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David Rockefeller’s Art Collection

May 17, 2018

Last week David Rockefeller’s art collection realized over $825 million at auction. The proceeds will be distributed to about a dozen of his favorite charities.

Rockefeller was the last surviving grandson of John D. Rockefeller and was the son of John D. Rockefeller, Jr. During his lifetime he donated selected art to museums and some years ago he sold a painting at auction intending to donate the proceeds to a museum. Well, after he saw the tax bite, he decided that any sales during his lifetime made no sense. The federal taxes are 28% on capital gains of collectibles which category art falls in. He also got hit for the added 3.8% net investment income tax and NYS and NYC income taxes. By having his estate sell the art, there would be no income or capital gains taxes, nor would there be any estate taxes as bequests to charities are deductible from the taxable estate. He also reasoned that the cash starved museums would appreciate the cash more that some additional paintings.

Many people donate collectibles to charitable organizations that immediately sell it to get the proceeds. What is not widely known by many contributors is that when the art is sold within three years the tax deduction is limited to their basis, which for most people is their cost. The deduction will be allowed at the fair market value on the date of the gift provided the charity retains the item and uses it in connection with its charitable activities. An example is where a painting is donated to a museum that cost the donor $2,000 but is valued at $100,000 at the time of donation, the donor would be entitled to a $100,000 tax deduction if it is retained in the museum’s collection. If it is sold within three years, the deduction will be limited to $2,000 regardless of the proceeds the museum receives. Further, all such donations of individual items valued over $5,000 must have a certified appraisal and adhere to strict compliance rules. A tax professional should always be consulted with before any such donations are made.

Successful bidders at the auction for David Rockefeller’s collection would not be entitled to any charitable deduction since the proceeds went to his estate which will disburse the funds to the charities. In cases where the charity conducts the auction and receives the proceeds, a tax deduction would be available for any excess over the fair market value that is paid. For example, a painting appraised with a $75,000 fair market value (FMV) that is sold for $90,000 would permit the winning bidder to take a $15,000 tax deduction, subject to how they file their taxes. However, any sales tax paid would not be added to the tax deduction. Note that the $75,000 paid would be a quid pro quo benefit the buyer received. Comment: If there is an appreciation in the value due to a time gap between the date of the gift to the charity and sale at auction, then the quid pro quo benefit might be the entire amount paid and there would be no charitable deduction for the purchaser. If you believe this might be the situation, then the FMV should be ascertained before you enter any bids.

Donating to charities is admirable but anything other than cash is fraught with minefields. Once you decide what you want to do, meet with a tax professional to determine the way to proceed.

Brian Lovett, CPA, JD and Withum Partner assisted in the preparation of this blog.

Investing Cliché of the Week

May 15, 2018

Investment analysts, financial writes, television and radio commentators and fund managers need to introduce change. Without change, the impression of their value would dissipate at best or disappear at worst. The best way change seems to be introduced is with an acronym or cliché. This method must work because it is continuously being done and the revenues for such sage advice keep rolling in.

Let’s get real. For most people the purpose of investing is to provide for specific goals or overall financial security. This security comes in two ways. Having sufficient 1) assets or 2) cash flow. Nothing else really matters. If you are investing to accumulate a certain amount of assets at a specific time such as to pay children’s college costs, start a business, buy a house or vacation home, or take a major trip you would invest one way. If you are investing to accumulate sufficient assets to provide necessary cash flow at a later period, such as when you retire or to be able to retire early or start a new career, you would invest another way. I see no other purpose of investing. If you want to make a killing or amass wealth beyond imagination, that is not investing but trading or speculating; and, in my opinion, the average person concerned about attaining their goals should stay away from this and stick to achieving their goals.

I suggest ignoring the clichés and doing the following. Note this is not new from me, I have been saying this for years and it can be found in many of my previous blogs, and it is still the right advice!

