Financial Awakenings

New 'Low Cost' Health Care Program for Heart Attack and Stroke Victims

Rick interviewed Glenn Roth, Vice President of Business Development of QMed, about his firm's new healthcare product for stroke and heart attack victims.  The plan combines the best of a Medicare Part D and a Supplemental Plan, less the doughnut hole, for less money than the partient would otherwise pay.

The only catch is that you have had to have suffered a stroke, heart attack, or have some form of heart disease.

To view the interview, go to the client only section of our website at www.rickkahler.com, or click here.  Download heartline_medicare_special_needs_plan.wmv

Setting the Record Straight on LLCs

Listen to Rick's column here: Download setting_the_record_straight.mp3

When I read Bill Napoli’s editorial in the October 26 Rapid City Weekly News, I felt compelled to respond. My concern is not with the merits or problems of Amendment D, but with correcting his egregious factual errors regarding the use of LLCs and corporations as they pertain to the ownership of residential property under the current property tax system.

Mr. Napoli listed seven negative consequences of putting your personal residence in an LLC. None of them has anything to do with Amendment D. Additionally, none of them is true. He contends:

1. You would not qualify for the federal home mortgage interest deduction.

2. You would lose your 30% “owner occupied” property tax reduction.

3. You would lose your residential mil levy rate and end up with the higher commercial rate.

4. Your property would be rezoned from residential to commercial.

5. Properties currently owned by LLCs and corporations represent an extreme method of tax evasion by circumventing the current property tax system and are not paying their fair share.

6. Putting your property in an LLC would almost double your taxes.

7. The average commercial property sells only twice every 80 years (“in a lifetime”).

Let’s take a look at the facts:

1. According to Paul Thorstenson, an accountant with Ketel Thorstenson, a single-member LLC is able to fully deduct mortgage interest. In addition, there is nothing in the tax code that would indicate a personal residence placed in a two-member LLC will lose its mortgage interest deduction.

2. According to Rob Miller, Pennington County Director of Equalization, an owner-occupied house placed in an LLC will not lose its “owner occupied” property tax reduction.

3. Also according to Mr. Miller, a house owned by an LLC will not be taxed at the commercial or non-ag mil levy rate.

4. According to Dan Jennissen, Planning Director for Pennington County, “Ownership has no bearing on what the property is zoned.” Putting a residential property in an LLC will have no effect on its zoning.

5. According to Mr. Miller, properties currently owned by LLCs and corporations are taxed based on zoning, value, and use. The ownership of a property has absolutely nothing to do with the property taxes paid. In fact, commercial property, whether owned by an individual, LLC, or corporation, is taxed at the highest property tax rates.

6. Obviously, since all the above are false, putting your property in an LLC will not change your property tax bill one iota.

7. I don't know where Mr. Napoli got his information that commercial properties are sold only "twice in a lifetime." Having sold commercial real estate in Rapid City for over 30 years, I can assure you that very few commercial properties sell that infrequently. As an example, the old First Federal Building, now Turnac Towers, has sold four times in 40 years.

There is one caveat to keep in mind if you decide to put your personal residence in a LLC. Make sure it is a single-member LLC so you will retain your Section 121 capital gains exclusion when you sell the house. “If the LLC is owned by one individual, the LLC entity is ignored by the IRS. If there are two or more members in the LLC, the exclusion will be lost,” says Thorstenson.

I also want to emphasize again the importance of consulting attorneys and accountants before you put either residential or commercial properties in LLCs. Decisions such as these need to be based on what is best in your particular situation. They also need to be based on accurate information. That is why I felt the need to set the record straight.

Asset Protection--An Unfair Advantage?

LIsten to Rick's column here: Download asset_protection.mp3

Among the responses to my recent columns about creating LLCs to own real estate was one from an elected official who was critical of the strategy. The accusation was that LLCs and corporations are not even "paying their fair share" under the present property tax system; he implied that making use of them was somehow not ethical.

