Structured sales and farm property, the boom in farm land revives a great planning tool for farmers

In this weeks edition of Speaking of Settlements, I look at the renewed interest by my farmers in using structured sales to spread out the tax hit and guarantee cash flow on the sale of their farm land. I also look at the recent surge of farmers who are leasing land to oil companies due to the discovery of shale under their property and the ability to collect oil and gas leasing bonus payments that can be structured as well.

The use of the structured sale has been on the back burner for several years now, largely as a result of the collapse of the real estate market and financing options for both buyers and sellers. It was a product originally conceived and used successfully for several years when people who own highly appreciated, low cost basis real estate, want to cash out and sell, but don’t want to write huge tax checks to the state and federal government on the capital gain. While we can all agree it makes a lot more sense to use 100% of your net sale proceeds and spread the money out over years, many people are still wondering what a structured sale is, and why it makes sense for those selling farm property.

In almost every case that has been referred to my office over the last year in which farm land is being sold or is under consideration for sale, it is a family owned farm that has almost no cost basis and close to 100% of the sale is going to be subject to capital gains tax. While the tax is a big issue, what is a larger problem is that with the sale of the farm, most farmers or their families are also losing their source of annual income, something they need to sustain through the investment income on the sale proceeds.

The structured sale allows them to design guaranteed payments, on a schedule that makes sense for their situation, paid monthly, annually and for years if not decades into the future. Combined with spreading out the tax hit, putting 100% of the net proceeds to work and creating a guaranteed cash flow and payment stream that provides income to the family, you can see why this is becoming increasingly popular during these uncertain market conditions.

If you want to learn more about structured sales and it’s use when selling farm property, contact my office through our web site at www.wahlstromandassociates.com and we will be happy to assist you.

Selling structured settlements at effectively zero rates of return? Not for too much longer.

I take a break from my five day commentary on the structured settlement industry to instead cover the issue of interest rates and trying to sell structured settlements at what are effectively zero rates, a calculation arrived at by the average yield on structures being 3% to 4% and the effective rate of inflation running at the same 3% to 4% as well. I felt compelled to write this due to the bashing that Bill Gross, the brilliant bond manager of PIMCO is taking in the press for his Cassandra like warnings earlier this year for people to get out of US Treasury Bonds and long term fixed bonds in general due to the inevitable impact of the end of the administrations policy of pouring debt in to the bond market.

A lot of financial writers and bond managers keep talking as if the trillions in debt being issued, and brought, by the US Government and the resultant low interest rates, are here to stay for awhile, when the facts are that we are likely in for a swift and rude awakening regarding interest rates, the value of the dollar and the rate of inflation once this Ponzi Scheme, (Gross’ term, not mine) comes to it’s inevitable conclusion.

For those of us who are somewhat mathematically challenged, you arrive at the effective rate of return on an investment by taking the actual yield on a bond or structure, lets use 4%, and then measuring the actual or projected rate of inflation during the duration of the payments. By both established and colloquial measurements of inflation, we are seeing the cost of living in areas such as gas, insurance, food, commodities, utilities, etc, running well north of 4% right now. When matched against the yield on most structures of 3% to 4%, thanks to the continued plunge in interest rates toward zero, it is clear that most clients obtaining a structured settlement right now is essentially realizing a zero return on their allocation of funds.

Painful to admit, but intellectual and financial honesty require it.

That said, this situation will likely end soon, and change course quickly and dramatically, once the Federal Reserve and the US Treasury end the Quantitative Easing, i.e. QE II, and the Fed no longer buys 70% of the US Treasury Debt being issued like a flood into financial markets.

For a look at the scale and scope of this Ponzi Scheme of cycling debt click to the PIMCO site and commentary here.

The point being is that while I don’t pretend to be a market genius, I am pretty good at listening to the people in our midst who are the true geniuses, such as Bill Gross and Jim Druckenmiller, both of whom see this as the looming disaster it is about to become. Therefore, for those of us in the settlement profession who are advising people on allocating their one time settlement proceeds into structured settlement we need to be exceptionally careful about long term commitments at these rates and use designs that allow for reinvestment of funds in the near future when rates are higher.

We also need to be exceptionally careful to warn clients to NOT utilize outside managers for their funds who are buying bonds, bond funds, or any investment vehicle that would be impacted by a rise in rates. The carnage in bond funds that is about to occur, as well as asset value loss in a long bond’s market value, is going to be brutal.

The solution that we are recommending to clients who are receiving settlements and have to do SOMETHING with the money they are awarded, is to carefully structure payments monthly payments over the short and medium term to cover living costs, but then provide for lump sums to be reinvested in non-qualified accounts over 3 to 7 years at what are certain to be higher interest rates. While they will theoretically give up some of the tax advantage of a structure on the reinvestment, it is my experience that most of our clients are in a no tax or low tax rate scenario due to a very low real income and what they need more than tax free money is maximum cash flow and return from a highly secure investment. ( Ideally a non-qualified immediate annuity if suitable.)

