Category

Taxes and Investing

Estate Planning, Lifestyle, Taxes and Investing

Living with a NIMCRUT

Recently I discussed my net worth and how I went from a poor farm boy to an eight figure net worth. To keep the discussion moving I glossed over a few issues, most notably some of the vehicles I use to invest and protect my net worth from taxation. My sole mention of using trust instruments to protect net worth and save taxes caused several requests to hit my email inbox. People wanted to know more about trusts and how they can be used to super-charge net worth, provide guaranteed income, reduce taxes and protect against lawsuits stealing your hard earned money.

To which I mentally replied, “Is that all?”

A tax discussion on trusts turns into hard core tax planning quickly. Discussing all trusts is beyond the scope of a simple blog post and even beyond the scope of an entire blog. Too many variables are involved. What we can do in a single blog post is cover one trust topic enough to help you decide if it is right for you and get you to the right people to facilitate the process.

Today we will discuss an animal called the net income makeup charitable remainder unitrust, or NIMCRUT. It sounds like a derogatory name you would call someone in the heat of battle. Instead, the NIMCRUT, or even her sister the CRUT, is the perfect tool to get a massive tax break now, avoid paying capital gains on highly appreciated assets, help the charity of your choice and get a nice income stream—some of which might be tax free—for your entire life or a set number of years. Sound like fun? Then read on.

The Problem

Highly appreciated assets face a large capital gains tax rate, currently topping out at 20% for federal, plus more in many states. To make matters worse, the alternative minimum tax is calculated using a 22 ½% capital gains rate.

Moving money from a long-term, highly appreciated asset to a higher income producing asset requires a serious tax haircut. The reason for the transfer of investments frequently revolves around income. The old asset has appreciated several fold, but has a low or no current income distribution. To access your net worth requires sale of a portion of or the entire asset, triggering a taxable event.




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Taxes and Investing

How Long Should You Keep Your Records and Tax Return

A common question around the office involves records retention. Many people think they need to keep their tax returns for seven years, others think it is three; both are wrong.

Tax returns are not the only records you need to consider when building a record retention policy in your business and personal life. Some items can safely be disposed after one year; some items need to be kept forever—your estate can handle disposal.

Record retention in the past required filing cabinets filled with papers. The filing cabinets can be—and should be—replaced by digital storage. A fire, theft or weather damage put irreplaceable documents at risk when stored in a filing cabinet. A better solution is to scan all documents into a digital filing cabinet and store a backup copy offsite.

Most banks already provide digital copies of statements and your tax preparer should have no problem providing a digital copy of your return. Your tax preparer is required to provide you with a copy of your tax return and it can be a digital copy. Have your accountant email you a copy or bring a flash drive to their office. Also, many accountants have secure drop boxes built into their website now. For security reasons you may wish to use this method over less secure email. Plus, emails are easier to subpoena for court proceeding.

Security is the biggest concern when storing records. The amount of documentation held by a business is huge. Even a modest household can accumulate a serious amount of paperwork they must retain. Digitizing data is fast and simple. Security of this “fast and simple” data is important because it is just as “fast” and “easy” to steal it. Storing data at home or business should be secure behind adequate firewalls, encrypted and password protected. Offsite storage must be with a reputable firm safeguarding your data. The cost of storing data is cheaper than ever so there is no reason not to keep all required documentation and store these records safely.

Below is a handy guide for determining how long you need to keep records. I have added a few notes after some items to clarify certain requirements. It would be a good idea to bookmark this page for future reference. I list personal requirements separately from business requirements. To simplify your search I have listed items by 1 year, 3 years, 6 years, forever, and special circumstances.

It should be noted state requirements can differ from federal requirements. I follow the records retention list with special rules affecting certain states. People filing a tax return, conducting business or own property in these states will need to consider additional records retention issues.




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How Actively Managed Funds Legally Lie about Performance

Past performance is no guarantee of future performance.

I’m going to start an investment company. Actually, I’m going to start a whole bunch of’em. Anyone interested in throwing in with the Wealthy Accountant? Read on if you think I am a good investment risk.

As an accountant I don’t want to leave anything to chance. People invest in firms with proven track records that exceed the norms. Therefore, my investment company will start several investments with only my money at risk. Several different strategies will be used to see which ones outperform. Underperformers will be closed without any investor money put at risk.

Before you start shedding tears for me, know I only invested a token amount into each fund. My loses were small and so were the gains. I just needed to know which ideas worked best.

Only the winners will be offered to the public. That means you, kind reader. Only the finest for those reading my blog.

Once the deadbeats are eliminated I can provide paperwork showing the wonderful returns on the winning investments. In fact, every investor from now on will see investments returns that include the numbers when the investment was really small and unavailable to the public.

Since the early, and unavailable to you, outperformance carries the same weight as the future returns when the fund is larger, the investment might have lost money overall and still claim a positive long-term return to investors. In other words, results are not weighted.

Oh, but the Wealthy Accountant knows future returns eventually catch up to a guy. So, I will close funds that take’er on the chin. Nobody wants to see that kind of thing in this investment company. Only survivors get to live on around here. For the laggards: OFF WITH THEIR HEADS!




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Recommended Reading

Call it a weakness.

You can’t sit down with Bill Gates for more than 10 minutes before he starts telling you about a recent book he read. If you’re not lucky enough to chew the fat with Bill you can get an update on his reading recommendations anytime you want on his blog: Gates Notes.

