Centura Wealth Advisory deviates from the traditional standards of everyday wealth advisories. Our main focus as a wealth advisor is to liberate your wealth, creating an independent advisory firm that goes above and beyond traditional money management. We aspire to bring only the best value-added solutions to our clients; not be all things to all people.
As financial advisors, we want to help our clients Liberate their Wealth and shape a future.
Our Purpose
Centura goes beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions. Often, traditional wealth managers lack the knowledge and resources to offer their clients the best financial planning.
“We believe everyone has a purpose in life, and ours is to help wealthy individuals and families achieve their purpose through a proactive and comprehensive wealth management process called Liberated Wealth®.”
The Centura Foundation
One tangible example of our actions following our words is the Centura Foundation. The goal of the Centura Foundation is to focus efforts on building and sustaining vibrant communities in the areas where we live and work.
The Centura Foundation was established to harness the charitable nature of our founders and clients for the purpose of directing resources to underfunded established organizations. Built on the concept of Think Global, Act Local, we are dedicated to focusing on community-building activities that address key social issues that create a healthy and vibrant community.
At Centura Wealth, we strive to be the best in our chosen lines of business, not the biggest. Learn more about what liberated wealth means for you today.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-467367026-scaled.jpg17072560Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2021-08-29 17:59:002024-08-27 18:01:31Meet Centura: Not Your Traditional Wealth Advisors
Trust us, it’s never too early to start year-end financial planning.
Year-end is about so much more than just your financial statements. The right year-end planning allows individuals to make the most out of their financial plans and tax strategies while also monitoring their current progress.
Centura Wealth Advisory believes that there are ways to liberate your wealth—that process can be made possible through financial planning.
What are some advantages of getting ahead of the curve? You may be able to:
Lower your taxes with retirement contributions and charitable gifting
Offset taxes on investment gains by selling some assets
Adjust your budget to meet your financial goals as they change
Whether you’re focused on building wealth, fine-tuning your portfolio or preparing for retirement, there are things you should consider before December 31st.
Below are a couple of steps to follow for your annual financial planning. Let’s take the opportunity to get ahead of the curve and reach your financial goals.
First, What is Year-End Financial Planning?
In its simplest terms, year-end financial planning is a way to determine where you are financially as the year comes to a close.
A successful financial plan can help you:
Assess your budget
Cash flow
And other assets
A financial plan can reduce negative spending habits, help manage taxes, savings, debt and more as well as push individuals towards their financial goals.
Now, let’s take a look at some steps to take in your year-end planning.
Review Your Mortgage
It’s unlikely that you want to deal with a mortgage, but there are many benefits to conducting an annual mortgage review. Why? The factors which drove you to that loan choice – such as finances – have likely changed since after the settlement. By taking the time at the end of the year to review your mortgage, you can be sure the loan you have is still the best choice for your financial situation.
For instance, maybe you’re working from home long-term and want to move to a new area, maybe you’re just ready for a change of pace. Either way, evaluating your current mortgage and adjusting can help future plans be set in motion.
Tax Loss
Year-end financial planning should also include a look at your taxes. While Tax Day may not be until April 15th, getting ahead on tax preparation can be beneficial.
Centura Wealth Advisory specializes in tax planning for different categories including:
Short Range Tax Planning
Long Range Tax Planning
Permissive Tax Planning
Purpose-Driven Tax Planning
Some professionals believe in a tax-loss method as a way to invest in returns, but each family and institution is different.
Our investment philosophy is centered around achieving the best absolute returns given a range of likely outcomes. We achieve this through passive investment management, and by offering a unique set of alternative investments that can bring an excess return to your portfolio.
General Planning
Consider what’s coming in the next few months and beyond. The holidays can become spendy and might require further budgeting. This is another reason why financial planning can never be started too early. It can be tempting to wait until after the holidays, but if you start now then there is greater room for financial liberation.
Let’s Talk Insurance: Time to Review Your Coverage
Insurance policies have a tendency to shift depending on changes in the environment. Centura Wealth Advisory acknowledges that a key element of financial liberation is to monitor and pivot your original plans.
Insurance policies can be broken up into categories depending on your lifestyle. General liability insurance or personal liability insurance are a couple of examples that are worth reviewing.
General liability insurance covers your business when costly claims arise during normal business operations. It can help cover your business in the case that your business caused:
Third-party bodily harm
Third-party property damage
Reputational harm
Advertising injury
General liability insurance, however, does not cover your business for work-related injuries or illnesses sustained by employees. It also does not cover damage to your own business property or mistakes made in your business’s professional services.
Meet with a Tax Advisor
Meeting with a tax advisor can save you time, money and the stress of worrying that you might have made a mistake.
At Centura Wealth Advisory, we are dedicated as fiduciaries to our clients’ stewardship of their assets.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1208782670.jpg14152119Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2021-08-14 18:02:002024-08-27 18:03:27Get Ahead of The Curve: Year-End Financial Planning
So… you want to sell your business. You’re not alone in the crazy market right now.
While there are many risks to owning a business, there are many reasons why you might be considering selling. Whether you are retiring, moving, or seeking new opportunities, here are some steps you can take to make this process as easy as possible.
