An Introduction To The Family Officeyour investment accounts as cash is needed. One popular offering...
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Sometimes, the broker will include a separate list summarizing PTP investments. A majority of PTPs engage in oil, gas, and other energy- related ventures. Benefits One of the largest advantages of investing in a PTP is that the partnership can avoid corporate tax treatment, if 90% or more of the income is qualifying income. Qualifying income includes interest, dividends, rent from real property, gains from the sale of property, and income from natural resources. This makes the income from the partnership subject to only one level of tax, at the investor level; whereas, if this were a normal stock, it would be taxed at the corporation level and again at the investor level as a dividend. Another advantage of investing in a PTP is the liquidity of owning publicly traded stock. An investor in a PTP has the benefit of selling interests very quickly through the market, if desired. When you sell your PTP units, your taxable gain is the difference between the sales price and your adjusted basis. Cash distributions decrease basis and are commonly dispersed quarterly. Cash distributions from a PTP are considered a return of capital, and are not taxed as dividends at the federal level. Complications Net losses attributable to an interest in a PTP are not allowed to net against the investor’s other income. When a particular PTP incurs a loss, that loss can only offset future earnings from that same PTP. This is very different from interests in regular, non-PTP passive activities where allocated losses can be used to offset earnings for any other passive activity. These losses can only be realized upon either income recognition from the PTP or a complete disposition of the PTP units. Complications can occur upon the sale of PTP units. If PTP units are sold at a gain, there is a division between taxing the gain at the preferential capital gain rate and the ordinary income rate. If PTP units are sold at a loss, some of the loss may be disallowed depending on how much income has been recognized previously within that PTP or how much of the PTP units are disposed of. It should be noted that investment brokers rarely track shareholder basis for PTP investments, but an adjusted basis will be shown on the Schedule K-1 when all or some of the units are sold. It gets especially complicated where there are PTP units owned across multiple brokerage accounts. This will cause extra time for tax preparation to distinguish which units sold are coming from which accounts. A PTP may also operate in a number of states. Because a PTP is a pass- through entity, the investor could be subject to filing tax returns and paying taxes in those states. These potential income taxes and additional tax return costs should be carefully considered when evaluating the economics of the PTP. Tax planning for PTPs can be challenging because the income from PTPs is often not estimated or communicated with investors before the Schedule K-1 release after year end. Additionally, if there is a sale of interest, the split between capital gain and ordinary income will be unknown since that is also provided as an attachment to the K-1. A QUARTERLY WEALTH ADVISORS NEWSLETTER BY LBMC QUARTER 2 Nashville (615) 377-4600 Knoxville (865) 691-9000 Chattanooga (423) 756-6585 lbmc.com An Introduction To The Family Office Have you considered Family Office services? You don’t have to be a Rockefeller to enjoy the benefits of a family office. While traditionally, only families with a net worth of $100 million or more would establish a family office to control and maintain the family fortune, the practice has expanded to encompass a much broader clientele. Firms today offer what we call Multi-family Office services. They are helping many families with multiple services, ranging from bill pay only to a full concierge-type service. You only pay for as little or as much attention as your family requires. Firms serve multiple families, so the cost of maintaining a staff of professionals is also spread among multiple families, making these services accessible to a larger base. Whether you are dealing with multi- generational wealth or if you are in the process of generating the wealth right now, these services can be beneficial to you. At the entry level, a family office can help with bill pay. All of your monthly bills can be directed to the firm. Mail is processed and bills are paid with little involvement from the client. You are always aware of what is being paid, but you aren’t dealing with the paper, filing or organization of the information on a day to day basis. The firm maintains copies of all of the bills, reconciles the bank accounts, and delivers reports to you. This service is popular with entrepreneurs and executives, whose valuable time is more productively spent increasing wealth than with routine financial maintenance. It is also helpful for individuals who own multiple homes or investment properties and would like to have expenses segregated for management and planning. We are in a time where many early retirees are taking care of their parents. A bill pay service might be invaluable for freeing up time and providing peace of mind. A step up from the bill pay offering is a package including personal financial statements. The firm creates a balance sheet from the assets you own and updates it regularly. Investment activity organization and financial management of a family office. Financial record keeping can be maintained in one accounting software and reports can be generated by property. These reports can identify which properties are performing well and which need additional attention. In summary, a family office may be a service you’ve needed, but either didn’t know existed, or didn’t think was a practical option for you. They offer specialized and personalized professional services to help your family preserve your wealth and prepare the next generation, ensuring your legacy continues for generations to come. LBMC offers a full suite of family office services. To discuss if our services may be right for you, please contact Jacqueline Weiss by email at [email protected] or by phone at 615-309-2459. Hedge Funds continued Family Office continued Jacqueline has been an accounting professional for 20 years. She gained extensive experience in individual, corporate, and non-profit accounting during her 13 years in Business Management on Nashville’s Music Row. Jacqueline works effectively with companies of all sizes, from start-up organizations to multi-national corporations. Jacqueline Weiss [email protected] 615.309.2459
Transcript of An Introduction To The Family Officeyour investment accounts as cash is needed. One popular offering...