Ryan Holiday actually has a free subscription service to inform his followers monthly of great books he has read and recommends. Over the years I have found many inspiring and mentally stimulating books from Holiday’s list.

Books are the foundation of knowledge. I read a lot because you will be hard pressed to find a successful individual who doesn’t read on a regular basis and because it is fun. Books have a special feel. Some people enjoy Kindle versions; I still prefer holding a book in my hands. I might get my news digitally, but when I dive deep into a subject I want paper in my hands even if I have to lug it through an airport. It’s just me.

Outside family, books have provided my greatest pleasures in life. I have traveled the world and through time; I have seen great societies and dined with the greatest minds of history. I did it all through the eyes of those who were there. Books have given me all that and more. You are free as long as you can crack a book and disappear into another realm.




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Investment Commercial Real Estate Profits and Pitfalls

Residential investment property is forgiving for the most part. Professional managers exist in most markets and except for the very worst of conditions it is possible to fill most apartments even if it is not at a profitable rate.

The number of residential properties available is large and unloading a single family home or duplex is fairly quick and simple. Many economists consider a six month supply of homes on the market a healthy balanced market.

Things get slightly less forgiving when you graduate to multi-unit apartment complexes. There are fewer to select from, they cost significantly more, there are more tenants to manage and it usually takes longer to sell the more expensive buildings. Not as many investors can swing a multi-million dollar deal or even finance one.

It might not be intuitive, but the more expensive the property the more likely it will be purchased as a cash deal. Big buildings carry big responsibilities and risks, but also are coupled with larger rewards.

Generally the rules are straightforward with residential rental properties. Lease contracts are generally standardized in most states and the landlord/tenant rules are clearly defined. The laws tend to protect the tenant more than the landlord. Still, the landlord, if she bought right, should turn a tidy profit.

Real estate investors usually start small, a single family rental or duplex, moving up to multi-unit buildings later. Most landlords stop at the duplex level with maybe a 4-plex or so tossed in for good measure.

The next leap takes courage. Financing a large deal is more difficult. Only a select number of banks are willing to fund a seven figure project. You need good credit, experience and a documented plan. At the end of the day the multi-unit complex is still a forgiving animal in the real estate world.

Then there is the commercial property.




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$10 Million Isn’t What it Used to Be

I remember the day I realized I crossed the seven figure mark. The actual moment of crossing was lost because I didn’t know I was doing so well. There was no party or celebration.

The year was 1996, I was 32 years old and the bank needed a personal financial statement for an investment property purchase. The real estate partnership I had with my dad and brother was in full swing, but I wanted to add a few additional properties to my personal portfolio.

The bank asked for a personal financial statement. It had been a while since I filled one out so I was interested in where I would end up.

Don’t get me wrong. I track my finances closely. Each individual investment gets reviewed annually or semi-annually. I don’t always add up all the numbers to see where my net worth is, however.

As I gathered each asset and wrote its value down I could see this was going to be higher than I originally anticipated. My liquid investments had advanced a lot over the years and the real estate in my portfolio was adding a serious number to my net worth.

Once I had the assets added I knew I had crosses the million dollar mark before tallying the liabilities. Debt was low, even with all those rental properties.




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New Tax Law Changes Dangerous to Your Wealth

On a recent ChooseFI podcast where I was the guest speaker I mentioned the possibility the backdoor Roth and her sister tax strategy, the laddered Roth, could be going away. Many people heard me say it WAS going away. That is false. It is only a proposal at this time.

Because so many potential tax law changes now whispered in the halls of Congress have the potential to cause great damage to those in retirement or working an accelerated program toward financial independence (FI), now is the perfect time to review those with the highest possibility of happening. A word of caution before we begin. These are only ideas floating around Congress. They are NOT current tax law! Not all ideas whispered in the halls of Congress become law, but all laws start as a whisper in the halls of Congress. There is a difference.

Most ideas for tax law changes never see the light of day or are significantly modified before becoming a law. Some ideas become law in a few years, other may take a decade or longer before working through both houses of Congress and signed into law by the President. As we review the ideas now floating around Congress I will give my opinion on the likelihood the change will take place and how soon.

Remember, this is one guy’s opinion. My opinion carries weight because I have decades of experience. I also rely upon sources outside my own viewpoint, such as continuing education courses I’ve attended, The Kiplinger Tax Letter, and calls to several Congressmen. (It should be noted I rarely get to speak with an actual lawmaker. Usually I speak with a staff member. They can still be very helpful with potential tax law changes working through the system.)




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Word is Out

Today The Wealthy Accountant has been exposed in his first ever podcast! (Why am I talking in third person about myself?) In January at Camp Mustache SE Jonathan asked me if I would do a podcast with ChooseFI. Brad loved the idea too. I agreed. A month ago the podcast was recorded. Then, through the magic of editing, Jonathan and Brad made me look good. Thanks guys!

Today is Memorial Day in the States and my intention was to take a day off from my publishing schedule, but with the podcast out I wanted my kind readers to have a chance to enjoy the podcast.

Enjoy, everyone. I’ll be back Wednesday with a Camp Mustache IV roundup.

P.S. I enjoyed doing the podcast and am open to doing more for other podcasters too. (Brad and Jonathan nailed me down for additional podcasts for ChooseFI.)



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