock mutual funds.
Let us compare some tactical private wealth management funds that we have found through our research with the #1 mutual fund in Kiplinger’s Best Performing Mutual Funds to Invest in (10-year period). These returns are all net of fees and expenses so we are comparing apples to apples. As you can see from the cumulative returns chart below. The private wealth management funds are the blue line, Kiplinger’s #1 on their list of best performing mutual funds to invest in (10 years) is olive, and the other lines are benchmarks such as the Barclays U.S. Aggregate bond fund in yellow, 60%/40% (S&P500/Barclays U.S. Aggregate) stock/bond mix in orange, and the S&P 500 in black. The average return for the tactical private wealth management funds through a full market cycle (analysis period) are higher by around 2.5% (13.59% vs 11.09%) over this 10-year period.
Kiplinger's best performing mutual funds to invest in 10 year period.
Kiplinger’s best performing mutual funds to invest in 10 year period. Source: Informa Business Intelligence Zephyr OnDEMAND

Manager vs Benchmark Return Jan 2007 to June 2016.
Manager vs Benchmark Return Jan 2007 to June 2016. Source: Informa Business Intelligence Zephyr OnDEMAND

Over 10 years the difference can be staggering. For example, if we start with $500,000 in Kiplinger’s top fund, and extrapolate 10 years with an average return of 11.09% your Kiplinger’s top fund investment will be worth $1,420,862. While the same extrapolation over 10 years with an investment in a tactical private wealth management fund we achieve a 13.59% average return and end up with $1,788,014. That is $367,000 more for the tactical private wealth management fund.
In reality, most retirees and pre-retirees are going to live through multiple business cycles. What does an extra 2.5% do for you over 20 years? Well for example, if we start with $500,000 and extrapolate 20 years with an average return of 11.09% we get $4,060,309 for Kiplinger’s top fund, not bad. While the same extrapolation over 20 years for the tactical private wealth management fund with 13.59% average return is $6,393,991. The tactical private wealth management fund returns $2.3M more. What could you do with an extra $2.3M? Perhaps you could retire a year or 2 earlier than you had planned, but, of course, we have to remember that past performance is never an indication of future results.
But as we said earlier, these comparisons really are not fair, because the tactical private wealth management funds do not have the same level of drawdowns as most mutual funds, especially the growth stock mutual funds, due to the fact that mutual fund prospectus restrictions don’t allow them to avoid big market losses, while tactical private wealth management funds can go to cash and avoid the big losses, while at the same time being able to take advantage of the market decline by putting their cash back to work in the market in near the lows. See the drawdowns over the last 10 years of the funds from below. During the depths of the 2008 crash the tactical private wealth management funds were down about 11% while the Kiplinger’s Top Fund (NASDX) at its lows was down a full 50% during the same period. Do you remember how losing 50% felt?
The drawdown report below shows how much each investment was down a during any given point in time within the market cycle. All of the funds we are analyzing are shown below.
Drawdown investment report market cycle.
Drawdown investment report displaying when markets were down at any given time. Source: Informa Business Intelligence Zephyr OnDEMAND

There is another great caveat here: the best performing mutual funds to invest in as reported by Kiplinger, are high risk / high return growth stock mutual funds. The tactical private wealth management funds described herein are only moderate risk funds that typically trade with 50% less risk than the market (S&P 500). This is reflected in the drawdown report above, but one must seriously consider the amount of risk they are taking in order to achieve the returns they are getting. In the world of low interest rates and the everlasting reach for yield, one must consider the quote by the founder of PIMCO and current Janus Fund Manager, Bill Gross:
Janus Fund Manager Bill Gross

“At some point you should not worry about the return on your money, but rather the return of your money.”