Organize
Depending on how long your business has been in operation, there is a lot to organize. The paperwork is looming, but there are always steps you can take to organize. In general, financial planning is always a great goal to have as a business owner.
Some documents to gather and organize include:
Tax returns
Three years worth of profit and loss (P&L) statements and balance sheets
Copy of current lease
An updated list of everything that will be sold from business
Contact and clients list
Sales transactions
A summary of monthly sales
After organizing these financial documents, the next step is to review them with your accountant.
Engage with the Professionals
Centura Wealth can help you through this process, and keep your priorities and goals at the forefront of selling your business. Mark Morris speaks to the importance of On the “Live Life Liberated” podcast by the Centura Wealth team. The podcast follows the one idea of minimizing your taxes — through the ING trust. Mark Morris highlights the following subjects for anyone looking to sell their business:
The major hurdles that the ING strategy helps you overcome
What the new California legislative proposal entails — and its implications, if it’s successfully passed
Why Mark strongly recommends that the sale of the business happens this year for optimal results, but options if it doesn’t
How to take advantage of the ING trust even if you don’t yet have a buyer for your business
Click here to learn more about the ING trust from a professional’s point of view!
Benefits
Besides making sure your business looks the best it can, there are various strategies you can follow to make smart decisions, including defined Benefit Plans (DB) and Defined Contribution Plans (DC).
Defined Benefit Plan
A Defined Benefit Plan (DB) is an “employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors,” according to Investopedia. These factors can include the length of employment and salary history.
With a DB plan, the general rule of thumb is that an employee cannot take out funds from their 401(k) plan.
Defined Contribution Plans
A Defined Contribution Plan (DC) on the other hand is, “a retirement plan that is typically tax-deferred like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements,” according to Investopedia.
With a DC plan, participation by employees is voluntary.
Find a Trustworthy Buyer
Finding a buyer can be a lengthy process, but it’s worth waiting for the right fit for multiple reasons. Here are a couple of tips to be aware of when looking for a buyer:
Have multiple options as deals fall through all the time
Allow cushion room for negotiation
Keep your values top of mind—does this buyer follow them?
Keep potential buyers updated to help build trusty relationships
It never hurts to network
Communicate with Employees
Throughout the selling process, remember to keep your employees engaged and focused. If employees are happy in their positions, the value of your business grows.
Consider their perspective as an employee throughout the selling process. Telling them too early could cause confusion. Telling them too late can be offensive to the work they are doing. Timing is everything.
One of the key elements of liberating your wealth is planning in a way that unpacks your family’s values and dreams, following an overall purpose. This is a great perspective to have going forward after having a conversation with your parents.
For those who are interested in liberating their own wealth, please contact us at Centura Wealth Advisory today to see how we might partner!
Our process does not discriminate between uniqueness versus common and therefore is well-adjusted to serve our audience. Just as important is our passion for finding and solving complex problems.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/How-Do-I-Prepare-to-Sell-My-Business.jpg13382239Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2021-07-31 18:05:002024-08-27 18:08:23How Do I Prepare to Sell My Business?
At Centura Wealth Advisory, we make it possible for you to liberate your wealth. But what does this mean? Let’s dive in and take a deeper look.
Planning
Planning is a multi-step process that is tedious but essential to moving forward in your wealth. It’s easy to be disorganized financially, that’s where we step in. Centura Wealth helps you create order and organization, and most importantly — peace of mind.
Planning to liberate your wealth can look differently for each family, individual, or institution. We at Centura offer different areas of planning, including:
Tax Planning
Short Range Tax PlanningLong Range Tax PlanningPermissive Tax Planning Purpose-Driven Tax Planning
Real Estate portfolio Analysis 1031/ExchangesRefinancingExit PlanningLike Exchanges (TICs, NNN, DSTs)
Clearly, there is a lot of planning options available. Depending on your position and interests, we can work with you to narrow down which options deliver the highest value for you.
Precision
Our tax planning starts with your existing baseline. After a comprehensive review, we illustrate and synthesize the complexities of your tax profile into sophisticated options that drive meaningful outcomes to reduce your tax burden for you, your family, friends, and your organizations.
Precision is key, and our team will analyze and triangulate your purposes and want to design a unique liberated wealth plan.
Part of the precision element includes:
Identify Existing Strategies
Establish a Baseline Plan
Unlock “What-If” Scenarios
Identify Planning Scope
Purpose
The purpose of liberating your wealth will naturally stem from planning your finances with precision. Once Centura designs your personalized Liberated Wealth(R) Plan, the next step is to implement and advance the plan. This includes coordinating professionals, portfolio implementation, and scorecard reporting.
With any big step, there are going to be adjustments that come up along the way, and we make sure they still align with your purpose. Centura will help you steward your Liberated Wealth (R)Plan, even if that means pivoting original goals.
There are tangible ways your plan can be stewarded, including:
Plan monitoring
Timely Recalibration
Life Events Reset
For those who are interested in liberating their own wealth, please contact us at Centura Wealth Advisory today to see how we might partner!
Our process does not discriminate between uniqueness versus common and therefore is well-adjusted to serve our audience. Just as important is our passion for finding and solving complex problems.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-985087934.jpg14142121Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2021-07-24 18:08:002024-08-27 18:11:51How to Liberate your Wealth: A Deeper Look
With any administration change, you are bound to see changes that affect your business or financial plan, we call it Legislative Risk.