The net result should be insuring the bills are paid today, no long term interest rate risk or exposure and large sums to reinvest when rates are higher. Not a perfect solution but one that works for the vast majority of our clients.

In summary, don’t be fooled by todays rates and the media reports of a resurgent economy. Interest rates have been cynically kept so low that people were forced to move funds into bonds and stocks, but the result over the next few years is that unless those stocks are in companies that benefit from inflation and the bonds are VERY short term in duration, those portfolios are going to be hammered. My advice is get liquid, cut debt and prepare to reinvest when the rates jump up dramatically in the next six to 12 months.

We won’t be selling zero yield structures for too much longer but in the mean time we need to prepare todays clients to reinvest when rates or risk further alienating our current and future clients through poor planning.

It is time to expand tax free structured settlements to cover abuse, molestation, wrongful imprisonment and civil rights cases

What’s that you say? You weren’t aware that children molested by teachers, priests and others are not universally provided tax free payments if they settle a personal injury claim?

You didn’t realize that a man or woman sent to prison under false testimony or a mistake in the prosecution, who is deprived of liberty and subjected to the horror of prison life does not get get tax free payments if they get a settlement from the state?

Or, that civil rights cases fought and won are in many cases fully taxable to the person who fights for years or decades for justice, only to see legal fees and taxes take most of the monetary compensation?

You aren’t alone in your lack of knowledge or confusion about the tax status of these types of claims, largely because they are currently governed by unclear federal tax statues, conflicting or ambiguous revenue rulings or private letter rulings or that many lawyers simply instruct their clients to take the cash and take their chances with the IRS to come looking for it later.

The fact is that Congress, the courts and the US Treasury have left these areas either untouched, partially explained or so ambiguous that it is hard if not impossible to provide definitive tax or settlement planning advice to those who have been molested, abused, wrongfully imprisoned or had their civil rights violated. I understand Congress not getting around to this as this is a small and powerless group of people who receive these types of cases and they aren’t a big lobbying arm in DC. Small children, emotionally damaged teen agers or young adults, prisoners and those whose civil rights have been violated don’t write big checks or deliver a lot of votes so I understand Congress letting this slide to the bottom of their radar screen.

What I don’t understand is the lack of action and attention to this issue by the settlement trade associations, NSSTA and SSP, when this is so clearly a fight worth picking with Congress and the courts to correct an obvious wrong.

It is not because there has been a failure by some of our brightest minds to bring the issue up and even ask for hearings in front of Treasury to discuss the issue and see what avenues we have to correct these wrongs. No, the reason we have not taken this on is largely due to distraction on other matters and a general fear of bringing up the issue of tax free benefits; terrified that we might get noticed by Congress and lose that which we already have.

In my conversations with various members and leaders of our industry and trade association it has become painfully clear that we are afflicted with the same mentality of trench warfare where you don’t advance, you don’t retreat, instead you sit in the mud, keeping your head down and happy your not being shot. Instead of taking advantage of our strong lobbying group, the 30 year track record of our product to deliver safe, predictable, tax free returns and its ability to improve the quality of life of the vast majority of annuitants, we choose instead to sit in our trench, scared to death that if we talk to Congress about expanding section 104 and 130 treatment to these deserving areas, that they might take away our existing tax treatment.

Ladies and Gentleman of the settlement profession, if we are so unsure of the value of our product and our ability to explain why molested children, wrongfully imprisoned and those who have suffered civil rights abuses need to be covered by the same tax free benefit afforded physical injury victims, then we need to retire or consider representing another product. The fact is we should be arguing to correct something that should have been fixed when the code was amended back in the 1990s and to provide similar benefits to some of the most traumatized, victimized and abused people in our society. That’s a noble and intellectually honest stance to take and one that we should be proud to take to Congress as an association and as individuals.

It is a fight we can win and one that we should make a priority of the association going forward.

However in closing, I fear that the looming freight train of Executive Life of New York is only going to make us more timid than we have been on this issue, afraid again to lift our heads out of the trench and attacking the problem. I would argue we need to go on the offensive and start promoting what is good and obvious about our core product instead of sitting under cover hoping we don’t get noticed by the bad guys. What we offer protects the financially and socially vulnerable and provides a secure, tax free income to those who are least able to afford the loss of their funds to market swings and riskier investments. We can’t be afraid of a debating our critics or educating our Congress for if we are and we fail to act, that which we seek to protect will eventually be taken from us with out a fight from us at all.

Tomorrows position statement: The looming issue of the Executive Life of New York structured settlement contracts. If liquidation is inevitable, how can the settlement profession best handle the fall out.