Being 8 years into a business cycle does not leave much time for one to consider their options in the authors opinion. Estate Street Partners is not an investment advisory firm, but if you would like to learn more about tactical private wealth management funds, we can refer you to an appropriate advisor. Call us today for more information at (888) 938-5872.
We look forward to our visit with you and your professional representatives to assist you with the advancement of your estate planning.
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Cordially,
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Rocco Beatrice, CPA (Certified Public Accountant), MST (Master of Science in Taxation), MBA (Master of Business Administration), CWPP (Certified Wealth Protection Planner), CAPP (Certified Asset Protection Planner), CMP (Certified Medicaid Planner), MMB (Master Mortgage Broker)
Managing Director, Estate Street Partners, LLC
Riverside Center Building II, Suite 400, Newton, MA 02466
tel: 1+888-938-5872 +1.508.429.0011 fax: +1.508.429.3034
email:
www.UltraTrust.com

“Helping our clients resolve their problems quickly, effectively, and decisively.”
The Ultra Trust® “Precise Wealth Repositioning System”

What is Self-Directed IRA Investing?

Posted on: February 21, 2017 at 4:13 am, in

Self-Directed Investing 101

The Self-Directed IRA industry is growing at a staggering pace and is expected to see over $2 trillion enter the market over the next few years. With over 45 million retirement account holders and less than 4% of those being held in nontraditional assets, the time to consider Self-Directed investing is now. The Investment Company Institute- the national association of U.S. investment companies, estimates that nearly $4.7 trillion in IRAs were held in the U.S. last year. Of this, an estimated $94 billion or a mere 2 percent are Self-Directed IRAs.

So, what is Self-Directed IRA Investing?

A Self-Directed IRA allows you to decide how to invest your retirement funds. Many people assume “Self-Directed” is a unique type of IRA. However, “Self-Directed” is not a type. Any IRA, whether it’s a Traditional, ROTH, SEP, or SIMPLE IRA can be self-directed.
Using your IRA to invest in non-traditional assets like real estate has been available to investors since 1974. You may be learning about this for the first time because large banks and brokerage firms don’t typically offer these investment options. You may ask – “Is this really legal?” The answer is yes. With the exception of life insurance contracts, collectibles, and stock in an S corporation, IRS rules allow all other investment types as long as they comply with the rules governing retirement plans.

Why Self-Direct?

Stock market volatility and the economy have many investors considering alternative assets for their retirement accounts. A Self-Directed IRA gives you control over your retirement funds by making tax-free investments in assets that you’re familiar with.

What Can I Invest in?

Below are some examples of investment opportunities available to you through your Self-Directed IRA:
Types of Self-Directed IRA Investments Allowable by IRS: Revocable Living Trust2
Residential real estate Tax Lien Certificates Precious Metals
Commercial real estate Equipment leasing Factoring
Undeveloped or raw land Livestock Accounts Receivable
Real estate notes Foreign currency Oil and Gas
Promissory notes Stocks ,bonds, mutual funds Structured Settlements
Limited partnerships Private placements
LLC and C-Corp Structured Settlements LLCs, LPs and C-Corporations

What are the Rules?

Prohibited Transactions. IRS rules forbid certain types of transactions in IRA accounts. Some examples are listed below:
  • Collecting management fees for your properties is also prohibited as it is a direct benefit for you, the account owner.
  • Collecting commissions on properties purchased through your IRA.
  • You may not buy, sell, or lease your real estate from disqualified persons.
  • All profits generated from an IRA owned asset must be paid back into the IRA and all expenses incurred by the asset must be paid by the IRA (they may not be paid with personal funds and reimbursed by the IRA).
  • Any debt used to acquire an asset in an IRA must be non-recourse. In other words, the IRA owner is prohibited from guaranteeing the note personally.
Disqualified Persons. IRS rules define certain individuals that are unable to participate in any transaction with your IRA:
  • Yourself
  • Your Spouse
  • Your Children
  • Your Children’s Spouses
  • Your Parents
  • Certain Business Partners
Additional Regulations. Here are a few examples of prohibited transactions using your IRA that you should become familiar with:
  • The property must remain in the IRA until distributed or sold to a third party.
  • Property owned within an IRA will not be able to take advantage of write-offs, such as depreciation or other expenses relating to the property.
  • All rental profits must be returned to the IRA.
  • When purchased, the property becomes an asset of the IRA.
  • If you are an owner, you may not lease to a disqualified person, or in any way have a disqualified person occupy the property while it’s owned by your IRA.
  • While an IRA owner cannot manage the property, they can hire a property manager or real estate broker to collect rent and maintain the property.
  • Neither the IRA owner nor his/her family members (siblings excluded) may have access to or utilize the property while it’s in the IRA.
  • Borrowing money from an IRA. IRA’s are prohibited from making loans to IRA owners as well as any other disqualified persons.
  • IRA owners are prohibited from using their IRA as collateral for any loan, as the amount they pledge as security will be deemed a distribution by the IRS.
  • Selling assets you already own to your IRA or to a disqualified person’s IRA.
  • Purchasing a property for personal use, either by the IRA owner and/or a family member.
  • Purchasing a property owned by a family member who is a disqualified person.
  • Lending money to a disqualified person.

