In Episode 4 of our ABCast Podcast Janathan Allen discusses transactional planning. There were several interesting insights on transactional planning which can help to understand the need for transactional planning. In the episode, Jan describes the process of transactional planning in this way:
The first step of transactional planning is to understand the goals and objectives of the client as well as their short, mid-term and long-term plans for their life. What assets does the client possess and what is the nature of those assets. What is the fair market value of those assets? What income may be created from or generated by those assets? Could that income be classified as passive income (Passive Income Generators or PIGs)? Are there any passive losses (Passive Activity Losses or PALs) associated with the portfolio? How are these assets presently held?
For example, if the asset is real estate many investors will create an LLC or other entity to hold those assets. If no entity or entities are present, how should those assets be held? What structure(s) could be enacted to provide additional protections for those assets while distributing gains and losses in a manner which reduces exposure to taxation?
The next question discussed in Episode 4 of our ABCast Podcast providing insights on transactional planning relates to how income is created, where that income is generated and when that income is realized. There are times it may be in a taxpayer’s interests to accelerate income or losses, or to defer them. Jan discusses the value of a C Corporation which allows for the establishment of a “fiscal year” instead of the Calendar year. This provides a vehicle to defer income which otherwise might be realized in the present year into the following year, thereby delaying the taxable event associated with that income. In this “when” example, if the underlying entity generating income is on a calendar year basis, and a bonus or owner distribution would occur in November or December of that year (i.e. 2023), a C Corporation on a fiscal year ending on March 31 would allow the taxpayer to defer the receipt of that income until January of the following year (i.e. 2024) and taxation of that income would not be technically due until March or April of the following year (i.e. 2025).
Assets held in the EU or Great Britain may be more advantageously held in an Irish corporate entity which would have a lower tax basis than Britain might. The “where” of how an asset is held (and therefore where income and losses occur) can be an important element of transactional planning.
American taxpayers are responsible for reporting worldwide income to the IRS. Those with international assets have a much more significant potential risk and taxation exposure. In contrast, a taxpayer with only domestic US assets might require a more simple transactional plan to protect those assets while minimizing tax exposures.
Effective transactional planning applies to individuals and entities alike, domestic and/or international. The process of transactional planning ensures all assets are protected as much as possible from legal and financial exposure while minimizing the taxation implications those assets otherwise might generate outside of a transactional plan. The integrated legal, tax and accounting services provided by Allen Barron and Janathan L. Allen, APC provide a unique insight into the challenges of protecting assets while minimizing tax exposures within a single provider. This is the primary advantage of working with Janathan Allen and Allen Barron.
We invite you to listen to ABCast Episode 4 – Transactional Planning and learn more about why you need an estate plan and the tools you should have going forward. We invite you to meet with experienced San Diego estate planning and trust attorney Janathan Allen by contacting Allen Barron, or call 866-631-3470 today to schedule a free consultation.
Read a Transcript of Episode 4 – Transactional Planning