Loose Stones, EP 1: Navigating Client Conundrums with Jason Runung

Join us for our new Loose Stones segment as we tackle real client questions that can trip you up on your financial journey. Our clients asked questions, our advisors provided answers, and in this episode, Jason Runung adds his expert perspective to the mix.  Jason joins us from our Denver Tech Center office and is a wealth of knowledge. From investment strategies to retirement planning, we're here to clear the path to your financial summit.

Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network®.

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Transcript

Jessica: 0:00

Welcome to the Reach Your Summit, where we help you navigate the path to a better, more secure future. We are brought to you by Summit Wealth Group, and I am your host, Jessica Magnuson. We are here today with a little bit of a different segment that we are going to be starting, called Loose Stones. So we call it that because it is typically the loose stones that trip you up on your way to your summit. So we want to catch those now and talk about them so that it is smooth sailing on your way to your summit. We have with us today our advisor out of the Denver office, Jason Runung. He was with us last week when we were talking about tax planning, and also we'll be on an episode next week about tax planning for businesses. So thanks so much for joining us for this new segment, Jason.

Jason: 0:58

Thanks for having me, Jessica.

Jessica: 1:00

What we'll do is I have some questions here that were submitted by our advisors from clients that they work with, about just a range of situations that they've come across. We asked our advisors to submit these questions and kind of how they went about advising their clients. So I'll read the questions and answers and we'll have Jason kind of break it down and give us his thoughts on all of those. So starting with the first one actually it was one that Jason submitted, so I won't read his answer, but I will read the question. His client was wondering what options do we have for deferral of taxes on the sale of our business?

Jason: 1:44

Absolutely Well, and I could see my answer here and I stand by my answer. Apparently, I was completely wrong, so that's good.

Jessica: 1:51

Yeah it still stands, that's good.

Jason: 1:54

This is one that I've run into a few times. On the sale of a business, then you're running into a lot of potential capital gains taxes and that seems to be a recurring theme. And especially it could be frustrating when you've spent years and years and years building up a business and then to turn around after you finally go ahead and sell it and to give effectively away 20% of that gain can be pretty painful. Here's what we look at as far as that can be pretty painful. Here's what we look at as far as it's not going to be a matter of eliminating those taxes. Typically, it's a question of how can you defer them so that you're not paying them now, because if you're not paying them now, you can invest them or they can grow. There's lots of opportunities for how they can increase and that means that they become a smaller and smaller tax bill because the investment that you have or the amount of money that you have increases and grows and so that tax eventually, somewhere down the road, becomes smaller. A couple of the ways that you can look for the deferral of taxes on a business, specifically Now one of the most common ones, and this is out there as qualified opportunity zones. There are areas that need more development, so they're underserved areas, and so there's a lot of tax incentive to invest in those areas. Now, the challenging part to that and this is why I don't generally lean that direction challenging part to that, and this is why I don't generally lean that direction is that the returns on your investment, when you're investing in those areas, typically has been not that great. I hate to say that, because I do want to develop those areas, but when it comes to the investment returns, frankly they are underwhelming in a lot of those cases, and so that's not typically the direction that I recommend.

Jason: 3:50

Alternatively, it depends on the structure of your business. But if you have a large real estate holding now this also applies to if you're renting homes or doing those types of things then you can do what's called a 1031 exchange, and so a 1031 exchange is where you sell out of real estate in some capacity and replace it with other real estate, and that doesn't mean that you have to go out and buy a building. There are alternative investments where you can buy into more of a real estate fund that can be more easily liquidated. So, rather than selling your rental house, for example and that's your business and buying a new rental house. You can sell a rental house and buy a rental fund, a fund where they're focused on rentals. Then you can sell off pieces of it, almost like selling off a bedroom off of a rental, rather than having to sell an entire rental in order to go ahead and access it.

Jason: 4:46

So that's one of the options if there's a lot of real estate in whatever business it is. So some businesses have a lot of real estate, some businesses don't. Alternatively, there's also what's called a 543 transaction, and so that is a deferred sales trust. In effect, you're establishing a trust that purchases your business and then they set you up on a payment plan of how they're going to pay you, and then that trust turns around and sells your business to whoever it is that you were trying to sell the business to, and then now you're on a slower payment plan of how you're going to receive it. But the sale of the business happens a hundred percent immediately, but the proceeds are stretched out over a longer period of time and therefore you can control the distribution of those assets, and then you can control the taxes more as well, those both seem like could be really great options, depending on people's situation.