So should I open a Self-Directed IRA account?

Self-Directed investing isn’t for everyone. For some, the idea of having total control of their investments is a daunting one. We recommend reviewing your investment strategies with your tax advisor prior to investing. For more information about what a Self-Directed IRA can do for you call us toll-free at (888) 938-5872.

How to get 5% on a Certificate of Deposit (CD) like Investment

Posted on: February 21, 2017 at 4:06 am, in

Tired of the 1.9% the Bank Pays You on Your Certificate of Deposit (CD)?

Learn how and why you can buy wholesale annuity payments in the secondary market guaranteed by a Triple-AAA rated and recive a 4% to 7% return

Using investments resulting from Lottery and Courtroom Settlement winners who sell future payments from their Existing Annuities for a lump sum of money today.

Learn more with a presentation here: structured_settlements.pdf
Show me real secondary market deals available right now

Most people today love a bargain. Just walk into any TJ Maxx, Marshalls, or Ross stores and witness the excitement on people’s faces knowing they bought a shirt for $15 that was $100 down the street at Bloomingdale’s. You can get an interest rate bargain on returns on your money as well, if only you knew where to find these bargains.
The “retail banks” don’t have these discounts; nor do the local banks; not even banks such as Bank of America, JP Morgan, or Wells Fargo. The local branches of these major banks are retail locations similar to other overpriced retailers throughout the country. But instead of buying and selling clothes, they buy and sell money. They profit on everything they buy and sell. You need to find the bargains not offered by these banks.

A major profit source for the bank is taking deposits. By paying the retail investor, you and me, as little as possible, 0-2% on our checking account or Certificate of Deposit (CD), and lending our money to other people and businesses for 5–10% or more, they make profits on the spread of what they borrow and what they lend. This is retail banking.
Read Mary’s story:

Mary Opening Her Monthly
Interest Check

For example, Mary retired with $100,000 in a CD at Bank of America. Five years ago, she earned a monthly interest check of $300 to help pay her bills. Six months ago the bank gave her a mere $80 per month on her CD. Working hard for 35+ years, she now found it impossible to make ends meet every month.
After hearing about the structured settlements described here, she took her money and bought a secondary guaranteed annuity. Now she earns monthly interest in the amount of $446. That extra $366 really helps with her monthly bills and she uses the extra to splurge on her grandchildren from time to time. Mary felt confident putting her money in the annuity because Prudential and the State of Massachusetts (if something went wrong with Prudential) guaranteed it. Secondary market guaranteed annuities are available to everyone that knows about them. Banks don’t want you to know about these because promoting them would reduce the profits that they earn on low paying CDs. Knowing about them can put extra money in your wallet. If you are savvy like Mary and want to learn more, follow the link below to find real live inventory available right now.
Learn more with a presentation here: structured_settlements.pdf
Show me real secondary market deals available right now

