Max: I Don’t Want the Million Dollars–Now.

Max, a geek genius, has worked for a successful high-tech startup where he received potentially lucrative stock options. His pay day has now arrived: He will get $1,000,000 this year on his stock options.

Max consults his tax advisor. First, he learns that his options are “non qualified options” and will be taxed at the maximum tax rate for ordinary income and not at the lower capital gains rate. Second, the $1 million will get dumped onto his 2017 tax return, forcing him into the highest federal tax bracket, where he will experience even more tax pain caused by phase outs of tax deductions at his income class, burying him under by the piling on of the Obama Care tax, state and local taxes. His CPA estimates he will pay nearly $600,000 in combined taxes on his $1 million.

Max begs his boss to postpone the $1 million payout until next year when taxes will be lower and he will have enough time to figure out how not to lose $600,000 to taxes.  His boss says: the deal requires a payout this year. Boss to Max: “Either you take the money now or you are fired.”

He begins his search for tax deductions in 2017. Most are small: prepay some items, invest in some oil drilling or real estate deals, and accelerate some expenses. The tax code has been rigorously pruned over the years to cut out big last minute tax deductions. He only comes up with about $90,000 in tax deductions, way short of the $600,000 mark.  

Does he have other options?

Yes. There are charitable planning tools which could offset most of the $600,000. However, Max has to move on it now and close the transaction before the end of the year.

Max protests: “But I don’t know which charities I would like to leave most of the million to.” Us: “That is not a problem.  We can set it up for you to designate your own donor-advised fund to be your charity, allowing you to pick and choose a variety of qualified charities next year.”

Max says: “I would like to help others, but what do I get out of my $1 million if all or most of it goes into a fund for charity?” Answer: Max will get a competitive rate of income on earnings from his charitable gift for the rest of his life. Depending on how long he lives and the investment performance of the fund, it is likely that he will receive a lot more income than if he paid the tax. Also, depending on his other income, he may well be in lower tax brackets in future years and will have plenty of time for tax planning later, such as shifting future income into lower brackets.

Max will show the $1,000,000 on his tax return, but most of the $600,000 in potential taxes will be offset by a very large charitable deduction. And, most of the $600,000 to $1million donated to charity will produce income for Max for the rest of his life and fund his favorite causes.  

The structures are in place for this to happen before the end of 2017.  However, to determine the best strategy to take, Max has to meet with the planners now.  It takes time to run the

numbers, and that time is short.

Do you have a problem similar to Max at the end of this year?  If so, contact or call 571-633-0330 to have lots to celebrate about later.

Beth Can’t Live on Only a Million Dollars

Beth has a million dollars and does not have enough money to live on.  She even owns her own house in the Washington DC suburbs and owes nothing on it. 

To live in the Washington DC area, you need a minimum of $40,000 for a simple happy retirement lifestyle if you own your own home outright.  Beth has her investments in instruments she thinks are very safe: Certificates of Deposit at Mega Bank. She earns 2% on her $1,000,000 which provides her $20,000 a year in income, covering her real estate taxes, home insurance, utilities, car insurance and maintenance but this leaves nothing for food. Food comes from her $10,000 a year in Social Security.  Sadly, she can’t afford to travel to see her grandchildren in California.

Beth thought by saving her whole lifetime and retiring a millionaire, she would have it made for a happy and prosperous retirement.  Being a saver, Beth is not a big spender. She doesn’t change her furniture every year or buy new outfits with each change of season.

Beth suffers due to the artificially low interest rates of 1 to 2%. Blame it on government policy, world wide over capacity, the new economy or phases of the moon; but, knowing for sure why interest rates are low does not solve Beth’s problem.

Beth reliably needs $60,000 a year to live in her DC suburb.  That means she needs to earn a reliable $50,000 to $60,000 every year on her $1,000,000.

Beth is scared by the stock market and is afraid that there will be a market crash soon and she cannot afford to lose a quarter to half of her $1,000,000 in a stock market nosedive.

She consults a well-qualified financial planner who introduces her to laddered bond funds.

What are laddered bond funds? It is a selection of a series of bonds issued by major financially solid corporations.  If Beth buys a one-year bond for $100,000 which pays 6% annually, after one year, she then has her $6,000 in interest and her $100,000 in cash back from the corporation.  She will also look at bonds for two, three, four years and more.  The collection is called a “ladder,” each rung representing the number of the years until the bond is paid back.

Her financial planner carefully reviews the safety of each bond and comes up with a ladder of investment grade corporate bonds that will safely provide Beth $52,000 a year on her million. With her social security of $10,000 a year, Beth will have enough to live on and see her grandchildren. 

