August 1, 2024 - Volume LII No.15
IN THIS ISSUE…
- Popular Real Estate Investment Group Involved in at Least Three Known Frauds
- More Important Than the Deal is the Person in the Deal!
- For a Real Estate Investment, Look at Cohen & Steers Quality Income Realty
- Huge Tax Credits for New Retirement Plans
- Roth IRA Planning in Retirement
- Reporting IRA Distributions is a Must
- When It’s Better NOT to Have an Appraisal
- Preparing For a Solo Doctor’s Early Death
- ADA Moves From its Long-Time Chicago Home
- Don’t Delay Your Estate Planning
Real Estate Group Popular with Dentists is Involved in at Least Three Known Fraudulent Deals
A real estate investment group that heavily markets to dentists has been involved in multiple fraudulent transactions. The group is run by a former dentist who made money in real estate and now teaches dentists about real estate and how you can live off the cash flow. After you commit to paying $120,000 for the first 18 months of membership and watching some videos to earn your “investor badge” you are introduced to a group of “trusted advisors” that have real estate investments to sell. The group told the dentists that the trusted advisors are all subject to rigorous vetting and background checks.
Unfortunately for the dentists who invested, this was not the case. To date there have been three known frauds perpetrated by the trusted advisors. This is in addition to several deals that have gone bust or are in trouble due to the economics of rising interest rates. The group did not participate in the fraudulent transactions, but it did not adequately vet them either. The latest Ponzi scheme involved a trusted advisor paying 12% on second lien notes. The only problem was that he had no interest in the properties upon which the loans were made. Liens were never placed and documentation was lacking. Investors were complacent because they believed the group vetted the “trusted advisors”. In fact, no such vetting took place and the “trusted advisor” was a convicted felon. In May he disappeared taking an estimated 27 million dollars with him. By the way, these folks are no longer called trusted advisors but rather “service providers.”
The investment group not only charges the member dentists dues, but the service providers are also charged to be part of the group. This sets up a conflict of interest. The lucky dentists got their money out. The unlucky ones got clobbered. In addition, members sign nondisclosure agreements promising not to post anything negative online. This is why prospective members Googling this group will not find anything about this.
This Real Estate Fiasco Calls to Mind Our Most Important Lesson – More Important Than the Deal is the Person in the Deal
When you associate with good people, good things tend to happen . . . and vice versa! This is the single most important lesson, and it applies at all times and in all areas of life. When it comes to investing – and particularly syndicated real estate deals where someone else is in charge – you must work with people who are trustworthy. But how do you know if someone is trustworthy or not when you don’t know them personally? It’s not always easy to tell, but there tend to be signs. One is how much of their own money are they investing in the transaction? Are they personally invested or are they earning their income from other sources? Another is the use of non-disclosure agreements. We would never sign on with anyone who was so secretive that they would prohibit us from describing our experiences truthfully even when the truth might reflect poorly on them. Finally, we would be very wary about a company whose advertising uses cliches similar to an annuity salesperson’s that is dismissive of stock investing, qualified retirement plans, and “Wall Street.”
When we’ve invested as limited partners in real estate deals, it’s been with Chase Properties out of Cleveland. Though we haven’t invested with him yet, we would also be comfortable partnering with Casey Fines, D.D.S. In both cases, these are long-time personal friends who have also participated at our Advanced Investment Seminars and have guest written articles in the Newsletter. We respect and trust them and know they have most of their own wealth invested in their deals.
For a Simple, Diversified Cash Flow Investment, Consider Cohen & Steers Quality Income Realty, Ticker Symbol “RQI”
This is a closed-end real estate investment trust with 190 quality REIT holdings inside of it. RQI is so broad-based that it is comparable to a real estate market index. But unlike, say, Vanguard’s REIT index fund (ticker “VNQ”) which has a distribution yield of 4%, RQI pays 8%. Over the past nine years, RQI’s total return (income and appreciation) has been 112% while VNQ’s has been 54%. RQI is trading at a 6.4% discount to the net asset value of the securities it owns, which is about its average. The negative is the high expense ratio of 1.9%, but in this case the high fee is justified.
REITS have been laggards this year, underperforming the S&P 500 by 18%. Income investors have preferred the guaranteed returns on Treasury debt over the more up-and-down income from REITs. But REITS have been trending up since April as the signs are pointing to Fed rate cuts. When bond yields begin to fall, investors may shift their focus to REITs and the generous income distributions they’re paying.