Buying a CD at 2% from Bank of America is like buying a sweater at Bloomingdale’s for top dollar when everyone knows they can go down the street to TJ Maxx and buy the same thing for less or get interest paying 4–7%; equivalent to a 50% discount at the retail store. In the world of interest–bearing instruments, the lower the price for the future payments results in a higher overall rate of return.
Say, for example, Bill gave an investor $50,000 and received $1000 per year, creating a return of 2% a year. Now, Bill needs money immediately to pay for a new car, fix the roof of their house, pay medical bills, or college for their child. What can he do? Bill could sell it to somebody else in a secondary market. Bill, in order to pay these expenses quickly, sells it to Ted for $25,000. Ted gets the same $1000 per year, but only paid $25,000. Ted, now getting a 4% return, just doubled Bill’s original rate of return and tripling his bank’s lousy rate of return.

You want to be Ted, the savvy investor in the secondary market.

Now you see the difference between buying a CD from a bank in the “primary” market versus buying the same cash flow in the “secondary” market. You get the monthly income for half as much, thus doubling your overall rate of return. What is the downside to this? Well, your large chunk of money, in this case, $25,000 is tied up in monthly payments. Not a big deal if you are saving for the future, but if you get yourself in a pickle like Bill did, you have options. Because you negotiated such a good price, you could resell it for more or less what you paid. You may not see this occurring in the real world, but these transactions happen everyday and they are guaranteed by the most secure insurance companies in the world. Those payments are typically insured again by the state of origin, creating a very safe investment.
Continue with part 2: Finding Interest-Bearing accounts Paying 4-7% with minimal risk
Learn more with a presentation here: structured_settlements.pdf
Show me real secondary market deals available right now

Guaranteed Annuity Payments:United States

Posted on: February 21, 2017 at 4:05 am, in

Guaranteed annuity payments from the wholesale secondary market receive 4% to 7% returns. How and why these guaranteed annuity payments can offer such a high return while minimizing risks substantially by cash flows guaranteed by the most secure insurance companies.

Most people today love a bargain. Just walking into a TJ Maxx, Marshalls, or Ross stores and you can see the joy on people’s faces knowing they bought a shirt for $15 that was $100 down the street at the mall in Nordstrom’s. The same thing can be done in finance, but most of the public does not know where to find these discounts.
In this day and age, when conservative investors are unhappy with the low rate of return on Certificates of Deposits (CDs), Government Bonds and Annuities, one question being asked is, “Where can we put our money that is extremely safe, and at the same time yield a high rate of return – at least double or triple what you could get at Bank of America with the same low level of risk?”
The answer: buy guaranteed annuity payments in the secondary market that lottery and Courtroom Settlement winners sell for “cash now,” at a discount. This is a transaction that people have heard about on TV and radio, often from a different perspective, through ads by companies such as JG Wentworth and Peachtree Funding. These ads invite people who have lottery payments and structured settlement payments to sell these cash flow streams (annuities) at a discount in exchange for a lump sum payment.
These companies (Factoring Companies or FCs) then sell them in huge packages to European Banks and large pension funds. These securities are guaranteed by major insurance companies and States (for lottery payments). The guaranteed rate of return is 4% to 7% (effective interest rate) – more that TWICE what one could get at the bank using the same kind of risk parameters.
Sounds too good to be true,

How does the Guaranteed Annuity Payments work and what is the catch?