Sometimes, the broker will include a separate list summarizing PTP investments. A majority of PTPs engage in oil, gas, and other energy-related ventures.
BenefitsOne of the largest advantages of investing in a PTP is that the partnership can avoid corporate tax treatment, if 90% or more of the income is qualifying income. Qualifying income includes interest, dividends, rent from real property, gains from the sale of property, and income from natural resources. This makes the income from the partnership subject to only one level of tax, at the investor level; whereas, if this were a normal stock, it would be taxed at the corporation level and again at the investor level as a dividend.
Another advantage of investing in a PTP is the liquidity of owning publicly traded stock. An investor in a PTP has the benefit of selling interests very quickly through the market, if desired. When you sell your PTP units, your taxable gain is the difference between the sales price and your adjusted basis. Cash distributions decrease basis and are commonly dispersed quarterly. Cash distributions from a PTP are considered a return of capital, and are not taxed as dividends at the federal level.
ComplicationsNet losses attributable to an interest in a PTP are not allowed to net against the investor’s other income.
When a particular PTP incurs a loss, that loss can only offset future earnings from that same PTP. This is very different from interests in regular, non-PTP passive activities where allocated losses can be used to offset earnings for any other passive activity. These losses can only be realized upon either income recognition from the PTP or a complete disposition of the PTP units.
Complications can occur upon the sale of PTP units. If PTP units are sold at a gain, there is a division between taxing the gain at the preferential capital gain rate and the ordinary income rate. If PTP units are sold at a loss, some of the loss may be disallowed depending on how much income has been recognized previously within that PTP or how much of the PTP units are disposed of. It should be noted that investment brokers rarely track shareholder basis for PTP investments, but an adjusted basis will be shown on the Schedule K-1 when all or some of the units are sold. It gets especially complicated where there are PTP units owned across multiple brokerage accounts. This will cause extra time for tax preparation to distinguish which units sold are coming from which accounts.
A PTP may also operate in a number of states. Because a PTP is a pass-through entity, the investor could be subject to filing tax returns and paying taxes in those states. These potential income taxes and
additional tax return costs should be carefully considered when evaluating the economics of the PTP.
Tax planning for PTPs can be challenging because the income from PTPs is often not estimated or communicated with investors before the Schedule K-1 release after year end. Additionally, if there is a sale of interest, the split between capital gain and ordinary income will be unknown since that is also provided as an attachment to the K-1.
a quarterly wealth advisors newsletter by lbmc
quarter 2
Nashville (615) 377-4600Knoxville (865) 691-9000Chattanooga (423) 756-6585 lbmc.com
LBMC
An Introduction To The Family OfficeHave you considered Family Office services?
You don’t have to be a Rockefeller to enjoy the benefits of a family office. While traditionally, only families with a net worth of $100 million or more would establish a family office to control and maintain the family fortune, the practice has expanded to encompass a much broader clientele.