  1. Determine your goals
  2. Set aside your “rainy day” funds
  3. Pay off ASAP any credit card debt and certainly do not add to it
  4. If you have a short term goal, i.e. less than 7 years, stay out of the stock market. Stick to bank certificates of deposit, fixed annuities or corporate bonds
  5. If your goal is to have sufficient cash flow that will last you for the rest of your life after you retire, then you should invest in well-diversified stock funds, particularly index or exchange traded funds.
  6. Depending upon when you start, you might not be able to accumulate a sufficient stock account to provide the needed cash flow, then you should put as much as necessary in longer term bonds so that reasonable projections will indicate that you will attain your cash flow goal. Once that is assured, then any new investments should be in the stock market
  7. If you still will not attain your cash flow goals, then, when you reach your retirement point, you should consider an immediate annuity for up to 20% of your investments or a reverse mortgage. Note that these are only to be used if you fall short of your goals and not for any other purpose
  8. In determining the cash flow you need from your investments, you will need to consider Social Security and retirement account balances that you will have at that time
  9. Part of your cash flow projections can include withdrawing some principal. How much will depend on your age and the current dividends and interest from the investments
  10. Another factor if it appears you will fall short is to reduce spending, or to get a part time job, or to start reducing your spending prior to retirement
  11. If your goals do not include using your tax sheltered retirement accounts prior to retirement, then these should be fully invested in the stock market, again in well diversified funds
  12. Keep in mind that whatever age you retire at is not the point when your investment should change. Your investments have to last you the rest of your life which can be decades after retirement. You need a long view, not a near term perspective
  13. My definition of retirement: When you stop working and stop receiving your salary from your full time job, or business

This is a step by step model of what to consider. Each person is different and while I believe this is an excellent guide, only you [and your advisor if you consult with one] can apply it to your individual situation. Good luck!

I noticed I listed 13 steps to follow. I also posted a related blog on February 20, 2014 with 13 steps. 13 must be a lucky number. Check that out too. Here is a link.

Ed Mendlowitz emendlowitz@withum.com

Lying is Not a Sustainable Strategy

May 10, 2018

The explosion of lies by public officials is unbelievable. Its proliferation is completely unacceptable for a civilized people, yet it has become acceptable and is now considered business as usual. I don’t have any answer except that we need to call to account every instance of this shameful behavior and if not publicly then at least to keep it in our minds to be considered if we ever have a chance to act on this knowledge.

I included a chapter on this in my Power Bites book and want to post that chapter here. This is Chapter 18 in my short book of 48 chapters.

Never Lie

Your boss shows you her newly designed corporate logo that cost $182,000 to produce and asks your opinion about what you think of it. You really think it stinks. What do you say?

Your reputation is the most valuable thing you have when you deal with people. Building that reputation takes a lifetime. One false step can shatter it. You must protect it with everything you have. One fib, one falsehood, one sentence less than the complete truth in a volume of remarks, one slip, however unconscious, can doom that reputation. Scrupulously guard your reputation. Never lie!

Telling your boss that you think the new logo is very, very, very interesting is a fine way of getting out of what could be a very embarrassing situation—and is a factually correct statement! Perhaps the blunt truth is more appropriate—as long as it is said in private and framed as your “uninformed” opinion.

There is a credibility threshold for most people and things. At some point, if it is crossed, you can’t get it back. This applies to governments and its leaders, parents and children, and in business situations. If you cross that threshold, you lose respect for yourself, for your company or organization, and for what you are trying to accomplish. If you have credibility, you don’t have to be well liked to get your points across. If you don’t have credibility, you can never be well liked, and you will never get your points across. You cross the threshold when you lie or hide or cover up the truth!

Someone lied to me when I was fourteen years old, and I never forgot it. A large and well-known stamp dealer offered, at a special guaranteed price if he received payment in advance, a set of stamps honoring the marriage of Grace Kelly to Prince Rainier. When the set was issued, he did not honor the price. I received a letter telling me the price would be higher. I don’t remember what I did, but I remembered that the stamp dealer lied in his advertisements, and I never bought from him again. He claimed a reputation for integrity. I know differently!