In the United States, the most litigious country in the world (94% of all lawsuits are instituted here), about $6 Billion per year is generated in legal settlements for personal injury or wrongful death claims that are settled so that the claimants (plaintiffs, annuitants) get their settlements in periodic payments over time. The payments, if set up under a provision in the law – IRC Section 5891 (c)(1), are totally tax-free and guaranteed by highly rated life insurance companies (and back-stopped by State Guarantee Funds).
For most people, this works out to be a wonderful arrangement, and in fact, there are about $100 Billion worth of these contracts in force with US carriers today. However, some of these claimants find that their circumstances change and they cannot wait 5 years for their monthly check, so they sell their future monthly checks at a discount. About $2 Billion of these settlements are sold to FCs each year at a discount of approximately 50% of their original purchase price. Thus, an investment guaranteed by a life insurance company at 3.00% could now be guaranteeing 6.00%, with the same benefits and assurances that the original purchaser enjoyed.
There has been some confusion among both advisors and their clients as to how these arrangements are transacted and regulated, and why the rate of return is so high when the risk is so low. For the winner of a lawsuit, it is very easy to get into a structured settlement, but very difficult to get out of it – it is like a lobster trap. Because the payments are set up by the insurance companies to be for a set period of time without any system to get an advance on future payments – there is no meaningful liquidity unless they wait. Claimants cannot go to a bank and get a loan based on these payments. A bank cannot foreclose on annuity payments the way it can, for instance, when someone doesn’t pay their home mortgage.
Also, the Courts don’t want people to get out of the payment stream unless there is a compelling reason. To sell one of these annuities, one has to obtain a court order. All of this takes time, knowledge of the legal system, and involves significant legal fees. However, because of this system, all sales are carefully monitored and underwritten so that at the end of the day there are no liens or encumbrances against the annuity policy so that annuity payments would not be able to be intercepted.
The process for transferring payments from a claimant to you or me and a new owner (investor) is very similar to buying a house. After a complete investigation of the contract, the insurance company sends out an assignment letter to the assignee (the investor) stating that he/she is the new owner of the future payments (structured settlement payment rights).
In order to make the future sale or transfer (for estate and/or gifting purposes) of the payments easy and without any delays, these transactions are set up to be serviced and processed through a third party – a large, well-capitalized title company. That way, there is no delay or publicity when a contract is sold or transferred at some time in the future.
The question comes up, “who are good prospects for this kind of conservative investment?” The answer is, almost any individual or entity that wants a rate of return in the range of 4% to 7% – more than twice what you can get today from comparable investments with the same amount of risk. The fact that these investments have a great deal of liquidity to them makes a strong case for putting a portion of one’s portfolio into this asset group.
Although these annuities are totally tax-free to the Courtroom Settlement winner who originally got them, they are taxable to almost all other investors (except charitable institutions). In fact, the insurance companies are not required to send 1099’s to the investors who buy these from claimants.
For qualified retirement plans, there is no tax while the investment is in the plan. When any money is withdrawn from a retirement plan (excluding Roth Conversions), the proceeds are taxable as income. For purchasers of these annuities, it is generally believed that the payments should be treated like an annuity payment under Section 72 of the IRC – a portion of the payments would be principal (using the exclusion allowance) and the rest would be considered interest. Investors should get advice on this from their individual tax professionals. (The IRS does not have any published rulings as to the taxability of these annuities).

Single Member LLC: Charging Order, Creditor Claims, Pass-through

Posted on: February 7, 2017 at 11:49 pm, in

A Single Member LLC is not enough protect from the creditor claims. The LLC is used as a pass-through for income and expenses. Many financial advisors believe the charging order defines the creditor as a “substituted limited partner for tax purposes.” Brief description on fraudulent conveyance and civil conspiracy in the LLC.

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Recently I’ve run across some significant issues with the single member LLC’s with courts handing down noteworthy judgement decisions in favor of creditors using the theory of “fraudulent transfers” and “civil conspiracy.” I ran across two such individuals that have made me more caution on client advice regarding single member LLCs.

Single Member LLC – Limited Liability Company Pass-through Legal Entity

The LLC is a TAX HYBRID “pass-through” legal entity similar to a partnership but with the limited liability of a corporation. The LLC is tax-driven and was classified legally by the IRS on January 1, 1997 when the IRS threw out its old, and unnecessarily complicated, business entity tax classification regulations and agreed that LLCs should be taxed as partnerships (or sole proprietorships if they have one owner) without jumping through a number of technical hoops. Moreover, the IRS now lets an LLC elect to pay taxes as a sole proprietorship, as a partnership, or as a corporation by filing IRS Form 8832.
For “Income Tax purposes” income and expenses of the LLC “pass-through” directly to your income tax return proportionate to your percentage of ownership, or if there is more than one member, whatever percentage you decide, for example, 50/50 or 75/25. Irrespective of your equity ownership percentage, this is a significant advantage over other forms of business entities, and the LLC also has another significant advantage; members decide how they want to be taxed or, in other words, as sole proprietor, partnership, or corporation. The LLC will obtain it’s own Federal Identification Number (similar to a social security number), operate as a business, and maintain it’s own bank account.

