Melinda Kibler

Act by December 31 to get full tax benefits on a new program that could diversify your investing portfolio. Opportunity Zones.

Taxpayers have a unique opportunity in 2019, thanks to the new 

. It offers valuable tax breaks to investors who reinvest capital gains in projects designed to bolster economically struggling communities. You can reduce your taxes, potentially make a long-term profit and help the targeted areas.

Under the 2017 tax law, Opportunity Zones are census tracts certified as experiencing economic distress. The idea is to spur investments and job creation in these areas.

To invest, you need a recent capital gain or gains—whether it’s from selling a business, property, stock or mutual fund. Short and long-term gains are eligible.

You then can reinvest your capital gain(s) in a Qualified Opportunity Fund that holds at least 90 percent of its assets in Opportunity Zone property—stock, partnership interests or business property, including real estate. You must invest the gain(s) in a fund within 180 days of receiving the gain.

The minimum investment for many funds is $100,000, though some funds have higher minimums. While most people don’t have such large unrealized gains, they’re not entirely unusual. If you have too much invested in a stock that has appreciated a lot, or have an appreciated home you want to sell, this program offers a way to diversify without taking a tax hit.

These are the three distinct tax benefits.

		Tax deferral on your initial capital gain until 2026

		Permanent exclusion of 10 or 15 percent of the deferred gain, depending on how long you hold the investment

		Permanent exclusion of all post-2026 appreciation if the investment is held for at least 10 years

You get the immediate benefit of not having to report the capital gain on your tax return in the year you received it.

Initially, your basis in the Qualified Opportunity Fund is $0, in exchange for the capital gain tax deferral. After 5 years, your basis increases to 10 percent of the gain that you initially elected to defer. After 7 years, the basis gets another 5 percent bump, for a total basis of 15 percent of the initial capital gain. For example, if you invest $100,000 in capital gains, after seven years your basis will be $15,000.

Investors who want the greatest possible tax benefit need to invest in a Qualified Opportunity Fund by December 31, 2019. This is because investors are allowed to defer tax on the original gain until the earlier of December 31, 2026 or the date the investor sells or exchanges the position in the fund.

All investors must report deferred capital gains by the end of 2026 on their tax return, regardless of how long they have held the property. Thus, to get the full 15 percent basis adjustment, you must act this year.

The program includes a test at six months. So, by December 31, 2019, to make sure that all assets in a Qualified Opportunity Fund meet the “90/10” rule, at least 90 percent of a fund’s assets must be qualified Opportunity Zone property. If a fund fails this test, the government will impose financial penalties and the fund will pass through to investors. Making it crucial to choose a competent fund manager.

Look before you leap. Consult a tax and investment professional—an individual or firm that can vet both the tax consequences and the fund manager. Consider the pros and cons of other ways to blunt the tax hit, such as selling the security over multiple years and taking offsetting losses.

Regulators are doing all they can to give potential participants the green light even before regulations are fully final. With a bit of caution and common sense, investors with appreciated securities or property can make the most of the opportunity Congress created.

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Melinda Kibler, Certified Financial Planner (CFP

®), Enrolled Agent (EA), is a client service and portfolio manager with Palisades Hudson Financial Group’s Fort Lauderdale, Florida, office. She contributed several chapters to the firm’s book,

Looking Ahead: Life, Family, Wealth and Business After 55

, including “Estate Planning, “Financing Long-Term Care” and “Retiring Abroad.”

 is a fee-only financial planning firm and investment manager based in Fort Lauderdale, Florida with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its 

 serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas. The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at 

Articles

This year begins the start of an interesting new program that can allow you to diversify your portfolio without making the same types of investments. Aptly named, opportunity zones. Make sure you're a good fit for them.

How Opportunity Zones Give Investors New Opportunities to Diversify, Cut Taxes, and Profit

A lifetime of savings could be lost quickly.

Don’t buy long-term care insurance (LTCI).

Long-term care is a big financial risk, but unfortunately, it’s not one that lends itself to insurance. LTCI can 

Long-term care insurance is an investment that doesn’t make sense. It’s better to plan for long-term care on your own by saving and investing, and in some cases, using a trust.

Mathematics works against LTCI because most people will need long-term care eventually. For insurance to make economic sense, the risk must be spread across a pool of participants. With other types of insurance, only a portion of the population collects, while the others continue to pay their premiums, covering expenses paid out and keeping premiums manageable.

Since the bulk of buyers will eventually collect, LTCI insurers will have to raise premiums. This, in turn, will cause the healthier portion of the population to opt out, leaving a pool of less-healthy participants who all believe they will need to collect on this insurance sooner than later.

Instead of paying into a policy with rising premiums that may empty your retirement savings, it is better to plan for long-term care by saving and investing.

The conundrum of long-term care is that people with few assets can afford it best. They’ll burn through their assets quickly and then Medicaid will pay for their care. If one spouse needs care and the other doesn’t, Medicaid rules provide for a reasonable level of assets and income for the healthy spouse.

On the other hand, wealthy people don’t need the product because they have the money to pay for care.

It’s the bulk of people in the middle who are most vulnerable to long-term care costs. And for them, there are no magic solutions.

The best solution is to save up for care using a balanced approach, investing in a comfortable mix of U.S. and foreign stock funds and bonds.

A Certified Financial Planner can run various scenarios and stress tests to show if you’re ready for retirement and can afford long-term care eventually. I regularly run such cash-flow projections for my clients.

What about giving your assets to your adult children so you’ll be eligible for Medicaid? It can work for some people, but there are a lot of drawbacks to that strategy.

One big problem is that there’s a look-back period of five years on assets you gave away. If you apply for Medicaid within 60 months of transferring your assets, you’ll pay a prorated penalty based on the average monthly cost of care in your area.

Because of that disadvantage and the fact that you lose control of the assets you give up, I don't usually recommend giving away your money.

But if you do decide to, set up an irrevocable trust. Without a trust, your former assets could be lost if your child is hit with a costly divorce settlement, or has big debts he or she can’t pay, or sued.

Have a lawyer who specializes in elder law and estate planning draw up the trust so it won’t jeopardize Medicaid eligibility. Find a reputable lawyer, not one who’s engaged in fearmongering.

If your goal is to leave money to your heirs, consider buying a life insurance policy. Term life policies are inexpensive for middle-aged buyers, but they’re costly for people above 65, who are usually better off with a whole life policy.

Life insurance is a good way to leave assets to survivors. It’s more predictable and has more reasonable costs than LTCI.

In addition, you can set up an irrevocable life insurance trust (ILIT) to purchase a life insurance policy. As the beneficiary of the policy, the trust can protect the proceeds.

Melinda Kibler, Certified Financial Planner (CFP), Enrolled Agent (EA), is a client service and portfolio manager with Palisades Hudson Financial Group’s Fort Lauderdale, Florida, office.

 is a fee-only financial planning firm and investment manager based Fort Lauderdale, Florida, with more than $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.

The firm’s monthly newsletter covering financial planning, taxes and investing is online at 

www.palisadeshudson.com/insights/sentinel

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Instead of long-term care insurance, better solutions include: saving and investing, life insurance and perhaps a trust.