None of the lawmakers, attorneys, and government officials I've talked with could come up with any scenario to fit this assertion of unfairness. In fact, the evidence would suggest the opposite. Corporations and LLCs typically own commercially classified property and pay the highest possible property taxes.

Such an unsupported assumption is tied to the broader issue of asset protection, which some people regard with suspicion. They seem to believe asset protection is sleazy at best and outright fraud at worst. They assume it means hiding assets in the Cayman Islands or in secret Swiss bank accounts.

Certainly, there are people who do exactly that, despite the fact that it is illegal and immoral as well as unethical. There are people who rob banks, too. Most of them end up in the same place—jail.

Anyone who suggests such strategies as fraudulently transferring assets or failing to pay taxes you owe is asking you to compromise your own integrity. Avoiding financial responsibility, including responsibility for your mistakes, is a clear misuse of asset protection. It is also, in many cases, illegal.

For legitimate financial advisors, asset protection is defensive, not offensive. In today’s world, with the increasing mindset that “somebody must be to blame,” anyone who owns a business or has significant net worth is vulnerable to a frivolous lawsuit. In addition, there are attorneys so lacking in integrity that they make a living filing lawsuits with little or no merit just because the defendant has “deep pockets.” They know someone is likely to write them a check rather than go through the expense and hassle of defending against the suit. Asset protection is intended to protect you from such lawsuits by making your “deep pockets” less obvious to the general public.

Another legitimate use for asset protection strategies is to reduce taxes or to mitigate the impact of ill-conceived laws. To some, this may seem unfair. In a way, perhaps, it is. A wealthier person with easy access to accountants and attorneys can take advantage of complicated strategies much more readily than a poorer person can.

A wealthier person can also travel in first class instead of coach, pay the tuition to send the kids to Harvard, and take advantage of many other benefits that go along with having money. This is "unfair" in the same way it is unfair that a young man who is six foot eleven is more likely to get a basketball scholarship than one who is five foot seven. There are vast differences in people's circumstances, abilities, and luck of the draw. It is absurd to suggest that those who can use circumstances in their favor shouldn't do so, just because others aren't able to do the same.

As a financial planner, one of the things I get excited about is asset protection. It is a way to use my training and skills to save my clients money or help make their futures more secure.

I also enjoy teaching about asset protection. That includes educating those who aren't wealthy about basic strategies such as buying appropriate insurance, setting up a small business wisely, or keeping savings in a more protected financial institution. Whether you are wealthy or are just starting out, knowing how to protect what you have is part of building prosperity and security.

More on LLCs and Amendment D

Listen to Rick's column by clicking here: Download amendment_d_part_2.mp3

In last week's column I talked about using LLCs to mitigate the impact of Amendment D if it should pass. Now it's time to get more specific about that strategy.

Since Amendment D would provide that property is reassessed when it is sold, the basis of this strategy is never to sell the property. Instead, you form a limited liability company and deed the property to that LLC. Then, instead of selling the property, you sell the LLC, which remains the owner of record of the property.

As I said last week, this doesn't give you a direct tax advantage. What it does is position your property to potentially have added value when you sell it, because the buyer would have a significant tax advantage.

If you choose to use this approach, I do recommend consulting an attorney and an accountant to make sure you don't affect your estate plan or create adverse tax consequences. Also, it probably is important to set up the LLC before the election, which doesn't allow much time to get everything taken care of. If that's a problem, you could go to the website of the South Dakota Secretary of State (www.sdsos.gov). There you can find forms to set up an LLC. Once you have the basic setup, you can consult an attorney and accountant and make any necessary changes to the company.

Don't forget to execute and record a deed transferring the property to the LLC. It's also important to have a separate LLC for each piece of property. Otherwise you can't transfer an individual piece of property, but the LLC would have to sell it.

I've discussed this approach with several attorneys and lawmakers, who agreed that it would be workable. It is certainly possible, even probable, that the Legislature will attempt to eliminate this strategy in the future. It isn't clear just how they might do so.