Firms today offer what we call Multi-family Office services. They are helping many families with multiple services, ranging from bill pay only to a full concierge-type service. You only pay for as little or as much attention as your family requires. Firms serve multiple families, so the cost of maintaining a staff of professionals is also spread among multiple families, making these services accessible to a larger base.
Whether you are dealing with multi-generational wealth or if you are in the process of generating the wealth right now, these services can be beneficial to you.
At the entry level, a family office can help with bill pay. All of your monthly bills can be directed to the firm. Mail is processed and bills are paid with little involvement from the client. You are always aware of what is being paid, but you aren’t dealing with the paper, filing or organization of the information on a day to day basis. The firm maintains copies of all of the bills, reconciles the bank accounts, and delivers reports to you. This service is popular with entrepreneurs and
executives, whose valuable time is more productively spent increasing wealth than with routine financial maintenance. It is also helpful for individuals who own multiple homes or investment properties and would like to have expenses segregated for management and planning. We are in a time where many early retirees are taking care of their parents. A bill pay service might be invaluable for freeing up time and providing peace of mind.
A step up from the bill pay offering is a package including personal financial statements. The firm creates a balance sheet from the assets you own and updates it regularly. Investment activity
organization and financial management of a family office. Financial record keeping can be maintained in one accounting software and reports can be generated by property. These reports can identify which properties are performing well and which need additional attention.
In summary, a family office may be a service you’ve needed, but either didn’t know existed, or didn’t think was a practical option for you. They offer specialized and personalized professional services to help your family preserve your wealth and prepare the next generation, ensuring your legacy continues for generations to come. LBMC offers a full suite of family office services. To discuss if our services may be right for you, please contact Jacqueline Weiss by email at [email protected] or by phone at 615-309-2459.
Hedge Funds continued
Family Office continued
Jacqueline has been an accounting professional for 20 years. She gained extensive experience in individual, corporate, and non-profit accounting during her 13 years in Business Management on Nashville’s Music Row. Jacqueline works effectively with companies of all sizes, from start-up organizations to multi-national corporations.
Jacqueline [email protected]
What is it?A hedge fund is an investment pool, generally limited to high net worth individuals and institutions. There is no legal definition of a hedge fund but most share the following traits: (1) invest in a wide range securities and assets (stocks, currencies, derivatives, private equity) (2) compensation of the manager is based on a percentage of assets and capital appreciation (3) leverage is often used (borrowing money to add to an investment position in order to increase returns) (4) hedge funds are taxed as pass-through entities and issue a K-1 to each investor. Some strategies that attempt to exploit small pricing discrepancies in the marketplace require large amounts of leverage in order to generate an attractive return for investors.
BenefitsThe deductibility of expenses depends on the type of fund – trader or investor. A trader is someone who aims for rapid portfolio turnover, whereas an investor is someone who tends to hold securities for a longer duration. The trader fund investor can deduct all ordinary and necessary expenses paid or incurred. An investor in an investor fund can deduct these expenses as well, but they will be classified as miscellaneous itemized deductions and subject to the 2% of adjusted gross income (AGI) limitation.
Hedge funds often have investment interest expense, since they make use of leveraging. To the extent the interest expense exceeds investment income, the excess is carried forward indefinitely. Investment income is income from investment property that produces portfolio income – interest, dividends, annuities, royalties. Long term capital gains and qualified dividends are not included in investment income unless the taxpayer makes an election to tax these items at ordinary rates.
Hedge funds that qualify as trader funds are generally not subject to passive activity loss limitations, which means investors can use their share of hedge fund ordinary losses to offset unrelated active ordinary income, such as salary, and capital losses from the fund may offset unrelated capital gains.
ComplicationsHedge funds are often a mix of trader and investor activities and include both nonpassive and passive income. This adds complexity for
tax return preparers, having to break-out income and expenses to different pools. This can be very time consuming and might require additional tax preparation fees.Additionally, the hedge funds may not issue their Form K-1 to the investor by April 15th, requiring an extension of the investor’s tax return.
