I need some advice from all the "Fools" out there. Here is the situation: My father (age 62) recently sold a portion of the family business (a ranch). The sale is structured with Dad as the mortgage holder (7 year term). The mortgage will generate a monthly payment. He retains ownership (under an S-Corp) of the remaining portion of the ranch, which will be leased out, generating yearly payments.Dad currently has no outstanding debt, no retirement plan (aside from a small IRA), and no interests in any other businesses.My questions are: How would you invest the monthly and yearly payments (asset allocation)?Should he be converting the remaining land holdings out of an S-Corp into a trust or some other financial vehicle?Thanks!Jerry
You didn't state your father's age, the state of his health, how long he reasonably can expect to live, or the sums involved. Presumably apart from the small IRA he will have no other income. He will continue to live in the ranch house, where he will have taxes and utility bills to pay? He has someone to cook for him, or goes out to eat a lot? What, in short, will be his expenses? If the amounts involved allow him to sustain his life style and put part of that payment into investments, to be drawn on after the 7 year stream of payments stops, then he could be invested in stocks such as an S&P 500 index fund. (remember, with a 5 year or more time frame, one would wish to be in stocks) At the end of 7 years what will he do? Sell the rest of the ranch and move in with you? You can see we do not have enough information. Best wishes, Chris
Sorry Chris, you're right, I didn't provide enough information.Dad is in his early 60's, excellent health, should live well into his mid 80's.He owns a house which I imagine he will spend the rest of his life in.Monthly bills, including utilities, insurance, etc, are around $800.After the mortgage from the ranch sale is paid off to him, he wishes to continue holding the extra land for the lease payments, which currently bring in around $7500 a year. He isn't the type to just sit around and retire, and will probably find a part-time job to keep him occupied.Dad has enough money in the bank to pay for his living expenses for the next five years. So all the money generated from the mortgage payments will be available for investment (after taxes, of course).Better?Jerry
The mortgage will generate a monthly payment. He retains ownership (under an S-Corp) of the remaining portion of the ranch, which will be leased out, generating yearly payments.You may need to first look at the tax consequences before looking at the investment options. Mortgage payments will/should be made to the S-Corp., generating income for the Corp. The S-Corp. can then pay your father a salary for managing the S-Corp and the S-Corp can also pay dividends on the income generated. Which is better? It may not matter much. All income to an S-Corp is reportable on the owners personal tax return. However, with the new tax laws, I think dividend income is taxed lower than wage income. Therefore, a lower salary and higher dividends could be better tax-wise.How would you invest the monthly and yearly payments (asset allocation)?This is a tough question. If all of the income is not funneled through the S-Corp directly to your father (or other owners) then the S-Corp has retained earnings to make investments with as well as your father. This may be a way to reduce taxes by having the S-Corp retain earnings to pay taxes and make improvements to the land, if there are any. The S-Corp can invest some of the money and your father can invest what the S-Corp has paid to him. Should he be converting the remaining land holdings out of an S-Corp into a trust or some other financial vehicle?Another tough question that has tax issues to deal with. How much is the S-Corp or land worth? Does he plan to pass the land on to you or other children or grandchildren? The land holdings do not have to be transferred out of the S-Corp into a trust, the S-corp can simply be gifted to a revocable trust with your father being the owner and trustee of the trust. but the real question is - does he need a trust for estate tax protection? If not, then the S-Corp can simply be left to heirs with each heir recieving so many shares.I realize I haven't answered your orignal questions, but in dealing with estates, reducing your taxes first can mean having more to invest later. You may want to post this question over on the tax board also.Hop you find an answer,Tony
-S-Corps don't generate dividends, they get a K-1 to the owners at year end. Why give him a salary??? He'd have to pay Social Security on it, an unnecessary tax at this stage of his life. Just take all the income as K-1 income, subject to income tax, but not Social Security.Sunnyin Sunny So FLA
-S-Corps don't generate dividends, they get a K-1 to the owners at year end.It depends on how you split up profits. In my S-Corp, we decide what to retain for the business, and what to pay out in profits at the end of the year, the profits are divided by the number of outstanding shares and each owner receives a K-1 based on their percentage of ownership. However, I agree with you for the most part. Most S-corp don't have more than two ar three owners.Why give him a salary??? He'd have to pay Social Security on it, an unnecessary tax at this stage of his life. Just take all the income as K-1 income, subject to income tax, but not Social Security.Good point. The only reason I can imagine needing to pay in more social security is if he hasn't worked his 40 quarters to be eligible for social security. An ulikely event, I know.Tony
Why give him a salary??? He'd have to pay Social Security on it, an unnecessary tax at this stage of his life. Just take qall the income as K-1 income, subject to income tax, but not Social Security.Isn't K-1 earnings subject to Self-employment tax?
rclyde asked: "Isn't K-1 earnings subject to Self-employment tax?"The answer is no, they aren't. This is one of the advantages of using the S-Corp status over Schedule C in reporting business earnings. Disadvantages include administrative costs of maintaining a corporate existence and costs of extra tax returns, etc.This is off topic for this board, but I believe the advantages of S-Corps far outweigh the disadvantages. For example, in the early days of my business before I sold out and went back to work, I had to really stretch to make ends meet. One trick I used was to fund my day to day living expenses with distributions (kind of like dividends but not taxable). Near the end of the year, when I knew what my business was going to earn for the year, I would cut myself one paycheck with the required withholdings for FICA and Medicare but with 100% of the remaining net pay going to pay my necessary federal income tax withholding for the year. This way I could avoid the need for quarterly estimated payments during the year since any amounts withheld and presented on a W-2 are deemed to have been withheld over the course of the entire year. My CPA set this up for me and said it was a pretty common practice for S-Corp owners.My business never made enough money to begin retirement planning so I don't know if there are disadvantages to the S-Corp for retirement planning purposes (other than the potential disadvantage that failure to report sufficient Social Security wages might present).WiseNLucky
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