Ep 202...The Wealth Blueprint: Advanced Techniques for Financial Success

Hey, everybody.

This is certified financial planner David Chudick.

And welcome to episode number 202 of the weekly wealth podcast.

You might remember that last week in episode 201, we talked about some basics that almost everybody should be adding into their financial lives.

We talked about some, some spending considerations.

We talked about some basic tax considerations.

We talked about some insurance considerations.

And these are the things that we should all start with.

But today, we're going to talk about some things that you might think are a little bit more fun, a little bit more advance, and a little bit more sexy.

So I hope that you enjoy this episode.

And here we go.

Welcome to the weekly Wealth Podcast.

I am certified financial planner David Chudick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money.

We talk about financial strategies, prosperous mindsets, and simply how to build true wealth.

So come on and let's enjoy this journey together.

So inside my wealth management practice, I always start off with the boring things with my clients.

And it's not that much fun.

But we look at your insurances.

Do you have the right kind of car insurance, the right amount of car insurance?

Because when it comes down to it, if you cause a major car accident and if we've done a really, really great job helping you to build a big portfolio, that portfolio still could be attacked by a lawsuit.

So insurance is a really simple way that we can control how we are protecting our money.

We look at things like spending.

Are you spending the right amount of money for you based on your financial reality?

I don't like to use the word afford because it's kind of, I don't know, it has a negative connotation.

But I like to talk to my clients within my wealth management practice about spending the amount of money that is appropriate for your financial reality.

Some people have different financial reality and they can spend more money.

Some people have a different financial reality and they need to spend less money.

So I usually start out my relationships with my clients dealing with the things that are easy to fix and might even be considered a little bit boring, not that exciting and not incredibly sexy.

Most people want to start off with, should I buy Nvidia or hey, I found this new stock that I heard is going to double and triple and quadruple, or should I do crypto and become a multi, multi millionaire?

And these are things that we address at a point in the financial planning process.

But last Week's podcast, episode 201, talked a lot about the boring basics, the things that we just have to get done.

So this week I do want to talk about some things that might be a little bit more exciting.

They might be more interesting.

But I want to preface it by saying that I'm going to be Talking about some 30,000 foot level details about these strategies.

There probably are many more specifics involved.

They might not all apply to everybody.

And this is just a really brief description.

So make sure that you're talking with your tax advisor, with your attorney, with your financial advisor and getting the scoop on all of these to see if they fit in your financial situation.

So here we go, and we're gonna start our first section talking about some tax mitigation strategies.

Let's talk about some state tax credits and how these might be able to help you on your state tax burden.

Now again, we're talking really, really high level stuff here.

Not every state even has an income tax and sometimes state tax credits are not available in your state.

But let's talk about some details on state tax credits work and you can definitely refer back to episode number 190 of the weekly wealth podcast, the Truth About Tax Credits.

Are they too good to be true?

For more detail here.

But with state tax credits states offer tax credits for investments in affordable housing developments, historic rehabilitation, renewable energy projects, and film production.

By investing in these tax credit programs, you can create higher wage jobs, build quality homes, stimulate economic growth, and revitalize local communities.

So the governments, whether it's state or federal, often give tax credits that encourage the behaviors that the governments would like to see.

Now oftentimes you can invest in funds that are taking advantage of these tax credits and you can receive some of the rewards.

Now in many cases, in order to participate in these funds and invest needs to be what we call accredited.

And the definition of accredited investor is having a million dollars of net worth, not counting their primary home, or having a $200,000 income if you're single or $300,000 income if you're married.

And once you satisfy those requirements, you may be able to participate in a tax credit fund and oftentimes save between 10 and 15 or 16% tax liability.

So if you have any questions about this, go back to episode number 190 or you can email me davidarallelfinancial.com and I can point you in the right directions.

But our first hack for mitigating state income tax is to participate in a state tax credit fund.

Another tax strategy that I'd like to give you the cliffsnose version of.

And if this interests you.

Or if you'd like to learn more about it, you can email me.

David, at parallelfinancial.com is the historic preservation trust.

So we just discussed that the government, whether state or federal, oftentimes gives tax credits and tax incentives to encourage certain behaviors.

Well, the government wants to encourage the restoration and rehabilitation of historical buildings, so they offer some credits.

Now, if you are a high earning investor, oftentimes you can take your federal tax liability and, and you can use that amount of money to purchase into a historic preservation trust fund.

And that should almost completely or even completely negate your tax liability from the federal government.

And then you are now a part owner of a historic preservation trust.

And if the trust does well, you can receive some income over the course of the first few years.

And then even after several years, you will have the option to sell your interest in the trust and receive part of your part of your principal back.

So this is a great way.

And now this works only for high earners.

So we're talking 5, 6, 7, $800,000 and up adjusted gross incomes.

But what you can do is you can offset your federal income tax burden by purchasing a subscription into a fund.

And that can all but eliminate your federal tax burden for that year.