With change comes opportunity. And with risk we see potential.
The Past
In 2019, Centura Wealth wrote a blog, “What Proposed Legislation Could Do to Your Wealth Transfer Plans.” This is a perfect example of legislation that would directly impact your financial planning. The data that came from the legislative acts serve as a reminder that legislative changes can have huge financial planning implications as increased tax burdens are never welcome.
We can learn from history. In 2019 the legislative changes caused Roth conversions to become increasingly valuable as does charitable giving; pairing the two together in the right way can liberate wealth transfer, decrease taxes and fulfill philanthropic goals for your estate.
A current example is the SECURE act (technically “Secure Act 2.0), which could affect your retirement. This bill is an updated version of the original one in 2019. According to Forbes the Secure Act 2.0 could, “Increase minimum wage distribution and raise the catch-up contribution limits.” These are just a couple of changes mentioned that would change retirement and wealth planning.
What is Legislative Risk?
As explained above, the legislative risk is the potential for financial wealth drain because of changes in the law. There are also more specific examples of legislative risks surrounding the workplace. This can be anything from changes in employee benefits or free trade agreements.
Legislative risk can also be phrased as political risk. The goal of legislative risk is that the government should be able to intervene if the industry is failing. However, that is just the goal. There is a continued risk that the government does too much to balance the market, and overly gets involved.
Here’s a few examples of what risks could happen during the shift to a hard market:
Trade policy
Tax regulations
Healthcare changes
Local product safety and environment laws
Local labor laws
Currency regulations
Political instability
Legal and regulatory constraints
Framework, Framework, Framework
Risk Management as a whole is a lot to tackle. So implementing legislative risk into that plan is key. It’s important to remember that frameworks can be simple and effective.
At Centura Wealth Advisory, we invest in our client’s future financial stability. Contact one of our advisors today to see how you can get started liberating your wealth!
How to Prepare
Again, the market is unpredictable, but there are steps you can take to prepare for the worst-case scenario with financial planning. At Centura Wealth, we go beyond the traditional standards for a wealth management plan.
This means to plan for legislative risk, you should consider a couple of options:
Monitor your liberated wealth plan
Analyze future legal risks
Communicate with trusted professionals
Commit to an organization tactic and framework
At Centura Wealth Advisory, we invest in our client’s future financial stability. Contact one of our advisors today to see how you can get started liberating your wealth!
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1126265493.jpg14102125Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2021-07-10 18:14:002024-08-27 18:15:42Legislative Risk: What do you need to do to prepare?
“I’ll start financially planning next month” is a phrase that’s muttered too often.
At Centura Wealth, there are five steps that make clear how financial planning is key to liberating your wealth.
Knowledge
Knowledge is power, and this rings true especially with financial planning. For some, financial jargon is reason enough to avoid financial planning. The fancy words, however, still fail to cover the truth about financial planning. Wealth has many complexities and responsibilities, but a big part of the burden is simply doing right by your family and your values. In short, grow your knowledge.
Time Management
Life is stressful, and some factors are out of your control. But, if you start financially planning, one element can be in control. Time management plays a major role in creating balanced financial planning.
Statistics show time management is wildly out of control for the general population. Some of these include:
“If you spend 10-12 minutes planning your day, you’ll save up to two hours of time that would have otherwise gone to waste
The average person has tried and/or uses 13 different methods for managing their time
American companies lose roughly $65 billion because their employees are suffering from a lack of sleep”
Time management and financial planning go hand-in-hand. If you can manage your finances, you can manage your time better and prioritize what matters most.
Future Goals
The future matters. If you start financial planning now, however, you’ll be set up for success on all levels of your financial wealth plan. This includes savings, retirement planning, charitable giving, and overall security.
Goals are hard to attain if the planning isn’t present. There is never a better time than now to start financial planning. Feeling overwhelmed with the idea of financial planning? That’s why Centura Wealth Advisory is here.
At Centura Wealth, our approach is to understand your wealth, identify inefficiencies, design new pathways, then liberate and steward your wealth. We achieve this through our unique and comprehensive process: Uncover, Unlock, Design, Liberate, and Steward.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-959028830-scaled.jpg17082560Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2021-07-03 18:15:002024-08-27 18:18:06Why Financial Planning is Important Now
With a swoop of a pen, could thousands of households suddenly face an Estate Tax? If so, is there anything that can be done about it? Why would someone now face this wealth tax when they haven’t before? How does this relate to the current political election?
In this blog post we explore these ideas, and more. Consider the following:
The upcoming presidential election has the potential to radically change tax laws that govern Estate Planning
Democrats are targeting a repeal of the Tax Cuts and Jobs Act and have proposed lowering the estate tax exemption from its all time current high of $11.58MM today if they win the White House and senate1
The possibility of repealing and changing current tax law has created a frenzy of estate planning activity as many more families might face the Estate Tax in coming years
This post discusses a brief history of the estate tax and how it works, explores the current exemption level and highlights potential implications associated with the upcoming election. For a more in depth conversation on your plan, contact Centura Wealth Advisory.