Single Member LLC May Not Be Protected From Creditors

Ninety percent of financial advisors give the wrong advice regarding single member LLC formations. Single member LLC are mistakenly assumed to protect the member from the creditor. Most financial LLC advisors state that a Limited Liability Company (LLC) protects the owner (i.e. single member LLC) against present, past, and future creditors because the creditor may not step into the shoes of the LLC and has to look at the LLC member for collection.
The advisors point to an IRS Revenue Ruling (77-137), where the creditor holding the “Charging Order” will receive the “K-1.” They further explain, the creditor must pay the taxes on the income generated by the LLC, even though the creditor never receives any actual cash from the business. The creditor saddled by the charging order is treated as a “substituted limited partner for tax purposes” and will suffer the tax consequences without capacity to force payment, dissolution, or distribution of the LLC.

Charging Order Defines Creditor as Substitued Limited Partner for Tax Purposes?

The area of the laws surrounding the issues of the charging order to protect the single member LLC is dynamic and evolving. There’s no legal reasoning for a charging order protection for single member, even though most state statutes call for such protection. The charging order protection cannot create a “personal legal liability” out of a legal business entity for “the acts” of the LLC.
There are several litigation issues unique to the LLC that are beginning to emerge in trial forums. State LLC laws, when written, were primarily tax driven, and accordingly, they defined key terms and concepts in accounting and tax terms, and not with thought of contract tort law issues. When the LLC is in financial distress, litigation will usually focus on:
  • Dissolution issues,
  • Capitalization issues,
  • Failure to comply with state statutory and regulatory requirements, and
  • Violation of one or more provisions of the entity’s documents.

Fraudulent Conveyance, Civil Conspiracy

The central issue to single member LLCs (one owner) is “FRAUDULENT CONVEYANCE” which, if not handled properly may become part of a “civil conspiracy” to fraudulently act against creditor claims. In some cases the financial planner, lawyer, or accountant becomes part of the conspiracy and in some cases such advisors have been reprimanded.
Single shareholder corporation, single shareholder of Sub “S,” and single member LLCs can provide the owner with protection against liabilities arising from “the conduct of the LLC” but not the owner of the LLC membership shares. In other words, “if” the LLC does something wrong, the owner is not necessarily responsible. To reach the owner’s personal assets, a plaintiff would have to “pierce the veil” of the entity showing that:
  • The LLC, the corporation, or the Sub “S” was undercapitalized for it’s intended business purpose,
  • Formalities were not followed,
  • The owner used the LLC, Corporation or Sub “S” mostly for personal purposes,
  • It did not serve a “bona fide” commercial purpose,
  • It lacked in economic substance and was merely an alter ego of the owner whose sole intention is to frustrate the creditor(s), etc.
A single member LLC (one owner), Corporation, or Sub “S” will not protect the owner, because the charging order protection that is much touted, is based on protecting the “innocent” non-debtor.
Under the Uniform Fraudulent Transfer Act you would be committing a crime, see Section 19.40.041
“…(a) a transfer made or obligation incurred by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor…”
Read the second part of this article “Single Member LLC: Charging Order, Creditor Claims, Pass-through” by clicking here Fraudulent Conveyance, Civil Conspiracy, Uniform Fraudulent Transfer Act
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Gift Tax: What are the Gift Tax Exemptions?

Posted on: February 7, 2017 at 11:48 pm, in

What is the definition of a gift tax? What are the gift tax exemptions and stipulations? How to avoid gift taxes within the family, with tuituion expenses, medical expenses and chartiable organization donations?

