Using Structured Installment Sales to Reduce Capital Gains on the Sale of a Professional Practice

Today I'm going to be talking about the topic of whether a professional practice can be sold and take advantage of a structured sale so as to spread out a tax hit and lock in cash flow as lawyers, accountants, doctors and others start to retire and transfer their professional practices. Most people think of structured sales for just real estate, but you can use them for the sale of a professional practice and reap many of the same benefits provided you are properly organized and prepared at time of sale. 

Now when I talk about a structured sale, let's keep in mind that it's essentially a very common tax strategy called an installment sale. Installment sales have been enshrined in the US Tax code since just about forever, the process is well understood by just about every CPA and tax professional, as well as business brokers who work with you to sell professional practices. Just because someone decided to brand these as "structured sales" doesn't mean they take on some mysterious tax strategy, in fact it's just the opposite. It's pretty vanilla at it's core.

Where it does differ from an installment sale is that instead of the seller relying upon the credit worthiness and business acumen of the buyer to make the future payments, a structured installment sale TRANSFERS that obligation for the payments to a secure third party institution such as a life insurance company or trust company. This assignment of liabilty is a pretty simple process and essentially transfers the obligation to the third party with no strings attached to the buyer. That's a simple explanation but for now if you want to know more on the mechanics of that, go to my web page at Wahlstrom & Associates and you can see in greater detail how the assignment works. 

However, this video is about selling your professional practice so lets hit the three key points quickly that you need to know. They are Qualify, Notify and Planning. 

1. What is your business entity organized as? Sole proprietor, single member LLC, multiple member LLC, S Corp, etc. All of this matters big time as to how the IRS will classify the sale of your practice, so the first step before you even consider a structured sale is get top level tax advice as to the best entity organization for your company ahead of your exit strategy or asset sale. This has to be done first so you know what, if any, parts of your business qualify as capital assets. 

2. Is the buyer on board with you selling in an installment sale basis and agreeing to the assignment of the obligation to make payments to a third party. So many people wait until the very end to raise this with a buyer, who in many cases gets spooked by their unfamiliarity with the concept and refuses to execute the assignment or installment sale. I can't stress enough the importance of NOTIFYING the buyer early you intend to use this concept. 

3. Have a clear plan for your distribution of the installment payments. By this I mean look at the rates offered by the life insurance company on the funds held, decide how long you want payments to be spread out over time, but most importantly how you plan to reinvest or use those assets once they arrive each year. Map out your post retirement expenses, investment plans or estate planning and maximize the value of each year's payments to insure you leverage this tax planning tactic to it's maximum value. 

If you have questions, go to my web page at Wahlstrom & Associates.com or call my office at 480-478-0183. I'm happy to help you and your team of advisors understand how to make structured installment sales work for you. 

When did structured settlements become such a dirty word with trial lawyers?

In this weeks commentary on The Settlement Channel, host Mark Wahlstrom looked at the question of why the term "structured settlement" has become a dirty word with trial lawyers over the last 20 years. 

In this brief video commentary Mark looks at the primary root causes, among them:

  • The use by property casualty companies to cycle money back into their life insurance subsidiaries, leading to inappropriate or excessive allocations of structured settlements just to enrich the defense insurance company.

  • The excessive advertising by factoring companies in the "cash now" TV mode which made it appear that everyone is looking to get out of structured settlement contracts, when in fact only 5% to 6% of all contracts are sold off. The vast majority of people appreciate and value their structured settlement plans, but the brand name has been tarnished by this advertising blitz.

  • A flood of investment advisors and money management firms looking to tarnish or destroy the idea of structured settlements, so that they can divert money to money under management programs which often carry more risks, and costs, than injury victims realize.

Structured settlements are one of the primary tools for settlement of personal injury claims, providing guaranteed income to injury victims and transferring the risk of out living one's assets or need for income.

Enjoy our on going tutorial series on structured settlements and settlement planning. If you or a client need assistance in locating a local structured settlement expert, please contact us or one of our regional experts directly for assistance!

AIG named in lawsuit alleging fraud in structured settlement program

Hagens Berman law firm has filed a class-action lawsuit against the nation's largest insurance company -- American International Group, known as AIG and American General Life Insurance Company, which is a part of AIG.

The lawsuit claims the companies defrauded annuitants and injury victims of their rightfully deserved claims. The suit says through their structured settlements, AIG took 4 percent from the cash portion and secretly used it to fund commissions to their own defense brokers.

According to the lawsuit, clients agreed to the 4 percent deduction, thinking it would be used to fund future annuity payments, but instead AIG kept the money for themselves.

The suit claims AIG used plaintiff's funds to decrease their defense expenses and reduce the amount of money they promised to pay clients. The lawsuit seeks more than $5 million and involves more than 100 plaintiffs, of which fewer than one-third are citizens of Massachusetts, where the case was filed in federal court.