What is the Estate Tax
The Estate Tax is a tax on your right to transfer property at your death. Currently, there are very few taxpayers that encounter the Estate Tax and that is because the current exemption level is at an all-time high (see Estate Tax Exemption chart below). A high exemption level ensures that only the wealthiest pay this tax, however a lower exemption level would expose many more American families; and that is the concern as it relates to the upcoming election. To understand the estate tax and how it is used by the federal government, it is important to begin with a historical perspective.
History of the Estate Tax: Prior to 1916
In the United States, the death tax has been used several times to generate revenue in times of war or crisis. In each instance, congress used the death tax as a short term tool to raise funds during times of need and repealed the tax when the need was no longer there. The first example of this was during The Stamp Tax of 1797 when the tax was used to create revenue for an undeclared war with France. The second iteration came with the Revenue Act of 1862, which was used to raise money for troops, ammunitions, and other expenditures during the American Civil War. And finally, when the Federal Legacy tax was created during the Spanish-American War. All these enactments of the death tax were repealed shortly after the wars ended. However, the death tax was once again reintroduced in 1916 during World War I, setting the stage for the Modern Estate Tax.2
History of the Estate Tax: 1916 to present
The Revenue Act of 1916 created the Modern Estate Tax which was a tax on the transfer of wealth from an estate to its beneficiaries. The key caveat here is that this tax was levied on the estate as opposed to an inheritance tax that is levied directly on beneficiaries.
Since inception, the Modern Estate Tax has been amended at least twenty times for various reasons such as, the increase to a $120,000 exemption level at an 18% rate in 1926, and more recently in 2018 when it was amended to an $11.18mm exemption level at a 40% rate due to the Tax Cuts and Jobs Act. Chart 1 shows the Estate Tax Exemption since 1916, adjusted for inflation. As is clear from the chart, the current level of the estate tax exemption (adjusted for inflation) is at an all time high.2
Chart 1– Estate Tax Exemption Over Time (inflation adjusted)
How does the Estate Tax work
There are 2 primary aspects to the Estate Tax: the Exemption Level and the Tax Rate.
Exemption Level – The estate tax exemption level is the threshold at which an estate is subject to estate tax
Tax Rate – The estate tax rate is applied to the amount of the estate above the estate tax exemption level
Through manipulation of the exemption level and/or rate, congress can creatively target revenue (in the form of tax dollars) that would otherwise not exist if the current law of the land were to prevail (i.e., Tax Cuts & Jobs Act).1
What could it mean for me and my family?
Estate tax form
We know that decreases in the exemption level and/or increases in the rate are tools that can be used to target more money from more estates, but at Centura we are increasingly concerned about this wealth transfer risk due to 2 primary factors:
Government Debt: An urgency to raise funds to pay off debt associated with the COVID-19 pandemic as current government debt is at $27 Trillion.3
Revenue Collection Deficit: The current estate tax only affects a small fraction of estates (due to the high exemption level) and raises less than 1% of federal revenue.4
With the U.S presidential election less than 30 days away, the Estate tax has been the subject of significant interest among policy makers, researchers, and the general public. Reasons for this interest range from views on the fairness of the tax to interest in the effects of taxing transfers at death on the overall U.S. economy. No matter what the reason is for reformation, we know that this tax rate is volatile and significant to those affected by it.
Scenario Analysis
A great way to illustrate the potential impact of a revised estate tax is to consider one specific estate, and analyze the tax implications under two different death scenarios. These scenarios differ by the year of death (2021 vs 2026), which has an impact on the estate value, exemption level and potential tax liability. Thus, these are for illustrative purposes and are meant to help the reader contextualize the implications of these political decisions. The four scenarios analyzed are:
Scenario 1: (Baseline) Estate value of $5.0M in 2021 (at death)
Scenario 2: Democratic Proposal Retroactive to 01/01/2021
Scenario 3: $5.0M (2021) Estate in 2026 (Sunset Provision, TCJA)
Scenario 4: $5.0M (2021) Estate in 2026 with Democratic Proposal 01/01/2021
Table 1– Scenario Analysis
Illustration of Tax Risk
Scenario 1 in Table 1 represents the estate tax due under the current law (Tax Cuts & Jobs Act) and Scenario 2 shows the estate tax due under the proposed democratic policy. Both Scenarios 1 & 2 depict a 2021 date of death scenario since the democratic policy would likely be retroactive to 01/01/2021.
Alternately, for Scenarios 3 & 4 we selected the year of death as 2026 which is when the exemption level is scheduled to sunset, based on current law (Tax Cuts & Jobs Act).5
As is clear from this example, a change in estate tax policy to the democratic proposal could have huge tax ramifications. In addition, these taxes may extend to many more families than they otherwise would at higher exemption levels. Thus, the upcoming election should be of keen interest to families with estates of $3 Million or more.
What can you do?
At Centura, we assist individuals and families with navigating the complicated world of estate planning, specializing in strategies designed to help you efficiently transfer wealth to your loved ones and causes you care about. To help you get started we put together a calculator to help you estimate what your estate tax liability could be.