Jason: 5:48

They are. That's great they are, Especially when you're like I said. You put a lot of effort into whatever business. That was typically, and there's not a lot of people who have great big businesses who haven't put a lot of work into it. So when you put a lot of work into it, it's a shame to just immediately siphon off a portion of that as soon as you're trying to go ahead and get out of it.

Jessica: 6:11

Yes, so we have one more question from you, so another one. I'll just read off and you can answer. This client said they're in the process of selling their winery, including the operational business and the real estate associated with the vineyard. How do you advise them on that?

Jason: 6:30

So what's interesting here is it depends on how you're looking to access the funds. The interesting thing here is that there's a business component and then there's a real estate component. So you can do both of the strategies that I just talked about. You know, you can do the 543 transaction or you can do the 1031, or you can find a way to balance those out.

Jason: 6:55

And if you have conversations typically if you're having conversations with the buyer they don't really care about how much they're paying for the business versus how much they're paying for the property or any of those types of things. Ultimately it's all just one transaction to them. But you can have a conversation with them where you say, hey, let's move more of this towards the real estate or let's move more of this towards the business, based on the strategies that you've put in place in advance, and then you can have much more control over your taxes and what it is that you're trying to do. 1031, for example, you can defer a lot of taxes to where you don't have to access anything for a long time. The 543, that one. You typically have to go ahead and pull some of the funds out immediately, but not all of them, but you have to start some form of payment, and so that's where you can really have more efficiency by balancing the two and figuring out the best combination of both of them.

Jessica: 7:53

Well, that works very nicely with our episodes. We're talking about taxes, so those are great timing those questions. This one comes from another one of our advisors and his client said that one of their retired client couples wanted to know if they could afford to help their kids with a home renovation and his response was we looked at pros and cons and helped them understand that they could afford to do this. But it means being careful about the future lump sum expenditures outside of their normal retirement income.

Jason: 8:33

My opinion on that.

Jessica: 8:34

Yes, or just what does that mean, like if you are going to take a big portion out now to help someone, what does that mean for your retirement future? I mean?

Jason: 8:45

effectively. What they're saying is like okay, if you're taking a big chunk now, then you can't keep taking a bunch of big chunks in the future. You can accommodate that and make that exception. Now, here's the thing, is one of the things that I recommend.

Jason: 8:58

Everybody wants to help their children. It is good to help your children on this front, but it is this thing that you do have to prioritize making sure that your retirement is taken care of and comfortable or not not comfortable, but secure before you start expanding it to giving things away and doing those things. So that would be one of my first suggestions is make sure that you're squared away, and that's that's what this conversation was. Is that they said you know they can do it, it fits within the budget that they're operating. They went ahead and said you can distribute these funds out and then, if there's future expenses, if there's large distributions that you need to go ahead and take, if there's too many of those, then you'll have to go ahead and slow it down, which makes sense. I mean, it just means that if you're pulling money out now, then you're going to have less money to pull out later, and so you have to pull out less money later for other expenses that you plan on doing for yourself.

Jessica: 10:00

So just definitely something you want to talk to an advisor about to make sure that you'd be okay in the future.

Jason: 10:06

And I say this to everybody that I work with, and it's become a little bit of a mantra over the course of the past two years, which is every time there's a question with a dollar sign next to it and even a couple of times when there's not. Give me a call, like, even if you think it's silly, even if you think it's too small to just bother, or you know any of those types of conversations. Don't, don't think that way, just give a call and then you have a person for a reason and use them and call them and ask them those silly questions or what you think are silly questions, what you think are obvious because you don't know whether or not they are. I mean, we're trained specifically to think about a hundred different things that generally you wouldn't even. I mean the information's out there but you, a normal person, might not know to Google a specific question because they wouldn't think to ask the question. And so that's where you involve your advisor and then they ask the questions. Then you can figure out answers to questions that you didn't know, that you had Always introduce these types of things and say well, you know, we're trying to gift our children some money and how do we go about that?