Any time you give someone money or property you may be subject to paying a gift tax. The federal government has established guidelines for gift tax exemptions and gift tax rates for all property transferred. These rates and exemptions can change on a yearly basis and it is important to check with the IRS for updated gift tax laws.
Starting in 2006 the IRS determined that gifts under $12,000 per year were exempt from federal gift tax, which is an increase from the $10,000 limit set for years prior. In 2012, the exemption was $13,000 and in 2013 it moved to $14,000. If you give a gift valued over this amount your gift will be taxed at the current gift tax rate unless you utilize your lifetime gift tax exemption. Giving a gift over the annual exemption just mean you do not have to file a gift tax return. But don’t be intimidated by a gift tax return because you can elect your exemption and pay no gift taxes. Federal gift tax laws state that there is a lifetime deduction amount of $5.12 million in 2012 and only $1M in 2013. If you don’t gift the entire amount in the first year, the balance gets grandfathered in. So if in 2012 you only gifted $1M, in 2013 you will have a balance to gift an additional $4.12M. If you donate more that this amount in your lifetime than you will be subject to a fifty-five percent gift tax rate.

What is the Definition of a “Gift”?

In order for the government to consider your donation a “gift” it must meet several requirements. First, your gift must be gratuitous. This means that when you give someone something, such as a car, you do so for less than the fair market value of the item. You cannot exchange or receive goods for the fair market value because then it will be considered a sale by the government and will not be exempt under gift tax laws.
Your gift must also be complete and voluntary. This means that you cannot retain control over the item you are transferring, and you must be giving the gift under your own free will. If you are being court ordered to put aside money for your children this is not considered a gift. Lastly, the gift you make must be tangible. According to current gift tax laws, an exchange of services is not considered a gift.

Stipulations on Gifting for Tax Exemptions

As long as your donation is considered a gift according to the above guidelines, and you keep the value of the gift below the annual limit, you do not have to claim anything on your taxes. Keep in mind that the annual limit is on a per person basis. You are allowed to give both Little Johnnie and Little Susie gifts of up to $12,000 each per calendar year and still be exempt from the federal gift tax.
You should also remember that the IRS counts the gift on the day your check is cashed, not on the day it was written. Therefore you may be liable for paying a gift tax if Little Johnnie didn’t cash his check until the following year, and you proceed to give him more money on Christmas.
Most people will never have to pay a gift tax based upon the federal guidelines previously mentioned. Several gifts are considered exempt from the gift tax assuming they meet particular guidelines. The exemptions, in no particular order, are as follows:
  1. Gifts made to pay for tuition and/or medical expenses
  2. Gifts to your spouse
  3. Gifts to a charitable organization

Tuition Expenses Exempt from the Gift Tax

Both tuition and medical expenses must be qualified transfers to meet exemption guidelines. Tuition payments to assist another individual must be made directly to the qualified institution, not the individual. Also, the money must be directed towards paying down the cost of attending the school and not put towards books and supplies.

Medical Expenses Exempt

Medical payments are similar. In order to qualify for a gift tax exemption the money must be paid directly to the medical facility and not to the individual who received services as reimbursement. The money gifted for medical expenses cannot be covered, and therefore reimbursed, by insurance. Failure to adhere to these guidelines will nullify your money as a “gift” since you will be receiving reimbursement from the insurance company equal to the money you paid to the medical facility.

Avoiding Gift Tax Within the Family (Between Spouses and Children)

Gifts between spouses can be unlimited. Additionally, spouses can pool their annual exclusion limits to give a larger gift to an individual or group of individuals. For example, a married couple with three children will be allowed to gift $39,000 from each individual (i.e. $13,000 per child x 3 children), for a total of $78,000 per year to the children. Now, instead of $13,000 per year, each child can receive $26,000 in gifts and both parents will still not be subject to paying any gift taxes in 2012.

Charitable Organizations

Gifts made to qualified charitable organizations may also be unlimited. Qualified organizations include foundations operated for the following reasons: prevention of cruelty to animals or children; educational purposes; scientific; literary; charitable; or religious. When filing your income tax return you will have a separate section for listing items which qualify for a charitable gift tax deduction.
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