Depending upon the outcome of the 2020 election, we believe many more estates may be exposed to this long standing tax and we can help in planning to address it. Please contact us to learn more or take advantage of our free calculator.
https://centurawealth.com/wp-content/uploads/2024/08/AdobeStock_241616506-Resized-scaled.jpeg12582560Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2020-10-19 18:18:002024-08-27 18:20:56A Brief History of the Estate Tax and Potential Implications for the Upcoming Election
Opportunity Zones (O-Zones) are a unique product of the 2017 Tax Cuts and Jobs Act (TCJA). Since being introduced, opportunity zone investments (OZs) have been a hot topic for potential tax planning. So much so, it’s been reported that Qualified Opportunity Funds have raised over $6.7 billion thru December 2019, a number that grew at a rapid pace at the end of 2019 as taxpayers looked for ways to defer capital gains.
When it comes to O-Zone, tax breaks are the headliner, but the actual underlying investment within the Opportunity Zone shouldn’t be overlooked. Questions investors should ask include:
Where am I investing my money?
Are there enough good investment opportunities in this space?
Will the tax benefits be significant enough to outweigh an under-performing investment?
Would the investor be better off just paying the tax and re-investing in an investment of their choosing?
In this blog post, we’re going to dive into Opportunity Zones, which can be a hybrid tax planning and investment solution for those that have recognized a large capital gain. We’ll define the basics of the Opportunity Zones, discuss the tax benefits, compare O-Zones to other types of investments, and explore the characteristics of an investor that might consider an investment in a Qualified Opportunity Zone.
What is an Opportunity Zone?
The Tax Cuts and Jobs Act of 2017 brought about a new type of investment offering, Opportunity Zones, which provide a unique way of mitigating capital gains tax. The Opportunity Zones were created to incentivize investment of capital gains into low income or economically distressed communities. By investing in these communities, taxpayers may be allowed to defer capital gains when investing funds into a Qualified Opportunity Fund (QOF) and meeting other requirements.
Check out the California Opportunity Zone map here.
What is a Qualified Opportunity Fund (QOF)?
A Qualified Opportunity Fund is an investment vehicle that files either a partnership (Form 1065) or corporation (Form 1120/1120S) federal income tax return and is organized for the purpose of investing in Qualified Opportunity Zone property.
What are the tax benefits of investing in a QOF?
There are three main categories for the tax benefits:
Deferral of a Capital Gain
Step-up in Basis of the deferred gain amount
Tax free gain on new Qualified Opportunity Fund growth
Deferral of Capital Gain
When a capital gain is recognized on the sale of an asset, you have the option to take any part of the capital gain and re-invest the proceeds into a Qualified Opportunity Fund (QOF). If the capital gain proceeds are re-invested into a QOF within 180 days of the gain being recognized, the dollar amount invested will be eligible for deferring the capital gain until the earlier of:
The tax year when the QOF interest is sold
Or December 31, 2026
At that time, the capital gain amount that was initially deferred when proceeds were invested into the QOF, would be recognized (less any step up in basis, see below) and taxes will be paid. The capital gain tax rate will be based on the tax rate applicable during the year the gain is eventually recognized.
Step-Up in Basis
If the investment in the QOF is held for at least 5 years, there is a 10% step-up in the basis of the deferred capital gain. If the QOF investment is held for 7 years, there is an additional 5% step-up in basis of the deferred capital gain (for a total of 15%). For those investing in 2020 and beyond, there will not be a 5% step up since it will be impossible to reach the 7-year holding period by 2026.
Tax free growth
If the interest in a QOF is held for 10 years or more, the post-acquisition gains in the QOF will be excluded on the sale of the QOF interest, thereby completely avoiding capital gains tax on this portion of the gain. There are several tax incentives that could be a big win for the long-term investor. However, taxes alone should never drive an investment decision, so let’s review a few of the primary risks associated with investing in a Qualified Opportunity Fund.
Risks Abound
The TCJA just put Opportunity Zones on the map in 2017, and as recent as December of 2019, the IRS published its final regulations on Opportunity Zones. The Qualified Opportunity Funds are new vehicles and due diligence is paramount. Investors will be facing questions of operator risk, investment risk, and illiquidity risk to name a few.
Operator risk– There won’t be an extended track record for any of the funds or operators. Are they putting the money to work in good opportunities that will net investors a positive return? Are they operating in compliance to meet the requirements of a Qualified Opportunity Fund?
Investment risk– While the Opportunity Zone rules do encourage more than just real estate development, it is likely that a lot of early projects will be in real estate development. Any real estate development project carries its own risks, not to mention that the developments will be located in Opportunity Zones, which by design are designated as an economically distressed area. As such, investing in these areas could carry additional risk(s) and expectation of returns should be scrutinized closely. Depending on the QOF, there could be single property risk if the fund has only invested in one project versus others that plan to invest in multiple projects.
Illiquidity – depending on the fund, the investment could be illiquid. To capture the tax benefits and defer the gain the maximum number of years, you would need liquidity elsewhere. This will be a 10-year investment if you want to hit the tax trifecta (deferred gains, step-up in basis, and future tax-free growth). If holding the QOF investment for ten years, the investor would also need to set aside cash to pay the initial capital gain tax that was deferred and recognized in 2026, so plan accordingly.
Is an Opportunity Zone Investment Worth Consideration?
