CASE STUDY: TAX ADVANTAGED INVESTING

CASE STUDY: TAX-ADVANTAGED INVESTING

CLIENT: A high net worth business owner with a significant income stream who is starting to explore estate-planning issues.

STRATEGY: The client owned two adjacent commercial properties in a major metropolitan area. One of the properties was purchased to develop and relocate the client’s expanded business. It was eventually deemed surplus and sold via a 1031 exchange. Due to the financing, all loans were paid off at closing leaving relatively small amount of sales proceeds before taxes. Since the lender agreed to refinance the retained property to the same debt level as before the exchange, funds were available not only to complete the exchange, but additional funds remained for further investment.

After reviewing the client’s tax returns in collaboration with her CPA, we determined that the additional funds could be used to: reduce the client’s effective marginal tax rate, and fund a plan that would produce tax free retirement income. An analysis showed her effective marginal tax rate could be reduced from 33.7% to 21.1% with a tax savings of $132,700.

A substantial portion of this strategy could be replicated annually, as long as tax regulations remain relatively consistent. The first area of interest was ordinary income. The solution involved the use of a charitable contribution (IRC Section 170h) to directly impact taxes at the ordinary income level. The next area of interest was rental and royalty income. The solution involved the use of depreciable assets to minimize the impact of rental income.

RESULTS: The client was able to reduce her effective marginal tax rate and realize substantial tax savings as a result of employing the recommended solutions. Furthermore, the client redeployed the savings into an insurance based retirement plan that, upon full funding of the program, would provide tax free retirement income for life.

By using assets that are not well known, and are typically non-public, we target specific areas of the tax code and take maximum advantage of those codes for the benefit of and in conjunction with a client’s specific financial objectives.

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