Reprinted from Power Bites: Short and to the Point Management, Leadership and Lifestyle Advice I Give My Clients! by Edward Mendlowitz, CPA ©2010. Available for sale at www.bn.com and www.Amazon.com

Additional services from your tax professional

May 8, 2018

Tax season is over and within a few weeks your tax preparer will have returned from their vacation. Now is a good time to think about additional services you could use them for. Here is a “short” listing to get you started with the thinking process..

  1. Estate planning
  2. Inheritance advice and guidance
  3. Succession planning
  4. Personal financial planning
  5. Investment allocation construction
  6. Investment management
  7. Investment clubs
  8. Elder care assurance services
  9. Business performance measurement services
  10. QuickBooks® training and consulting
  11. Outsource business and back office services
  12. Outsourced CFO services
  13. Outsourced corporate tax preparation – income taxes, executive tax preparation, sales taxes, state registrations
  14. Second opinions
  15. Business valuations
  16. Retirement planning and counseling
  17. Pension planning
  18. IRA distribution analysis
  19. IRS tax audit protection service
  20. Conflict resolution
  21. Single couples living together planning
  22. Second marriage assistance
  23. Pre-nuptial agreement analysis
  24. Divorce settlement planning
  25. Conflict resolution
  26. Buying and selling a business assistance
  27. Starting a business
  28. Buying a franchise
  29. Entering a partnership
  30. Getting stock in a corporation
  31. Receiving stock options
  32. Projecting financial aspects of proposed actions
  33. Basis calculations for pass through activities
  34. Employment contract negotiations
  35. Executive compensation review
  36. Downsize structuring
  37. Business downturn or winding down consulting
  38. Corporate management and financial planning training
  39. Industry specific tax and business advisory services
  40. Structuring partnership and buy sell agreements

 
Many accountants have expertise beyond tax preparation. You should take advantage of the existing relationship and database of knowledge the accountant has about you and your affairs and inquire about what you might need and any charges and how an initial consultation would work.

Order the Soup du Jour

May 3, 2018

A previous blog about calling your aunt generated a slew of emails that I decided to post another chapter from my book, Power Bites. Here is Chapter 45, Order the Soup du Jour.

Why does the soup du jour always taste different? Even when you order it from the same place two or three days in a row, it always tastes different.

Life is full of surprises. Don’t expect things to not change. Try new things. Life can be much more interesting if there are constantly new things for you to taste and try.

Improvement and innovation both mean change, and can only come if there is change in what is presently being done. Leaders and managers who say they want change have to be willing to pay for it. The cost is for training, retooling, measurement, buy-in, and the support of the project.

When instituting a new procedure or project or change, there will be dysfunction, lack of enthusiasm, possible high error rates, mixed communication, conflicts in company culture, and half-assed attempts at accountability. This has to be considered beforehand when deciding on the program and can be offset by a strong leadership commitment, evidenced by strong communication of the need for buy-in by everyone on the management team.

The broader your interests, the greater your opportunity for enjoying new things—and yourself.

Reprinted from Power Bites: Short and to the Point Management, Leadership and Lifestyle Advice I Give My Clients! by Edward Mendlowitz, CPA ©2010. Available for sale at www.bn.com and www.Amazon.com

College Graduation Speech

May 1, 2018

If you are like me, you probably will not pay much attention to the graduation speaker. When I was sitting where you are when I graduated college, I was fooling around with my friends, thinking about the partying afterwards and feeling proud of myself for having accomplished the college thing and receiving a degree that could never be taken away from me. I will always be a college graduate – and so will you.

You finished college, but it is just a beginning, albeit an auspicious beginning, of the rest of your life. Entering college was an important move, but not irreversible and not that consequential if you decided you didn’t like the school, or your major, or even going to college. You could get a do-over; and until you have that sheepskin, many do-overs. But, when you step out of here, your do-overs become limited. They are limited not only by you, but by the circumstances of where you were working and what you were working on, and who you were working with. The more you work doing something that turns out not to be your thing, the harder it will be for a do-over.