It's also possible that Amendment D, if it passes, won't be around forever. The current "150%" provision has been in effect for several years, and problems with it are just now starting to become evident. The same is likely to happen with Amendment D. It also might be challenged on Constitutional grounds, as my reading of the South Dakota Constitution is that it requires property tax to be "fair and equal."

Even if the amendment is questioned, however, it would be in force for at least a few years. A Constitutional challenge would take time. Also, since this is a Constitutional amendment, if it caused problems it could not simply be repealed by the Legislature. It would have to be changed by a vote of the people of South Dakota.

For those reasons, it makes sense to think now about strategies to manage your property should Amendment D become law.

One or two supporters of Amendment D have criticized using LLCs in this way, even implying that such an approach is somehow unfair or abusing the system. Yet, ironically, the goal of this strategy and the goal of Amendment D are essentially the same: paying less in property taxes. It's hard to see how this can be considered "unfair," since corporations and LLCs that own real property are taxed at the same rates as individuals.

Using strategies like these to reduce taxes is really no different from claiming all the exemptions and credits to which you are entitled when you file your income tax returns. Taking advantage of a legitimate opportunity to minimize taxes is certainly an appropriate and valid approach, especially when that opportunity is available to almost any property owner.

Today's RC Journal Features KFG Teleclass Topic

Today's Rapid City Journal ran a front page story, by Dan Daly, on my last tele-class where I suggested that SD property owners put their real estate into LLC's as a way to combat proposed Amendment D.  In the article, Sen. Bill Napoli, a strong proponent of the Amendment, discloses that he was aware of the LLC "loophole" and vows to plug it with legislation, whether or not Amendment D passes.

I am having a hard time understanding exactly what the existing "loophole" is. Right now, property owned by an LLC is reassessed just as frequently as any other property, so I am a bit in the dark regarding what he was referring to.

My guess is that if--and that is a big "if"--Amendment D passes and legislators can agree on a "fix," it won't be a simple one. As with almost every piece of legislation, there will be more unintended consequences that lawmakers will have to deal with.

Whether you are for or against Amendment D isn't the issue, although I do believe it will increase inequality in the property tax system. If you own property, putting it in an LLC may be a very prudent move if Amendment D passes.

A copy of the teleclass is available to KFG clients at www.rickkahler.com.

A Creative Approach to Property Tax Reform

Listen to Rick's article here: Download amendment_d_part_1.mp3

One of the issues South Dakota voters will be asked to decide this November is Constitutional Amendment D, the latest attempt to reform our property tax system. It would base the assessed value on the purchase price of a piece of property rather than the comparative values of similar properties.

If county officials had the resources to keep up with the market by assessing all property every year, assessed values would increase gradually. Instead, many properties are reassessed every few years. If neighboring properties have sold for significantly higher prices during that time, the assessed value of a property might increase dramatically. This is especially true for commercial property in an area of new development. Attempting to avoid such unpleasant surprises is the driving force behind Amendment D.

Amendment D would roll back current assessed valuations to the 2003 valuation, then cap the annual increase in those values at three percent. It's important to note that this is a cap on your property’s assessed value, not a cap on property taxes.

Then, beginning January 1, 2007, the assessed value would be set according to the purchase price whenever a piece of property is sold. The assessed value also "may be further adjusted if there is a change in use or classification or to account for any addition, improvement, or destruction to the property."

To illustrate, let's take two virtually identical houses in a fast-growing area. In 2003, they were each assessed at $100,000, which we will assume to be 80% of their market value. Under Amendment D, that assessment can only increase by three percent each year. By 2017, each of them would be assessed at just over $152,000.

Now, let's assume that property values increase at 7.5% annually, which is the historical average for Rapid City. The 2017 market value of each house would be $350,000. If one property sells, its new owner would pay taxes over twice as high as those paid by the owner of the property that had not been sold.

The bottom line is this: Amendment D will reward owners who don't sell their property. You would enhance the value of your property to a future buyer, then, if you could transfer it without selling it.