For comparison, we ran a hypothetical scenario to help evaluate the break-even return required by an investor that has captured a tax benefit from the Opportunity Zone (OZ) investment:
Option 1: Recognize capital gains on an investment, pay tax on those gains for Federal and California (assuming a California tax payer), and reinvest all the net proceeds (gain and basis) into a new investment
Option 2: Recognize capital gains on an investment, pay tax on those gains for California only, and reinvest the net gains in a Qualified Opportunity Fund while putting the basis in a new investment
It’s clear the Opportunity Zone investor has the beginning advantage with more capital to invest in year 1 (Option 2). A larger starting investment can compound at lower rates of return and still arrive at the same future dollar amount over 10 years. But, how much lower can the return be for the tax advantaged investor before the lackluster investment performance wipes out the tax advantages?
The goal here was to find the break-even return required from an Opportunity Zone fund to put the investor on par with just paying the tax and re-investing.
For the first scenario (Table 1), we assumed the investor paid the tax and re-invested the remaining proceeds into an equity portfolio with an expected return of 6.33% (see Capital Market Assumptions Blog). The Opportunity Zone investor invested the gain portion into a QOF and the basis in an equity portfolio. Assumptions are that all investments are liquidated at the end of ten years. The numbers are as follows:
For the second scenario (Table 2), we assumed the investor paid the tax and re-invested the net proceeds into syndicated real estate that is expected to return 8%. The real estate investment has additional tax deferral options at the end of the ten-year holding period. It is still assumed that both options are liquidated at the end of ten years. The breakdown comparison of the options are shown below:
The QOF has merit when compared to paying the taxes and investing in an all equity portfolio. The break-even return required in the QOF of 2.75% (see Table 1) gives the investor a nice cushion provided by the tax savings. However, for accredited investors with the options to place funds within more sophisticated investment vehicles, the results become more convoluted. The QOF investor would require a break-even rate of return at 6.64% which is a much higher hurdle for an Opportunity Zone investment that carries many additional risks outlined earlier.
Conclusion
Let’s summarize where the Opportunity Zone seems to be an optimal solution.
At minimum, it’s an investor that has recognized or will be recognizing a significant capital gain. If the investor:
Has liquidity elsewhere to allow for a 10-year investment horizon in a QOF and liquid assets to pay the deferred tax due in year 2026
Would like to diversify a portion of their portfolio to real estate
Desires to invest money within economically disadvantaged areas for community/social benefits
Based on the comparison we modeled, if the motivation is strictly financial, an accredited investor in California (zero state tax benefits) with access to private syndicated real estate investment opportunities might just consider paying the tax and investing in a lower risk real estate investment. Instead of investing money in projects requiring development, existing properties with current cash flows may be a lower risk option.
Of the tax incentives, the ‘tax free’ growth on a new investment in an Opportunity Zone sounds appealing. However, real estate investments already allow for significant tax efficiency. Real estate investors can defer unrealized gains in future 1031 (IRC Section 1031) exchanges and heirs of real estate property receive a step up in cost basis at death.
In addition, certain types of real estate investments also allow investors to utilize depreciation to shield income from taxation; until exhausted or exchanged into a new property via 1031 exchange.
Given the existing tax efficiency and opportunity to invest outside of economically disadvantaged areas, private syndicated real estate has the potential to outperform a higher risk Opportunity Zone investment in the long run.
If you’ve incurred or will be incurring a significant capital gain and need help evaluating your options, contact Centura Wealth Advisory for a consultation.
Centura Wealth Advisory (“Centura”) is an SEC registered investment adviser located in San Diego, California. This brochure is limited to the dissemination of general information pertaining to Centura’s investment advisory services. Investing involves risk, including risk of loss.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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Given an ever-shifting market, it’s important to stay abreast of asset class expectations and how changes in market levels over time can help drive asset allocation decisions in an investment portfolio. In our first blog series on capital markets, we presented our forward-looking risk and return estimates. In this blog we will check current markets relative to our projections and illustrate how we use risk premiums to garner insights necessary for optimal portfolio recommendations. Keep reading to learn more about risk premiums, what they might mean for your portfolio and why now is a prudent time to take inventory of your asset allocation across your entire balance sheet.
Introduction
Both stock and bond markets are at or near all-time highs but historically these markets have not been correlated like they are today. In fact, the S&P 500 Beta for the Barclays US Aggregate Bond Index is -0.03 which indicates virtually no relationship between the change in price between stocks and bonds and suggests that price correlations will likely diverge at some point in the future. Thus, the question is not whether stocks or bonds will go up or down but whether stocks are cheap relative to bonds; and other assets like real estate. In order to solve this riddle, we can utilize risk premiums in different markets to evaluate which may be over/under valued. This blog post will examine current risk premiums in the stock and bond market(s) to assess relative valuations between the two and garner investment insights.
Risk Premiums – What are they?
Risk premiums represent the price of risk in different markets and investors can use them as a gauge of relative risk. They also reflect fundamental judgement about how much risk we see in an economy/market and what price we attach to that risk. The price of risk influences our asset allocation decisions as well as security selection within each asset class. The following are some (not all) factors that influence risk premiums:
Risk Aversion
Consumption Preferences
Economic Risk
Information
Liquidity and Fund Flows
Catastrophic Risk
Government Policy
Monetary Policy
Behavior
As seen in the list above, risk premiums are complex, and embedded in them is a significant amount of information. Fortunately, risk premiums can be extracted from market data which infers that the considerations above are baked in to prices. Utilizing market data allows investor’s to assess risk premiums relative to their own forward looking views and relative to other markets.
