Money: First things first

J. Daniel Cox Financial Planner Published:

So, you received a sizable amount of cash from your gas & oil lease. What now? Many consider buying things that they want (maybe not need) such as "toys." However, you must take care of other things first, and then, perhaps, the toys can be purchased.

1) TAXES

The first thing that one should be prepared for is TAXES on bonus lease money. We live in a "progressive" tax system. This means the higher the amount of bonus, the higher the amount and percentage of taxation. This bonus money is typically taxed as ordinary income at the Federal and State levels. We help clients calculate the amount that they will pay by April 15 following the year which the bonus is paid.

2) Personal DEBT - pay off (maybe)

In most cases we advise paying off most, if not all, of the client's personal (non-business) debt. We can demonstrate why this is true even though one can no longer write off interest payments. The key is you will no longer have ANY payments to your bank or other creditors.

3) Accelerated Depreciation (tax write offs) > farming/business operations

It may make sense to invest in buildings and/or equipment. This is typically true if the client is still in farming operations. Qualified purchases would qualify for IRS deductions of depreciation immediately under IRC section 179.

4) Retirement PLANNING

Do you have a PLAN for your retirement? If not, it's time to get busy. Meeting with a qualified Financial Planner is the first step to establish goals, review assets and then to create a game plan. The key is implementation over time with periodic reviews with your Advisor to make sure you stay on track. This plan also will also consider Estate planning needs, who do you want to inherit what, when and how. How do you avoid and/or plan for Federal Estate taxes upon your passing? Are there gifting strategies which you should consider?

5) Investments

Annuity investments - these offer tax deferral. This means that you do not pay taxes on any gains within the annuities until you begin to take distributions. This is a buy and hold strategy which may be appropriate as one of many "buckets" within your overall retirement plan. Some annuities offer riders such as a death benefit and/or an income benefit. BE CAREFUL. Many annuities are highly expensive, difficult to understand, illiquid, and do not offer a "Step Up in Cost Basis." This last point means that your beneficiaries may need to pay taxes on their inheritance.

6) Stocks

Purchasing stock from large, very well-known and established companies is an excellent way to achieve tax deferred growth. This "bucket" is long term money that you may never need and could be a great method for your heirs to receive inheritance in a tax efficient manner. Inherited stocks receive a "Step Up in Cost Basis"; meaning that heirs could avoid capital gains taxes. Many stocks pay significant quarterly dividends. We usually advise the client to reinvest these dividends back into the stock when received. This can compound your gains. Downsides: stocks can be volatile and can lose value. Any dividends, whether reinvested or not, are subject to ordinary tax rates.

7) Real Estate

Consider buying other farms or land can be another alternative for growing your nest egg. Land values are increasing now as well as real state taxes. However, land is a great diversifier, which makes sense for some of our clients.

8) Fees

Knowing how your broker/planner is paid is important. Are they paid a one time up front commission? How much is it? Ultimately, you are paying this whether you know it or not. Many financial professionals choose to be paid a small quarterly fee based on the value of your account. This fee is typically paid by your account. Therefore, they have a vested interest in the long term value of your account beyond just day one.

9) TOYS

You now have your plan and you have begun its implementation. Now is the time to consider the TOYS should you have remaining assets for these purchases.

SUMMARY

Talk to qualified experts such as a financial planner, the Farm Bureau, OSU Extension, CPAs and an attorney prior to making a decision which can not be "unmade." Create a PLAN and do it the right way. Ten years from now, you will be glad you did. You could then look back and know you did the right thing for yourself and your family.

Cox & Cook Wealth Advisors, 90 S. High Street, Dublin, OH 43017 - (888) 203-1003.

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