May sound too good to be true, but it works for the right person.

And let me know if you have any questions about historic preservation trusts.

Now, have you ever heard of a 1031 exchange?

Well, a 1031 exchange allows investors to defer capital gains taxes by rolling proceeds from one investment property into another of what we call quote like kind.

So let's use a really simple example.

Let's say that you bought a property for $100,000.

And now, and let's say this is a rental property.

Now you are selling that property for a million dollars.

So you would have a $900,000 gain which would create quite, quite the tax tax bill.

So what you could do is you could perform a 1031 exchange.

And there are some strict lines here.

You have 45 days to identify a property and 180 days to close.

But then you can ro into a new property and avoid paying capital gains taxes.

So like all of these strategies, this is a very simplified overview of it.

But the 1031 exchange allows you to defer taxes that are paid when we are talking about income producing or rental investment properties.

If you have any questions about this, you can definitely speak to your CPA or email me davidarallelfinancial.com but 1031 exchanges can be a great idea with regard to commercial real estate.

And another strategy that I wanted to talk to you about with regard to commercial real estate is a cost segregation study that can help you to accelerate your depreciations.

So typically, when you own a commercial property, you can depreciate the property over a large amount of years, like 39 years.

But if you perform a cost segregation study, you can segregate how quickly you depreciate some parts of the property.

So things like fixtures, improvements, landscaping, appliances can be depreciated on a quicker schedule and save you a lot of taxes early on.

Now, again, this one's a complicated one.

A cost segregation study would need to be done.

There are some costs there, but oftentimes, by accelerating your depreciation, you can increase your cash flow and even use those tax savings to purchase additional properties.

So give some thought to the cost segregation study that will allow you to accelerate your depreciation deductions on your investment properties.

So those are some tax strategies that you may or may not have ever heard of, but I thought I would mention them.

And now let's talk about some investment strategies that may be a little bit more advanced.

So the first one we're going to talk about are private market investments.

This would be called private equity.

And these are different than what we call public market investments.

So with public markets, these are companies that are traded on the stock exchanges.

So you could go to cnbc.com and you can pull up Apple or Microsoft and you can see what the trading price is.

You can see the history of it.

And you can even log into your own brokerage account and you can buy shares of those investments because those are publicly traded.

Now publicly traded investments, you can tell what their value is literally almost on a minute by minute basis because their values change on the exchange.

In addition to publicly traded investments, there are investments called private market investments and investments in assets not traded on public exchanges.

And these would include private equity, venture capital, hedge funds, private real estate, and direct investments in businesses.

Now, some things to think about with private market investments is they are illiquid and they will require a holding period.

Whereas public markets, like let's say your stocks and bonds offer high liquidity and transparency.

So that Apple or that Microsoft stock that we talked about, you can go on your brokerage account today and you can buy it.

And then in theory, you could sell it later on today, or you can sell it tomorrow.

They're liquid in the sense that they do not have a holding period typically, then private investments typically do have a holding period and they typically have net worth requirements.

Now these are specified by the securities and Exchange Commission, maybe a million dollar net worth or 3 million or 5 million of net worth.

So private market investments have some barriers to entry, but they do have a lot of potential benefits.

So some of the potential benefits of private market investments is that they allow you to diversify outside of the public markets and diversify in investments that may not have a direct correlation to stock markets, they will have less volatility.

So while private investments carry risks, because all investments carry risk, they're insulated from the daily price swings of the public markets and that provides at least some perceived stability.

Now, with public investments, I have seen my clients and prospects.

They watch the value of their accounts several times per day, they log into their app, and that does cause some undue stress.

Whereas your private market investments, they don't have ticker symbols and you can't see the ups and downs of their values.

Now, some of the negatives of private market investments, because one of the things I always tell my clients is all asset classes have positives or most asset classes have positives and most asset classes have negatives.

So what are some of the negatives of your private market investments?

Well, we already talked about the illiquidity.

Your funds could literally be locked up for years, meaning that if you needed cash, that money is simply not accessible.

So when you're looking at or considering getting involved with private market investments, you need to make sure that you have other monies that are liquid for those liquidity needs.

Now, if you're dealing with startups inside of your private market investment, let's face it, the failure rate of startups and private companies can be high.

So there is some chance of losing your entire investment in a venture capital if it's early stage.

Private equity and private equity investments oftentimes have a high barrier to entry.

So you might need $250,000 to buy in.

You might need more than that.

Whereas let's go back to our example with Microsoft, or with even a mutual fund or an etf, oftentimes you can get into an investment for a very, very small amount of money.

It could be$510,100.

Whereas when we're looking at private equity, private market investments, you're typically going to need a large sum of money to get in.

So if you are considering or if you've ever thought about what it might look like to invest in some private equity or private market type deals, you can contact me davidarallelfinancial.com and we can walk you through that process and we can help you to decide if those types of investments are for you.

But let's recap with private equity or private market investments, they are not traded on exchanges.