Investment implications
Before diving into the different risk premiums, it is important to lay the foundation for why looking at risk premiums matters. By comparing risk premiums, investors and practitioners can evaluate risk and returns on a relative basis and make investment decisions accordingly. The table below provides an overview of the relationship between different assessments of risk and the related market interpretation and investment action.
Table 1 – Risk Premium Assessments
Too High
Accurate
Too Low
Market Interpretation
Under Valued
Fairly Valued
Over Valued
Investment Action
Buy
Hold
Sell
Equity Risk Premium
The equity risk premium (ERP) represents the price of risk in equity markets and can be inferred as the expected excess return over the risk-free rate. For example, if the risk-free rate is 2% and equity markets are expected to earn 7% then the ERP is 5%. This risk premium is interpreted as the opportunity cost for investing in a market as well as the expectation of what that market will return, on average. Both considerations can be adjusted by volatility (standard deviation) to provide a risk adjusted comparison as well.
In our blog series on capital market projections, we forecasted US Large Cap Equity market returns of 6.33% over 10 years with volatility of 15.58%. If we utilize our current 10-year treasury yield of 1.64% we would derive an estimated ERP of 4.69%. However, in practice there are a variety of methods for utilizing market prices and other data to model and estimate the ERP. At Centura, we calculate the current ERP to be 5.65% which would imply that relative to our 10-year outlook, stocks are currently undervalued at today’s low interest rates and may represent an attractive long-term investment. With the ERP explained, we turn to the RP of debt (bond) markets, also known as Credit Risk Premium.
Credit Risk Premium
When it comes to evaluating the bond market, we typically look to the default spread between a bond and the risk-free alternative (e.g., Corporate bonds vs US treasuries) to estimate the credit risk premium (CRP). Default spreads are the market’s interpretation of credit risk premiums at different maturities, and the tighter spreads get the more overvalued the market becomes (see Table 1). Fortunately, the US Federal Reserve provides default spreads, and for Aaa and Baa corporate bonds relative to 10-year constant maturity treasuries (i.e., risk free rate) the current (as of September 2019) spreads are:
Aaa Corporate Bond Yield vs 10 yr treasury (constant maturity): 1.30%
Baa Corporate Bond Yield vs 10 yr treasury (constant maturity): 2.20%
At Centura, our capital markets projection for US Fixed Income is 3.49%, which versus the current 10-yr treasury yield of 1.64% represents a 10-year projected CRP of 1.85%. This implies that fixed income is priced efficiently with our long-term credit market forecasts.
Stocks vs Bonds
On a relative basis, at a blended CRP of 1.85% vs an ERP of 5.65%, bonds look expensive versus stocks. That said, at Centura we prefer to look at risk adjusted returns when comparing what it takes to earn that extra risk premium. For example, fixed income standard deviation is estimated to be 3.45% which when paired with a blended CRP of 1.85% begets a Sharpe Ratio of 0.54. Equity Market standard deviation is estimated to be 15.58% which when paired with an ERP of 5.65% equals a Sharpe Ratio of 0.36. Thus, on a risk adjusted basis bonds are more attractive than equities. So, what does all this mean?
Conclusion
In summary, at current market levels the equity risk premium (ERP) implies that equities are cheap relative to bonds. The ERP also implies that equities are cheap relative to our forward-looking capital market projections; whereas bonds look more efficiently priced based on our forward estimates. Thus, we are bullish on equities for the long term (i.e., 10+ years). While we are neutral on bonds, we recognize that they provide enhanced risk adjusted returns and can serve a vital role in portfolio management as they help steady returns. Additionally, they allow us to target specific risk/reward mandates.
At Centura, we construct portfolios of stocks, bonds and other alternative assets utilizing risk premiums to assess relative value between asset classes and intra asset class as well. Given the long bull run in risk assets over the past 10+ years, we at Centura feel that this is a prudent time to take inventory of holdings across your entire balance sheet to ensure your asset allocation is in line with your risk tolerance and portfolio objectives. If you self-direct your own portfolio, or are interested in a second opinion on your managed portfolio, contact Centura Wealth Advisory for a complimentary portfolio review.
Disclosures
Centura Wealth Advisory (“Centura”) is an SEC registered investment adviser located in San Diego, California. This brochure is limited to the dissemination of general information pertaining to Centura’s investment advisory services. Investing involves risk, including risk of loss.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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Two retirement reform bills (the SECURE Act and RESA) have been circling around Washington, and if passed, may make significant changes to many retirement and estate plans. Notably, the proposed changes outlined in the bill(s) have meaningful implications as the rules on inherited IRA’s are up for debate. Both the House and Senate have different views on the technical aspects of how tax shelters for inherited wealth could be reduced. Read our blog to learn about the differences in proposed changes for “Stretch IRA’s” and what they could mean for tax planning, wealth accumulation and wealth transfer.
Introduction
Retirement savings and tax laws are inextricably linked. For example, IRA’s, 401(k)’s and other tax deferred retirement vehicles have been designed to assist savers in meeting their future income needs so that Social Security is not the sole source of retirement income. While lawmakers have created different ways to save (e.g., traditional IRA vs Roth IRA), the RMD (required minimum distribution) types of accounts that have currently garnered attention from lawmakers are “stretch” IRA’s. This post will examine new bill(s) from both the US House of Representatives and US Senate, as they pertain to stretch IRA’s, evaluating the potential implications from a financial planning perspective (especially taxes).
