Wealth Management & Financial Planning

Wealth Management & Financial Planning

Checklists Are Critical In Making A Decision.

Procreated checklists are the first step driving the majority of my professional decisions. There are financial opportunities and challenges that look very different in the beginning but as decisions are made and processes evolve, a solution is often found. Perhaps the engineers reading this may find a vague comparison to six sigma. Many of you helped to mold that thinking process over the years and we are very thankful.

Without a checklist, emotions can take over and details can be missed. Taking time to think is important, but knowing WHAT you need to think about is also critical.

Some believe that the best way to understand is by example. Today’s situation is this: An inherited asset is owned by two siblings. One wishes to buy the other’s half of the asset. For fun, let’s call the asset The Big House Storage Company. There are a series of things you need to consider to successfully transfer the asset. And yes, we have a checklist! This is not a complete list but you can request the complete checklist at www.yourlifeafterwork.com.

The first question is “What is the tax basis of the person thinking about selling their half?” If the asset was transferred to them at death, their basis will be the fair market value at the date of death of their benefactor. If the asset was transferred during life, their basis is the same basis as the person who gave them ownership. Any additional money that has been added to the storage facility may also add to basis.

The next series of questions are “What is the offering price? Is the price reasonable and fair? Do they WANT to sell, or do they HAVE to sell the asset? What is their current marginal tax rate before the sale?” There are several more questions… hence the checklist.

The biggest factor that seems to get overlooked is the question of investment and income replacement. Let’s say the business is worth $800,000 and the seller would receive $400,000 for selling their part. How much will they lose in taxes and then what will they do with the cash from the sale?

We often watch individuals sell assets – houses, farms and even stocks – with no plan on how to reinvest the cash. The purchase price may be a fair or exceedingly gracious offer, but if there are no great options to reinvest the capital for greater opportunity, why sell?

In addition, you must consider how much income the existing asset currently produces and whether you need to replace that income if you sell. The very low interest rate environment makes income replacement difficult and sometimes impossible.

Taxes, income replacement and requirements, opportunities, family hopes and wishes for future generations and a myriad of other considerations are required in making decisions to sell any asset regardless of the price. The idea behind checklists is that (hopefully) all the questions are predetermined. Invest time in gathering the details, not trying to recreate the wheel. Once you have identified the opportunity, search out the checklist and make the best decisions possible.

Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This” found on WIBC Saturday mornings from 6-7a.m. as well as three other Indiana-based radio stations. Joe has served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.

Financial Enhancement Group is an SEC Registered Investment Advisor.  Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor.  Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group.  FEG is not owned or controlled by World Equity Group.

Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.

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