There is a way you can do exactly that. If the property is owned, not by you, but by a separate legal entity owned by you, what you sell is your ownership of that entity. The legal ownership of the property does not change.

The best vehicle for this would be an LLC, or limited liability company. An LLC has many of the same features and protection as a corporation, as well as the pass-through features of a partnership. If each piece of real estate is owned by a separate LLC, you could sell your shares in that LLC to someone who wanted that property.

The disadvantages of this plan would be the costs to set up LLCs, plus the need to file separate tax returns for each one. The advantage would not be lower property taxes for you, but lower property taxes for a future buyer. There is a real possibility that this would enhance the value of your property whenever you decided to sell it.

In the example above, let's assume the taxes on the home that was sold increased by $3000 a year. If that property had been in an LLC so the taxes stayed the same, how much of a premium would a buyer pay to save $3,000 a year? My guess is somewhere between $3,000 and $30,000. That's a significant gain for the seller.

In next week's column, I'll discuss this strategy in more detail.

Is Your Home Underinsured?

Listen to Rick's column here: Download is_your_home_underinsured.mp3

The recent hot, dry summer in our area served forcefully to remind us how vulnerable any homeowner is to a sudden disaster. The Eastridge fire in wooded areas near Rapid City destroyed several homes, though incredible efforts by firefighters saved many others. Prairie fires burned homes and threatened many ranches and entire towns in northern Nebraska—a strong reminder that even homes built on the prairie, without a tree in sight, are at risk from wildfires.

Besides fire, there are a number of other disasters that can happen just as quickly to almost any homeowner in the Northern Plains. These include high winds, tornadoes, heavy snows, flooding, hail, freezing, and even earthquakes. About the only things we're exempt from are hurricanes and tidal waves.

The good news is that most of us have home insurance to cover such losses. The bad news is that most of us don’t have enough.

According to a Wall Street Journal article that appeared August 26, 2006, 58% of all homeowners are underinsured. They do not have enough insurance coverage to replace their homes. Most only have enough to pay for 80% of the cost of rebuilding. An average home in Rapid City would cost about $200,000 to rebuild, so a homeowner with 80% coverage would need to come up with $40,000 out of pocket in order to rebuild. Most of us don't have that much spare cash.

The biggest reasons for such widespread underinsurance are the recent appreciation in property values and the skyrocketing cost of building materials. In Rapid City, for example, house prices have increased by 50% just since 2000. And since building material prices have escalated at an even faster rate, the cost of rebuilding the average home would probably take most homeowners by surprise.

Last week, I contacted my insurance agent to review my coverage. I had $298,000 in coverage with an additional 25% cushion to take care of cost overruns. Basically, I had $372,500 of insurance. My agent did a quick calculation and determined it would cost $450,000 to $525,000 to rebuild my home. That meant I was among the 58% of underinsured homeowners, with only had enough insurance to pay 71% to 83% of the cost of rebuilding. If my home burned I would be writing a check for $75,000 to $150,000.

I strongly suggest that you do a similar review of your homeowners insurance. Don’t limit it to the cost of rebuilding the house, either. A complete loss will also mean you need to replace all of the personal items in your home. The cost of replacing everything in your home will probably be as surprising as the cost of rebuilding it. Experts suggest you should insure your personal property for 50% of the coverage on your home. If you own such things as antiques, valuable collections, or fine jewelry, ask your insurance agent whether you need to list those specifically as additions to your policy.

In addition, be sure that you have photographs or a videotape of your home's contents as proof of what you own. The importance of having such a record was underscored by the experience of one couple who lost their home in the Eastridge fire. They had intended to videotape the contents of their home, in large part because they were going to rent it out during the Sturgis Rally. Their home burned the weekend before they planned to do the taping.

Their unfortunate loss prompted me to videotape my home the next day. I also have increased the coverage on my home to $450,000. Sometimes writing columns has personal benefits, too.