Jason: 11:21

I had a similar conversation with a client of mine just this past week. She had gifted a lot of money recently to her three children. She wanted to do something nice and it had become a little bit excessive relative to what her portfolio was. So she she wanted to keep doing it. She kind of got in the habit. I said you have to slow this down for a little bit Now. That doesn't mean that you can't change it in the future. And also, if you end up having this money in your estate, they end up with those funds. They are your beneficiaries. But you know, just decrease some of what you're doing and that's okay, they'll still be okay.

Jessica: 11:57

So next question that we have is how do I determine whether to keep or sell my rental property? And this advisor said one of the best ways to determine the value of a rental property is by putting together a return on equity analysis. For example, if the net cash flows from the property are $10,000 per year and you have the equity of $200, but it can give you an idea of how well your equity is doing for you in that investment compared to alternatives. Now, there's a lot of numbers going on in there and for those of us that are not as inclined to numbers, what are they saying in this answer?

Jason: 12:51

Yeah. So in here I could tell that this is either somebody who's a total math nerd, which is fine, or somebody who has studied for the CFP recently.

Jessica: 13:03

Potentially yeah.

Jason: 13:05

It's one or the other on this one and effectively what they're doing is they're calculating their rate of return on the rental property. You know how much equity you have determines how much value you're getting out of these things. If you have a property that's 100% paid off, your rent is going to be a specific fraction of the property value, so that determines a percentage. And that's kind of what they're saying is you know, $10,000 a year on 200,000 is 5%. That's that's accurate. Um, when you're looking at this, determining whether or not to keep or sell property is a little bit tricky and it does. It does circle back, so you do. You do have the 1031 option, so that that is a 1031, you know that's an option out there so you can sell the property without all the taxes that are associated with it.

Jason: 13:58

So that's something that you want to take into account throughout this entire process. So that's one thing. But also here's the thing is and it's one that not a lot of people take into account and that this answer does not take into account is that what's your time worth and what's your? You know what's your effort worth, and do you have good renters and are they consistent? I mean, when I've run into these situations, I've run into individuals who've had great renters and their experience has been good, because the rents always come on time and it's been the most amazing experience of all time. And then there's other individuals where it's been horrible and they just don't want to deal with that anymore and they're constantly sending out you know service individuals and trades to go out and work on the house and it becomes just this you know you become a landlord and you are actively working as a landlord and you're spending time doing that, and for some people that's worth it and for some people it's not, and you have to take that into account.

Jason: 15:00

There's an emotional element here. This addresses how it view, how you can view it from a math perspective, as far as what's your what's your rate of return on your investment is, and that's good as far as your rent versus your equity. So how much money are you making versus how much money you have invested? Pretty straightforward, I mean you can run through that pretty quickly with a financial advisor and figure out what those figures are when you're looking at alternatives and figuring that out. I mean, if this is a 5% investment and I say, okay, well, you can get 5% in a money market right now, those aren't necessarily the same, because in one of these situations you're doing a lot of work, you're doing a lot of work and you're making 5%, and then in the other one you're doing nothing and you make a 5% and you're just cashing checks. So those are very different things. You have to understand that. Specific to rental property, it is effort.

Jessica: 15:58

Right, which definitely, like you said, is different to different people what that value is on your effort and work.

Jason: 16:06

That's where it comes into. Financial planning isn't always just about here's what the numbers are. Tell me what your figures are. Financial planning isn't always just about here's what the numbers are. Tell me what your figures are. Sometimes it's about understanding psyche and the mentality of the person and what it is that they prioritize, determining. Okay, based on what I know about you, I don't think that you want to do this. Or I do think that you want to do this. What do you think? Yeah, yeah, no, I don't want to do that. Yeah.

Jessica: 16:31

Totally have that conversation occasionally. Well, that wraps it up for our questions of this Loose Stones segment. Thank you again, jason, for being here to give us your commentary and to expand upon those answers for us as a listener. Have a question that is tripping you up or that you need some guidance on? Please feel free to reach out to us for us to connect you with one of our advisors. We are at Summit Wealth Group on all of our social media platforms and you can visit our website at wwwsummitwealthgroupcom. That is all, like I said. Thank you again and we'll see you next time. Thanks for listening to the reach your summit podcast brought to you by summit wealth group. If you enjoyed this episode and would like to help support the podcast, please share it with others and subscribe so you don't miss an episode. If you have any questions or topics that you'd like us to cover, please email us at info at summitwealthgroupcom.