The reality is you get profiled – not racially, but professionally. Whatever you start doing labels you in that silo. Certain jobs or industries are easily portable, but not as many as you might believe. I can give you a lot of for instances, but don’t want to bore you anymore than you already are, so will skip the litany of examples. What I will tell you is that you need to choose your first job carefully, and while you should think of yourself as starting a career in that organization what you are really doing is starting your career as a free agent. You will actually be continuously looking for better opportunities.

If you work for the right organization they will make sure you understand the opportunities with them and you will grow professionally with the right type of experience while continually learning new things and will be compensated based on the level you attain and will grow into and not where you’ve been and accomplished on their time. So, I just told you three things you should always be concerned about:

  1. Growing professionally with right experience
  2. Always learning new things
  3. Being compensated appropriately

All three should always be present, but two out of three keeps people longer than is good for the staff person and the employer. Actively manage your career. Your currency is your experience and what you know. No matter the cost to your employer and what they think, you will always own your experiences, with interesting and varied experiences greater in value than dull, boring trite experiences, and you will always own what you learn. Learning from dead ended bosses in dead ended jobs provides much less currency than the opposite of that. The salary you are paid is relatively meaningless to your employer, but very important to you. It is also a measurement tool of your value to the organization and places you in a tranche with others you work with. Make sure you are properly paid.

You are the CEO of your free agency. Manage it well and maybe someday you’ll be giving a well thought out and carefully measured graduation speech that no one will really care about.

Congratulations on your well-earned completion of your college career, and good luck on the commencement of your free agency.

Ed Mendlowitz

Family Offices

April 26, 2018

Family offices are a form of outsourced integrated personal financial management, guidance and oversight services.

Basically a family office is an organization that handles the personal finances of an individual and his or her family. It can be dedicated to serve a single family or an array of families, and can be organized and owned by the family or be an independent profit making business. The services fall under a generic title of family office but can be as varied as are the families it serves.

Generally, the services include planning, compliance, and administrative management of the principal’s assets and cash flow. Part of its focus is to manage wealth to maintain or grow it and to either actively manage the funds or monitor its management based on predetermined goals. It is not an operating entity but a support organization to provide an orderly mechanism of wealth and cash flow preservation and planned growth. Some family offices also actively manage the investments.

While many families have sufficient wealth to employ their own single family office (SFO), there are many benefits of outsourcing it to a multi-family office (MFO). MFOs can contain a wider array of in house experts in various disciplines along with the usual normal interaction of colleagues in a professional firm. Some family offices, or even many services, exist virtually with coordination of the specialists banded together by the team leader.

Many family offices perform all of the bookkeeping and accounting services required by the individual members it serves and this can include bill paying, income tracking and depositing, expense management, budgeting and auditing, dispensing regular payments to the family, obtaining and reviewing property, health, life and all other forms of insurance, making travel plans and booking vacation homes, bailing family members out of jail and even arranging for pets to go to the vet and elderly family members to set up and keep doctor appointments, healthcare advocacy, litigation support, setting up asset allocation tailored for individual family members, hiring and paying household employees including administrative assistants and chauffeurs, all necessary banking including (ugh) loan and debt and mortgage negotiations, overseeing philanthropic endeavors, tax planning and preparation, estate planning, investment planning and management and participation in private equity and venture capital investments, personal financial statement preparation and overall concierge services. The services cover almost everything a wealthy family would need, with the clients choosing the level of participation in each service. Not every family office provides every service and in those cases dedicated professionals are either brought in to be part of the team or engaged separately for that service.

There are many reasons why a family would engage a family office organization but the primary reason seems to be when the head of the family feels they have other more essential ways to spend their efforts and time and want to make sure that the financial affairs are maintained in an orderly efficient expeditious and secure manner. It also creates a mechanism where the family head can extricate themselves from dealing with younger, or older, family members and still be assured that these affairs will be handed and dealt with properly.

Family offices have become an essential service for the right people. At Withum we provide these services and anyone interested can contact me and I could explain it further or set up a meeting with the partners expert in these services. My email is emendlowitz@withum.com or tel 732.964.9329.

Ed Mendlowitz