If You Recently Started a New Retirement Plan, Don’t Forget Your SECURE Act 2.0 Tax Credits
SECURE Act 2.0 of 2022 introduced a new credit and expanded an existing one. It did this to encourage businesses to adopt new plans and contribute towards their employees’ retirement. (Remember – tax credits are dollar-for-dollar reductions in your tax bill and therefore much more valuable than tax deductions.)
The first is the new “employer contribution credit” which is a $1,000 credit against contributions you make on behalf of each employee who earns up to $100,000 per year. This credit is available for the plan’s first five years which can add up to a tremendous amount. Since the credit went into effect in 2023, you can claim it starting in that year. Let’s say your new plan commenced in 2021. You can’t file an amended return to claim the credit for 2021 or 2022, but can use it in 2023, 2024 and 2025. The second is a modification and expansion of one that had been around for a few years, the “plan startup cost credit.” Starting in 2023, the credit equals 100% of the costs of establishing and maintaining your new plan (up to a maximum of $5,000 per year) for the first three years of a new plan. If you incurred plan start-up costs in the year before the new plan went into effect, you can elect to use that prior year as Year 1 of your credit. (The original credit which was in effect from 2020-2022 was a credit of just 50% of the start-up costs up to a max of $5,000 per year.
If you recently adopted a new plan, make sure you’re not missing out on these. It’s possible that your CPA does not have a subscription to the Newsletter so may not be aware of them.
Roth IRA Planning in Retirement
This is a general topic of interest among our retired doctor subscribers who are wondering whether and how much of their IRAs they should convert to Roths. The Roth conversion is primarily a bet against the possibility of higher tax rates in the future. It’s not as though there are no taxes to pay if you don’t convert. Of course there are. When we turn 73 we’re required us to start taking minimum taxable distributions from the traditional IRA. And yes, we will have to dip into our other savings to pay those taxes just as we’d have to dip into outer savings now to pay the tax on a Roth conversion. So in that sense, the choice is between converting and paying taxes now – when rates are known and low by historical standards – versus not converting and taking our chances on what rates may be when we start taking RMDs.
Aside from taxes, Roth IRAs have two other big advantages. No RMDs are required from Roths which means these accounts can be left to grow tax-free for years and years without diminution. Secondly, Roths are fabulous accounts to pass to heirs who will also take them income tax-free. We like the Roth advantages so much that we’ve made the unscientific determination that we want to end up with 20%-25% of our retirement assets in Roth IRAs.
But with respect to taxes, the current lowish tax rates are set to rise to their former levels in 2026. And considering the size of our nation’s annual budget deficits and national debt, we expect higher tax rates in the future. Think of the Roth conversion as insurance against the possibility of higher and perhaps much higher tax rates in the future. At that point, we’ll be at the mercy of the federal government. When you reach 73, RMDs can’t be avoided. You can convert to Roth but only with the portion of the account that remains after taking the RMD. You have more control now. You can convert at a known tax rate and control the timing of the conversions over several years to keep your tax bill as low as possible (i.e., not converting so much in one year that it kicks you into a higher bracket).
There’s an added concern for retirees – minimizing the Medicare IRMAA surcharges. Since Medicare looks at one’s taxable income two years prior to set the current year’s Part B insurance premiums, a big Roth conversion will increase taxable income in the current year – and Part B premiums two years hence. Ideally, the bulk of the Roth conversions will be done by age 62 (more than two years before enrolling in Medicare). But if we haven’t reached our Roth conversion target by the time we are close to or already enrolled in Medicare, we’d keep doing the conversions regardless. We’d just pay more attention to the timing of them to try to minimize the income tax and IRMAA consequences.
Failure to Report Large IRA Distributions Will Draw Attention From the IRS
Brokerage firms report their customers’ IRA distributions to the IRS using Form 1099-R. The IRS then uses an automated program to match the data it receives on these 1099s with income amounts reported on individual tax returns. If there is a big mismatch, the IRS will, at the very least, send you a computer generated CP2000 notice inquiring about the mismatch. At worst, it will trigger an income tax audit. If you are taking distributions from an IRA or retirement plan, be certain to tell your CPA and report the income on your 1040 tax return. In a fascinating recent U.S. Tax Court, the taxpayer was committing all sorts of tax fraud. His failure to report $122,500 in IRA distributions was only a small part of the case. Nevertheless, the court had no problem assessing income tax on the distribution – plus a 20% penalty for substantially underreporting his taxes. (See Cotroneo, TC Memo 2024-70).