They do not have the market volatility with them that other types of publicly traded investments might have.

But on the negative side, they will be illiquid.

They will typically require a large sum of money in order to get in.

And there will be some net worth restrictions that are imposed by the SEC in order to participate in these types of investments.

But many of the mass affluent and high net worth individuals of the world, they appreciate the chance to have investments that are outside the stock markets.

And they also appreciate the opportunity to have what can be of course not guaranteed, but can be high rates of return part of your asset allocation.

If you are high net worth, might be well suited to go into private private Equity Investments again.

Davidarallelfinancial.com and we can talk about it.

And finally, you know, I love the business owners because I am a business owner.

Let's talk about some items that might be specifically used by the business owners of the world.

All right, so let's talk about one.

Let's talk about income splitting.

So you can potentially shift income to family members in lower tax brackets by hiring them in the business, but it has to be for legitimate work.

So ask your CPA if income splitting makes sense for you and potentially you can pay your children, you can pay other family members who are in a lower tax bracket to do legitimate work.

Let's talk about the R and D tax credit, which is research and development.

We won't get into the nuances and the specifics of it because it gets very complicated.

But research and development tax credits, there are credits for developing new products, processes, software and for small businesses.

So if a lot of your business is developing new products, processes, software, and basically participating in research and development, there may be some opportunities for you to get R and D research and development tax credits.

Let's look at buy sell agreements.

If you are not the full owner of a company, let's say you have a partner or partners, what would happen if one of the partners either became disabled or passed away?

So I think it's very important to come up with a buy sell agreement and also a funding mechanism for your buy sell agreement.

Make sure that you're working with your attorney and coming up with an agreement of what would happen to the company if one of the owners passed away.

Then potentially you might want to fund it with life insurance or disability insurance if we are considering the fact that one of the owners might not be able to actively participation in the running of the company because they're disabled.

So let me know if you have any questions about buy sell agreements.

Davidarallelfinancial.com we can talk about the concept, but they would need to be drawn up by an attorney.

Now here's one that you may not have thought about.

Do you know what a professional employer organization is or a peo?

Well, for the small to medium sized companies that are looking to streamline HR operations and scale efficiency, a PEO can make sense.

Now they do a couple different things.

They help you to outsource your human resource administration.

So the business owners of the world, they have to be experts in their trade, but they also have to know about things like human resource.

What are some reasons that you can terminate an employee, what are some ways to deal with discipline?

What are ways to deal with all of the human resource issues that businesses have?

And a PEO, a professional employer organization, is almost outsourced.

Human resources PEOs can also help you to get benefits at lower cost.

So this is huge.

The business owners of the world are always fighting a battle with the big corporations, the benefits packages that they can offer.

And quite frankly, if you're a business with 1, 5, 10, 20, 30 employees on main street, it is really tough to compete with the benefits that large companies can offer.

But PEOs aggregate multiple businesses under their umbrella, giving them greater purchasing power to negotiate insurance rates, health insurance rates, things like that.

We've seen some of our clients have significant, significant savings on health insurance and some benefits and also on the cost of operating their 401 retirement plan.

So using a PEO can help with payroll and tax compliance, it can help with employee benefit costs, and it can help you to outsource your HR administration and even potentially save you in the times of potential lawsuits by your employees.

So peos are a great hack for the right employer.

If you have any questions, I can certainly point you in the right direction.

Davidarallelfinancial.com with regards to PEOs, which are professional employer organizations.

Okay, so those are some hacks.

We could spend a whole lot of time talking about some other advanced strategies.

Who knows, maybe we'll make some more episodes and we can talk about the gifts tax exclusion, we can talk about private placement, life insurance, irrevocable trust, family limited partnerships, private foundations, opportunity zones, and many, many other concepts.

So if any of these strike you as something that interests you, or if you just want to know.

Are there some other advanced strategies that you can put into your financial planning?

Email me davidarallelfinancial.com or you can certainly go to my website www.weeklywealthpodcast.com.

click on the Contact Us button at the top and you can set an appointment with the it's quick and easy and we can talk for 30 minutes or so about your 30,000 foot level aspects of your financial situation.

Pretty simple stuff and I look forward to connecting with you.

Don't forget to join our Facebook group and let us know if there's anything you would like for us to cover on the weekly Wealth Podcast.

And as always, I would be greatly indebted if you would tell your friends, your families, your colleagues and your co workers about the show.

As I always say, I believe that how we handle our money should positively impact our lives and the lives of those around us, and I hope that this podcast is a little piece of that puzzle in your life.

So until next episode, I wish everybody a blessed week.

Thanks everybody.

Investment Advice offered through Parallel Financial and SEC Registered Investment Advisor able to conduct advisory business in states where it is registered or exempt or excluded from registration, contents contained herein or for informational purposes only and should not be construed as an offer or solicitation for investment advice or for the purchase or sale of any security, insurance or other investment production.