In talking with Beth, the financial planner learns that Beth has to have a dependable amount of income each month. The planner rules out a bond mutual fund whose payouts vary over time due to the purchasing and selling of bonds in the bond fund. Instead, the planner chooses enough bonds in the ladder to provide Beth with diversification to protect her from possible defaults of one or more bonds.  Also, the short term of the bonds from one to four years lessens the risk from an unpredictable reversal of corporate fortunes of these highly rated solvent businesses.  

Why not just get one 30-year bond for $1,000,000?

First, by putting all of one’s eggs in one basket should that one company default, you could lose all or most of your invested money. Secondly, when inflation returns as predicted, the value of your bond drops because the income paid on the 30-year bond is less than inflation-driven bonds you could buy in the future because the newer bonds are paying a higher interest rate and therefore worth more.  In contrast, with a bond ladder of a diversified portfolio of bonds with varying maturities or terms, the maximum risk that Beth is exposed to is what may happen through the term of her bond ladder.

A well-rounded plan may also include some stock equities, some Real Estate Investment Trusts and other financial instruments to provide growth in the portfolio, which the bond ladder does not.  Beth also needs her financial planner to brief her on any downsides of bond ladders so she can make an informed decision.

There are other solutions for people struggling with retirement finances such as moving to another part of the US with lower living costs, or for the adventurous, moving to another country where $30,000 a year provides a very good lifestyle.

Need help with your planning? Email or call 571-633-0330   

Those Hidden Clauses Can Bite You Bad.

Toni is selling his Barber Shop in a shopping center located next to a very popular Peruvian chicken restaurant and carry-out.  Toni is nearing retirement and wants to sell.  Toni knows that he has to have a lease for his shop as a condition of any buyer of a hair cut business, which will only draw customers in the area close to the shop.  Without the location, the business disappears. The owner of the restaurant makes Toni an all-cash offer for $100,000 to buy out his Barber Shop and hands Toni a check for $10,000 with a two-page simple contract.

Toni does not see why he needs a lawyer to go over such a simple contract, but Joe, Toni’s CPA, convinces him he needs to have a lawyer review the contract.

I am in the conference room with Toni, his wife, and CPA Joe.  The $100,000 price is reasonable based upon the gross sales and net income of the Barber Shop.  A key fact is that Toni’s lease runs out in three months, but Toni has sent a written request that it be extended.  This means Toni has a right to keep the store lease for the Barber Shop for the next five years, a requirement for any buyer of his business. The buyer says his sister will operate it as a beauty salon.

Since the amount involved is $100,000, the sale cannot support thousands of dollars in legal fees that usually derive from drafting tailor-made contracts and all of the attachments having to do with accounts receivables, inventory, leasehold rights, representations and myriad other details that are part of a smooth and efficient sale of a business. Instead, with a $100,000 transaction, it is possible to save fees and time by working with the short business sale contract proposed by the buyer.

As we are going through the contract together line by line, making revisions, accepting some provisions and rejecting others, we come to a seemingly innocent and obscure clause: “In order to discourage litigation, in the event of a contract breach by any party, the liquidated damages will be $10,000.”  Toni has no idea what that means.

Toni’s intuition tells him that what the buyer really wants is not the Barber Shop, but Toni’s lease. Toni’s gut tells him that the restaurant owner can then expand his restaurant to accommodate more customer seating and storage. As part of the sale, the buyer will take over Toni’s rights under the lease.  What Toni does not want is for the buyer to take over the lease and then drop buying Toni’s business.  Toni’s business would then not have a location and selling the business without a location would be nearly impossible.

What the liquidated damages clause says is that once the buyer gives Toni the $10,000 for the deposit on the contract and takes over Toni’s lease, and then fails to buy the business and pay the remaining $90,000, Toni has no real way to recover his remaining $90,000.

Sure, Toni can sue and say that he has a signed contract for $100,000. The Judge is likely to rule that the buyer broke his contract and then award Toni $10,000 and not $100,000 under the liquidated damages clause.  Toni gets nothing more because he already has the $10,000 deposit, which is the limit of the damages he can claim. .  Worse yet, it cost Toni more than $10,000 to sue, and the Judge does not order the buyer pay Toni’s attorney fees.  

Why? Because in the contract, Toni agreed to limit his ability to sue and recover what he lost by the buyer walking out on the contract to only $10,000 in “liquidated” damages. We change the liquidated damages clause from $10,000 to $100,000. Now, the buyer is motivated to pay Toni the remaining $90,000 because Toni could get a court order to be paid $100,000.  

By spending a few moments with a lawyer, Toni saw through the buyer’s scheme and protected the equity in his business.

Selling or buying a business? Avoid having a hidden clause bite you bad. Consult us at or call 571-633-0330.