There’s an added concern for retirees – minimizing the Medicare IRMAA surcharges. Since Medicare looks at one’s taxable income two years prior to set the current year’s Part B insurance premiums, a big Roth conversion will increase taxable income in the current year – and Part B premiums two years hence. Ideally, the bulk of the Roth conversions will be done by age 62 (more than two years before enrolling in Medicare). But if we haven’t reached our Roth conversion target by the time we are close to or already enrolled in Medicare, we’d keep doing the conversions regardless. We’d just pay more attention to the timing of them to try to minimize the income tax and IRMAA consequences.
Sometimes it’s Better NOT to Have Your Practice Appraised Before a Sale
Within just the past week we dissuaded two doctors (one a general dentist and the other an orthodontist) from having us appraise their practices in anticipation of their sales. The reason is that our valuation would come in lower than what they could obtain without the appraisal. In each case the doctor voluntarily scaled back their practice, working fewer days per week, seeing fewer new patients, and not surprisingly, seeing their revenues and profits fall. This presents a problem in that the appraiser is limited by the financial data it receives. There is some discretion to account for a practice’s non-financial attributes (e.g., an orthodontic practice located next to a middle school) but not enough to overwhelm the financials.
In these situations, it makes more sense for the seller to offer the practice at a price that he or she wants. The potential buyer reviews the tax returns and other financial reports (after signing a non-disclosure agreement) and can accept the price or negotiate. It’s possible the buyer may agree with your rosy outlook, particularly if this buyer already has some experience. It’s also possible that the buyer may have a hard time getting a bank loan to pay the seller 100% cash at closing. That doesn’t mean the deal can’t get done. It just means that you may have to finance some of the price yourself.
Preparing for a Sole Practitioner’s Premature Death or Permanent Disability
Each year we are involved in at least two practice sales where the doctor died suddenly. The grieving spouse, who may have had no involvement in the practice, now must deal with finding a buyer and getting the practice sold. Most states’ laws require that dental practices have to be owned by licensed dentists. There is an exemption in the case of death where the doctor’s estate is permitted to own the practice for a reasonable amount of time in order for it to be sold. The odds of a premature death or permanent disability are of course low, but here are things you can do now to alleviate the potential burden on your spouse.
First, reach out to one or more of your friendly local competitors and ask if they would be interested in taking over your practice or patients (for a very fair price) if the worst should happen. If so, then this is whom your spouse should call immediately after your death or disability. They may be needed in the interim to work in the practice to maintain the production. Second, prepare a list of your advisors for your spouse, with names and contact information, including someone to appraise the practice and an attorney who can prepare the sale contracts. (Some appraisers encourage dentists to get their practice appraised once every two years “just in case.” We don’t subscribe to that. The appraiser loves the consistent income stream, but the odds of premature death are so slim. If it does happen, your family will contact your appraiser who will complete it ASAP.) If the practice cannot be sold quickly, then it may be necessary for your advisors to retain a dental broker to help find a buyer.
Third, if your spouse is not an authorized check signer on your business bank account, make them one. If you pass away, bills will need to be paid, and the process becomes more complicated for your estate if you were the only check signer. Fourth, buy a policy of office overhead disability insurance. This is inexpensive and will help keep the bills paid during a temporary disability, one from which you expect to return to work.
ADA Sells Its Headquarters and Relocates to New Space in Chicago
The ADA headquarters is moving from its longtime home at 211 East Chicago Avenue to smaller space at nearby 401 North Michigan Ave. Many of the ADA staff now work remotely, and the ADA’s scientific operations are being outsourced to a new location out-of-state. This transition has special meaning for us. Collier & Associates’ (formerly known as Sarner & Associates) own founder, Harvey Sarner, served for years as associate counsel at the ADA where he advised many of its councils, developed the members retirement program and negotiated many of its member insurance programs. And it was Harvey who, way back in 1965, identified the location for the ADA’s new headquarters at 211 E. Chicago Avenue and negotiated the purchase of the building. When he left in 1971 to begin his own law practice, he took office space on a higher floor in the same building. But this is how it goes. When one era ends another one begins.
Putting Off Estate Planning Until You Figure Out All the Details is a Mistake
Sometimes there are issues we haven’t quite resolved. Some are crucial (who should be the guardian of minor children?), and some are less important (which niece should get which candy dish?). If my wife and I could not make up our minds on a few details, that is not a good reason to delay having (or delay updating) our estate planning documents. We should get on paper the parts we have resolved, and the documents can be refined later after we’ve devised the perfect plan. A partial plan will be better than none. To delay could create extra work, cost and heartache for our heirs.