Investing in hedge funds might also mean additional filings and forms related to foreign holdings and activities. There are hefty penalties for not filing these forms so an oversight could be a very pricey mistake.
PUBLICLY TRADED PARTNERSHIPS
What is it?A publicly traded partnership (PTP) is any partnership that is either traded on an established securities market or readily tradeable on a secondary market. PTP investments appear as a stock within a brokerage account, but are taxed as a pass-through entity and issue a K-1 to investors.
is booked. Detail of credit card activity and tax related expenses are tracked. An income statement is generated monthly to help you monitor the performance of your investments and help you track your spending, potentially maximizing your tax savings throughout the year. In addition, since CPA firms are some of the leading providers of family office services, your family office is already working closely with your tax preparers. They will already have access to your current financial reports, simplifying your year-end tax preparation.
Several additional value-added services are available. A family office team can make sure your household employees are paid and the payroll tax returns are filed on time. They can put a budget in place so you can anticipate upcoming planned expenses and make sure cash is available when it is needed. They can also coordinate direct transfers from your investment accounts as cash is needed.
One popular offering is the annual review of insurance policies. You are carrying insurance on your autos, your home, your valuable articles, as well as an umbrella policy and other special coverages. The family office can verify that your policies are up to date, that your coverage is adequate and that you are not open to liability. They are also maintaining a schedule and watching for the renewals to make sure no payments ever slip through the cracks so coverage doesn’t lapse. They offer peace of mind so you can focus your energy elsewhere.
The possibilities expand from there. How liberating would it be to have a go-to person for personal financial
assistance? Do you need mortgage or personal loan information in order to purchase new assets? Call your account manager. Do you need a copy of a check? How about a history of how much you have paid to a certain vendor during the year? Maybe you’ve received a tax notice from the IRS. Contact your account manager. In the time it takes to make a phone call or type an email, your requests will be answered by an account manager who already knows your financial history and can respond quickly.
While these services are obviously beneficial for busy executives and entrepreneurs, there are many affluent families who could also benefit.
Your family office can help you establish wealth transfer policies. They can assist with the development and implementation of distribution schedules to heirs, as well as annual gifting. Trended reports from year to year will show who has and will receive distributions, so heirs can plan for tax issues, philanthropic and investment opportunities.
Second or third generation heirs may need help managing the wealth they have inherited. They weren’t integral in developing the wealth, but they want to maintain those hard earned dollars and grow them for future generations. Being firmly planted within the financial services market, a family office can help with any number of issues. They are a hub with spokes reaching into the areas of tax, family law and estate planning. They can make recommendations for trusted providers in investment management. They can help educate
families on how to maintain wealth with tax and estate planning or the possibility of establishing trusts. They can even help create a family foundation which provides an ongoing legacy of charitable giving to issues that are important to the family.
Another generational issue is caring for aging parents. A family office can offer assistance with day to day matters for children who are overseeing finances for their parents, making sure medical and household bills are paid. This can be a comfort for children who may not live near their parents, or for siblings who split the responsibility of caring for their parents. There is an account manager outside the family, who knows the family, and is reporting to each of the parties involved in the same manner. It offers transparency to help maintain familial harmony.
Property owners with multiple homes or investment properties could also benefit from the
Tax Implications of Hedge Fund and Publicly Traded Partnership Investments Hedge Funds
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Briana, a Certified Public Accountant, has more than thirteen years experience and is a Shareholder in the wealth advisors group. She is a Senior Manager in LBMC’s Wealth Advisors Group and her experience includes providing accounting and tax services for clients in a wide range of industries including manufacturing, distribution, food service, construction, healthcare, non-profit organizations, and financial institutions.
Briana [email protected]
Sabrina Greninger, CPA started work for LBMC in 2015. She works in the Wealth Advisors team as a senior accountant. She primarily works with investment partnership, real estate, and individual clients tax returns and consulting.
Sabrina [email protected]
