Guest Article:
Are You Planning For Retirement?
Joseph Brodsky, JD
Structured Settlements International Minnesota
One of the greatest challenges for people who have accumulated wealth through appreciated assets is to find the best way to convert these assets into reliable fixed income and get rid of the day-to-day hassle of managing property or operating a business.
The Standard Sales approach involving the receipt of cash for the sale of an asset is widely used, but seldom the ideal tax strategy to dispose of an appreciated asset. The capital gains taxes payable when an appreciated asset has little or no tax basis can take 35% or more of the total sales proceeds, particularly if the selling entity is a C-Corporation.
1031 Exchanges are a fine vehicle for young active real estate investors, but when a person is in their 50's, 60's or beyond they are rarely interested in exchanging for a new investment property. The constant management issues and repair costs that can deplete any reliable monthly revenue from investment property will never be eliminated completely. Management companies generally have one simple focus which is getting as much of the monthly revenue from the properties they manage at the expense of the owner.
Selling investment property or businesses using the Installment Sale method under Section 453 of the Internal Revenue Code has been a common strategy to defer capital gain taxes while ensuring a reasonable rate of return on the sales proceeds. With the recent drop in fair market value experienced across the board in the real estate sector, many sellers who have sold real estate using the installment method are at risk. These owners had planned on the fixed income from the buyers to provide them a secure revenue stream during retirement with the assurance that the real estate values would keep going higher so even a default in payments could result in a windfall at a later time. A property that sold for $1,000,000 in 2005 may now be worth $650,000 and the balance on the note is likely to be well over $800,000. Although the 7.5% interest rate on the promissory note seemed like a solid return compared to the other options, the true exposure of this sales method is suddenly far more dire than the benefit of squeezing a few extra dollars in monthly income. Much like the major residential lenders who are dealing with thousands of properties in their portfolio due to defaults and foreclosures, this property is likely to revert to the seller and the property condition may require well over $100,000 in repairs just to make it marketable for a resale.
The newest method of selling an appreciated asset is the Structured Sales plan available through Allstate International Assignment and Allstate Financial. The basic mechanics of this sales strategy involves adding an addendum to the purchase agreement (real estate, business, collectible items or even race horses) that sets out the payment stream the seller is willing to receive from Allstate Insurance by way of an annuity contract. Once the full price is determined between the parties, Structured Sales International Minnesota will work with the seller to create a revenue stream based on the sales proceeds and the duration of payments desired by the seller. The buyer will pay the amount agreed between the parties, but the funds are assigned to Allstate International Assignments who then purchases an annuity showing the seller as the sole beneficiary of this contract. The buyer's position is neutral much like a 1031 Exchange, but the seller is able to structure a payment stream that fits his/her long-term needs and offers a secure revenue stream with no risk of losing the asset's value or interrupting the payment stream. Allstate Financial guarantees the payments will be made as per the contract so retirement plans are only interrupted by a monthly trip to the bank to deposit the check from the insurance company . . . and even this simple nuisance can be avoided by auto depositing the monthly annuity payments.
If you would like to discuss this sales strategy in more detail please contact Joseph Brodsky at (612) 867-6776 or e-mail him at jbterrafirmafinancial@gmail.com.