Holding the Boss Hostage

To listen to this column, click here. Download holding_the_boss_hostage.mp3

Some years ago I had an acquaintance who owned a small business. After a burglary at a neighboring business, he had an electronic security system installed. He was so uncomfortable with it, however, that he refused to learn the code for shutting off the alarm. If he wanted to get into his own building after hours, he had to get one of his assistants to let him in.

This man had put himself in the position of being a hostage to his employees. The term “hostage” may be a bit of a stretch. Still, I have recently realized how vulnerable a position you are in as a business owner if you are ignorant about day-to-day operations. Staff turnover in my office has forced me to become more involved in those operations, including a crash course in learning some complex new software.

If you own or manage a small business and are too much of a “hands-off” boss, your position of authority may be more illusion than reality. If you can't find what you need in the files (paper or electronic), don't know how to contact the company that clears snow from your parking lot, or don't know how much money your company spent last month, you may be allowing yourself to be dangerously dependent on those who work for you.

Being the boss, as any business owner can tell you, means that you are responsible to your employees as much as they are responsible to you. Mutual trust is essential if you want your business to flourish. That trust, however, doesn't mean taking yourself out of the loop. Part of being a good manager is knowing when and how to delegate. At the same time, it's unwise to delegate so freely that you isolate yourself from the daily operations of your business.

Here's a basic list of obvious but often overlooked things an owner or manager ought to know:

· How the accounting system works.

· Exactly what money is coming in and what is going out, including signing checks or approving expenses and being kept up to date on accounts payable and accounts receivable.

· How to use essential software (accounting, invoicing, inventory, etc.), including access to all employee passwords.

· The filing system—how things are organized and what is kept where.

· Who does what—the job descriptions and specific responsibilities of all the employees.

· Contact information and contract provisions for companies or individuals who provide maintenance, technical support, or other services for your business.

If you operate a business, your education is probably in the "what" of that field rather than the "how" of running a business. Your training has taught you how to be an engineer, a plumber, a mechanic, a doctor, or whatever it is you do. It hasn't necessarily taught you how to run an engineering firm, a plumbing business, a repair shop, or a clinic.

Part of your job as a business owner, then, is to provide that training for yourself. You don't have to get an MBA to do so; all you have to do is ask questions. If you don't understand the monthly financial statements or know how to use your accounting software, ask your CPA or your bookkeeper. If you have no clue about the filing system, ask the secretary or office manager to explain it.

I'm not suggesting that the owner should have a finger on every detail. Micromanaging isn't a good way to run a business. Yet—as I can attest with my newfound software skills—knowing what's going on is a boost to a boss's security, confidence, and ability to delegate wisely.

A Question of Trust

To listen to Rick's column, click here:  Download Thief.mp3  

Having a nameless and unknown thief break into your house or office and steal would be a frightening experience. I've heard people who have gone through it describe feeling violated. It takes time to regain a sense of safety after your space has been invaded.

It is almost worse to learn that someone has been abusing a position of trust by systematic theft. In addition to having your security and comfort violated, there is a sense of betrayal. That's what my wife and I felt when we learned that the babysitter we liked and trusted had been cold-bloodedly stealing from us for months. Her recent sentencing has once again brought those feelings to the forefront.

As I’ve talked with friends and colleagues about this experience, several of them shared similar stories. All of our discussions had a common thread. We all had been left pondering two questions. The first was, "How can I keep this from happening again?" The second was, "How do you know when you can trust someone?"

The first question was in some ways the easier one. I had to ask myself what I might do differently in the future. How might I protect myself, yet not become paranoid and unreasonably mistrustful?

Some aspects of preventing this particular type of theft in the future were embarrassingly simple. First of all, I needed to stop keeping cash too easily accessible. In addition, it was my failure to review Jill's timesheets regularly that had allowed her to get by with overstating her hours. As the person who signs the checks, verifying a statement or invoice is ultimately my responsibility, one I need to do more carefully.

