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LIMITED PARTNERSHIPS
Limited partnerships allow you to own a portion of a business entity giving you an opportunity for capital appreciation and tax deferral. In addition, they provide leveraged growth, since borrowed money is used to finance part of the project. Leveraged partnerships enhance your opportunity for capital gains and tax deductions. For instance, if you buy into a partnership that is 80% financed with borrowed money, and the project appreciates at 10%, in the first year the unrealized pretax appreciation of your investment is 50% (10% divided by 20% investment, net of debt). On the other hand, should the deal prove unprofitable, the leverage works to cause equally larger losses.
Tax deferral, like an interest-free loan from the IRS, is the norm with a partnership investment under current tax regulations. The appreciation in value of real estate or other assets is not taxed until the assets are sold.
Few investors have the expertise to evaluate a partnership’s legal, tax and financial implications, or to determine how these investments fit into an investment program. Sometimes the purchase is based on unrealistic projections of high returns. Still, carefully selected limited partnership investments can play in important role in diversifying and, hopefully, enhancing your portfolio. Important considerations include:
1) The degree of risk that you can safely assume
2) The current and expected income tax status
3) Recognition of the limited partnership’s illiquidity
Only investable funds with a long time horizon should be considered for these vehicles.
IRA Distribution Strategies
An IRA owner is not subject to the 10% early distribution tax on a distribution that is part of a series of substantially equal periodic payments made not less frequently than annually over the life (or life expectancy) of the IRA owner. This exception has several conditions:
1) If the IRA owner changes the method of distribution before age 59 ½ to a method that no longer qualifies, the 10% tax is imposed on all distributions received before age 59 ½.
2) The substantially equal periodic payments generally must be received for at least 5 years., even if she attains age 59 ½ before the end of the 5-year period.
The IRS has authorized three ways to provide for a series of substantially equal periodic payments:
1) Annual distribution of the required minimum distribution amount based on the life expectancy of the IRA owner;
2) By amortizing the IRA account balance over a number of years equal to the life expectancy of the IRA owner, using a reasonable interest rate.
3) By dividing the IRA account balance by an annuity factor derived from a mortality table and a reasonable interest rate.
When using the required minimum distribution method for det4ermining the amount exempted from the 10% early distribution tax, the IRA owner must receive the exact amount determined under that method, although the IRS has ruled that a four percent cost of living adjustment is permissible.
In another ruling, the IRS permitted the individual to begin substantially equal periodic payments on one IRA only, allowing the balance in another IRA to be disregarded in computing the annual distributions required.
COMMUNITY PROPERTY
Keep accurate records on your community and separate property. While you are a resident of Texas, virtually all of your ordinary income is considered community property. Community and separate property are treated similarly for estate tax purposes, if a very technical provision known as the “marital deduction” is utilized. Above all, it is essential for you to keep accurate records on your separate and community property. Commingling assets to an extent that their tracing cannot be maintained, sometimes results in the property being considered community property, but if the community and separate property are distinguishable, they should retain their respective character. By keeping accurate records, you will enable your counsel to plan the most effective distribution of your estate and you will also avoid a possible estate tax liability on the separate property of the survivor at the death of the first spouse.
JOINT TENANTS WITH RIGHTS OF SURVIVORSHIP
It is imperative that you make certain that none of your bank accounts, brokerage accounts, stock certificates or any other property (including real estate) is registered in your name with other individuals as “joint tenants with right to survivorship” or any other style of account which purports to provide that the surviving party or parties to the account have ownership to the account at death. Under Texas law, if an account is registered as “joint tenants with right to survivorship’ (or giving other indications of survivorship rights, such as JTWROS), your will does not control the passage of the property, but instead the survivor or survivors to the account will take the property. Some savings and loan, banks and brokerage companies furnish these types of signature cards for these accounts, without realizing the impact they have on individual client’s estate planning matters. It is important that your will govern the passage of these assets and that they not pass outside of your estate plan; otherwise, adverse property and tax consequences could result. Please make certain that none of your accounts or other property are registered in this manner, but rather are registered as “tenants in common” or in your individual (or combined) name(s) without any indication of rights to survivorship.
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