What is a Stretch IRA?
A stretch IRA is an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. This approach allows for continued tax-deferred growth of an individual retirement account (IRA) and sets limits to the amount that must be withdrawn each year. The goal of this type of strategy is to limit the required distributions on an inherited IRA, stretching them over time, in order to avoid a large tax bill.
The IRS blesses this approach through Required Minimum Distribution (RMD) factors (based on age), which guide how much of an IRA must be withdrawn each year (at a minimum). The RMD amount withdrawn is taxable and therefore represents revenue to the United States government. Thus, while investors seek to extend the period of withdrawal to be as long as possible, lawmakers looking to accelerate tax revenues have honed in on stretch IRA’s.
Proposed Legislation
On March 29, 2019 the House Ways and Means Committee presented HR 1994, also known as the SECURE Act, which eventually passed on May 23, 2019 and is currently awaiting senate approval. SECURE is an acronym for Setting Every Community Up for Retirement Enhancement and represents a bipartisan bill. In the House bill, inherited IRA’s would need to be withdrawn within a 10-year period. Depending upon taxpayer preference, this could be periodically, at regular intervals, or even ballooned on the back end. Taxes will be paid on the distribution(s) when taken and after 10 years the entire IRA balance must be depleted.
Following suit, on April 1, 2019 the Senate introduced a bipartisan bill known as RESA; Retirement Enhancement and Savings Act. The Senate version allows a “stretch” on the first $400,000 of aggregated IRA’s and the exceeding balance must be distributed within 5 years. Taxes would be paid on the distribution(s) when taken.
Both proposed bills cover a wide range of retirement issues, and allow exceptions for distributions to minor children, disabled or chronically ill beneficiaries, or beneficiaries who are not more than 10 years younger than the deceased IRA owner. Both versions would apply to inherited IRA’s for deaths occurring after December 31, 2019 and are applicable to Roth IRA’s as well as traditional IRA’s and Qualified Plans.
Potential Impact
To illustrate the potential impact of this legislation, we will model three scenarios to garner insight into how they compare and what they might mean for a beneficiary. The three scenarios we will model include:
Current Law for stretch-IRA’s
House Bill HR 1994 for stretch-IRA’s
Senate Bill RESA for stretch-IRA’s
The assumptions we use for all three scenarios include a 50-year-old beneficiary with a 30% effective tax rate (federal & state), inheriting a $1,000,000 traditional IRA. For simplicity, we use a flat effective tax rate of 30% to illustrate the effects of legislation on taxation and assume a linear withdrawal rate on non-stretch assets; however, we note that in reality “bracket creep” is likely to occur, absent tax planning.
Bracket creep means that incremental income (e.g., RMD’s) moves you into higher tax brackets and increases the overall taxes that you pay. This would mean that effective tax rates are likely to be higher than 30% when RMD’s are accelerated (ceteris paribus), exacerbating the punitive effect of taxes and increasing the value of tax planning.
Thus, for individuals at or near retirement (and/or in high tax brackets) accelerated RMD’s as proposed by the House and Senate could have detrimental effects on wealth retention, and tax planning strategies should be considered.
Ignoring the supplemental effects of “bracket creep,” we find that a $1,000,000 portfolio that earns an annualized 8% pays the following taxes over 10 years:
Chart 1 – Estimated Total Tax Paid: Hypothetical Example
Evaluating the results shown above, we find that under the current law a 50-year-old, at a 30% effective tax rate, would pay $135,131 in total taxes over a 10-year period. This compares to $447,088 in total taxes paid over 10 years under the House Bill (HR 1994) and $279,463 under the Senate Bill (RESA). Intuitively these results make sense as the House Bill is asking beneficiaries to deplete entire account balances over 10 years, whereas the Senate Bill only asks that a portion (in this example 60%) is accelerated over 5 years. See summary results in Table 1.
These proposed legislative changes have huge financial planning implications as increased tax burdens are never welcome. At Centura, we specialize in tax and estate planning, designing plans for 10, 20, 30+ year periods so these changes create new opportunities and strategies for us to discuss (and potentially use) with clients.
For example, under these proposals Roth conversions become increasingly valuable as does charitable giving; pairing the two together in the right way can liberate wealth transfer, decrease taxes and fulfill philanthropic goals for your estate. Additionally, permanent life insurance will be more valuable as it can be used to pass death benefits tax free to heirs, mitigating the negative impact of taxation on their inherited assets.
Challenges beget opportunities and we believe this legislation has the potential to make sweeping changes to many estate plans. As such, we are closely following this legislation and diligently working to be ahead of the curve with strategies and solutions to deploy. We encourage clients (and advisors) to follow this proposed legislation, and if passed, contact us to discuss the ramifications and appropriate solutions.
Disclosures
Centura Wealth Advisory (“Centura”) is an SEC registered investment adviser located in San Diego, California. This brochure is limited to the dissemination of general information pertaining to Centura’s investment advisory services. Investing involves risk, including risk of loss.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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