Several friends also said that such an experience had led them to review their systems for handling payments, invoices, and cash in their businesses. All too often, there was no systematic method designed to guard against dishonesty. A way of handling money had been developed, sometimes quite haphazardly, based on the undoubted integrity of one or more employees.

What needs to be in place instead is a system that is independent of the character of individual employees. It isn't a matter of trusting or not trusting specific people, but of having a reliable and neutral method of tracking what comes in and what goes out. This actually serves to protect employees as well as the employer.

The problem of how much and whom to trust is more difficult. My wife and I have been severely shaken by this betrayal, and so have other long-time and trusted employees. I also am questioning my ability to judge someone’s character. It was amazing to watch Jill's behavior once we knew she had been stealing. She was as friendly and apparently open as she had ever been. It was as if she were able to completely dissociate her act of stealing from her relationship with us. That is perhaps the scariest issue about her theft.

I now am assessing all my relationships. Who else might be stealing from me? Who else is in my life that I should not trust? I am wondering whether I have been too naïve when it comes to trusting employees. My style of management requires a high level of responsibility and trust from my employees. I don’t want to give up that style and that attitude. I don’t want to believe that most people cannot be trusted.

My conclusion is that I should not give up trusting, but should offer my trust more consciously and responsibly. Perhaps I need to follow the old Muslim proverb: “Trust in Allah, but tie your camel.”

The Case of the Nefarious Nanny

To listen to Rick's column, click here:  Download NefariousNanny.mp3

About a year ago, I filed felony theft charges against one of the last people I ever thought would steal from us—our children’s primary babysitter. Jill (not her real name), a college student, worked for us for three years. She stayed with the children several times when my wife and I were out of town. She was a trusted employee who became a family friend.

Everything was fine until we began missing cash from my wife's purse and from the spending money I kept hidden in the house. We weren't leaving cash around in plain sight; someone had to be searching systematically for it. We started an investigation, including setting up a surveillance camera, and before long we caught our thief in the act. My wife and I were dumbfounded that the culprit was Jill.

We were even more shocked when we reviewed Jill's time sheets. She submitted them to one of my staff members who made out checks, and we hadn't been checking them because we trusted Jill. We learned she had been overstating her hours by four times.

At first we were tempted to just confront Jill, get as much money back as possible, and let her go. Because we had known and trusted her for several years, it was hard to consider turning her over to the police. Maybe just being caught, we rationalized, would teach her a lesson.

Finally, though, we decided we needed to press charges. This was no impulsive, petty theft, but systematic robbery of significant amounts from people who trusted her implicitly.

I also remembered the experience of a friend who had discovered a trusted employee was embezzling from his business. He found out later that she had done the same thing earlier in a previous job. That employer had chosen not to press charges, but had let her go after she reimbursed what she had stolen. Instead of learning from the first experience not to steal, she was merely released to go and steal from a new employer.

This story reinforced the position that it would be wrong to let Jill get by without serious consequences for her theft. It became clear that we would be doing no favors—either for her or for her possible future victims—by failing to hold her accountable for her actions.

When we confronted Jill, she admitted she had been stealing from us. She had no explanation for her behavior other than to say she realized she had a problem and had no clue why she stole. I gave her the name of the detective I had previously talked to, and she agreed to turn herself in. When she did, she confessed to stealing around $2,000 in cash. In actuality, it was many times more than that.

It took over a year for Jill to finally agree to a plea bargain and plead guilty to the felony charges. At a recent hearing, the judge sentenced her to 10 years in the penitentiary, suspended her incarceration and put her on probation for 10 years. She will serve 90 days in the county jail on work release, pay a $1000 fine plus court costs, go to counseling and do community service. She will also have to make restitution, in an amount to be set at an upcoming hearing.

My wife and I are relieved that the case has finally been heard. Yet it doesn't feel "over." This whole incident has left us feeling sad, angry, and confused. We still struggle with the reality that someone we regarded as a friend could betray us so badly.