I've crossed the $25 million mark for the first time, and I have some thoughts for posterity, but mostly for me to think through.
An overarching thought is how to properly count assets while also accounting for applicable tax liability. There've been times when I've done this by inputing a debt into "other" on my profile for known tax exposure (e.g., when I had investment property that had appreciated a lot), but it has gotten more and more complicated in other areas.
My bottom line is that it's actually far easier ignoring tax exposure when tracking net worth, but it's also much less transparent and informative in my view. So I continue to try to adjust for transaction costs and taxes wherever possible to get a true net worth. It's not always possible, however.
With that said, let's try an easy one, I met with a reputable Realtor/Broker this month and I'd had my primary residence value too low. It was at $2,250,000, but the Realtor believes we could get $3 million. Accordingly, I've kept it conservative by valuing it at $2.5 million. The reason it appears as even less in my profile, however, is I always exclude transactions costs and applicable taxes (so the value here is $2.3 million).
Second, and a little more complicated, the overall value of my law firm should be higher than where it's been all year but I've resisted increasing it to the current "buy out" amount of $7.5 million, and I'm glad I've done so.
I'm now seriously planning on leaving the law practice and I'm confident that my current law partner will *not* honor the buy out. More on that in a moment. But, unlike real estate, for example, I've *never* adjusted the buy out amount based upon anticipated taxes since, frankly, it was too complicated to do so--i.e., what would my tax rate be at that stage?
Incidentally, another alternative to the buy out amount (which is becoming less and less likely) is/was to value my interest based upon a "liquidation value" (something that's surprisingly easy to figure out based upon our historic metrics and existing data).
That amount actually sits at $6.7 million (before taxes), which is higher than the buy out value as of last year (and the one I've used for this year), but in a liquidation I'm paying regular income tax rates on that value and not long term capital gains rates (i.e., twice as much). This is significant because this means $6.7 million is really closer to $3.8 million net (anyway, in either case it dips me back below $25 million).
Lastly, this tax issue is not limited to the business value. The value of my securities (which are all lumped into "cash" for purposes here) also represent potential tax exposure if I were to sell them, so you can see the tax issue is complicated. Thankfully, it's not so onerous such that a huge liability would meaningfully negate my net worth, but for someone who tries to look at things on a net basis it frustrates the my intentions.
So let's go back to the disposition of the business (law practice). The options include my partner actually honoring the buy out, the sale to a third-party, or a liquidation. The first two events trigger mostly long term capital gains rates whereas the latter implicates regular rates. This means, on a net basis, a liquidation grossing $7 million is basically equal to a buy out/sale grossing $5 million. It's something to consider. Also significant, a buy out/sale frees me up almost immediately whereas a liquidation ties me up for up to 2 years, so a buy out sale is far more attractive if it can be pulled off.
Most likely, this issue will come to a head in 1Q 2021, so quite soon. As a result, I am simply going to leave the current value ("other assets") as is and will adjust it later as things develop.
Finally, Tuesday is Super Tuesday. Covid combined with an election has made 2020 one of the most miserable years in my lifetime. I cannot wait to move past it all. That said, we've already seen a dip in the stock market of about 10% and people are wondering, with the election uncertainty and Covid spiking all over the globe, if we're headed for another March-like downswing. We'll see, but I'll keep some powder dry for that opportunity. |