Considerations on Big Purchases

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Larger “lifestyle” purchases, be it a vacation property, a private plane or a thoroughbred horse, typically come with a series of decisions beyond determining, what should I be paying for this?

Take a home purchase, for example:

How should it be purchased — cash or cash and debt?
Should it be purchased in trust?
If so, what kind of trust? Whose trust?
If not in trust, should you utilize private debt from the trust to finance the purchase?
Should the debt be structured as a mid-term note or a long-term mortgage, which would require filing?
Have all the insurance and carrying costs of the purchase been factored into cash flow?

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This is where things get complex. While a little nuanced, these are just some of the decisions to consider when preparing to make a major lifestyle purchase.

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And beyond questions of ownership lies perhaps the bigger question of integration — how will the ownership and debt payment structure fit into the family’s overall financial plan? Whatever the purpose of the purchase is, its impact will be felt across many other areas of the family’s financial life.

Here are a few major purchases we have assisted clients with in the past.

Vacation Homes

If a client wants to buy a vacation home, I would remind him or her that there are many far-reaching implications involved in such a purchase. In the realm of estate planning, whether the home is owned by a parent, child, trust or another entity, the purchase will have an immediate impact on cash flow, and a long-term impact on the legacy assets to be passed along to the next generation as part of the transfer of wealth.

Parents must also consider the long-term prospects for the home itself — is it likely that any of the children will want to maintain ownership of the house after their parents’ passing? Or is it more likely that it will be sold, and the proceeds divided among the heirs? If a future sale is expected, the potential ownership or liquidation contingencies should be clearly addressed in the parents’ wills to avert costly legal disputes. The sale or transfer of ownership of the home may also have tax implications.

Private Jets

Want to fly private? There are a number of choices available, from ridesharing to fractional ownership to chartering to jet cards. All of these options have their strengths and weaknesses based upon where you are going, how often you are going, and who you are going with.

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As we explain to our clients, it’s really important to understand the context. One of the first questions to be answered is will the potential flights be for personal use, part of a business enterprise or for philanthropic purposes? Plane ownership will never be an investment, but — depending on the use — there may be opportunities to realize some tax benefits.

Another important consideration is will the cost of the purchase impact your contributions to either your lifestyle or legacy investment portfolios? Or can you make adjustments in other areas of your finances to maintain current contribution levels? Other aspects of the purchase, such as whether an individual, entity or trust will be the owner, will have liability and tax implications. Further, depending on the number of guests you will be transporting, you may need to determine if you are tripping into FAA chartering rules.

We had one client who expressed interest in purchasing a light business jet, with seating capacity for eight passengers. When we dug into what he planned to use it for we learned that it would be for personal and business uses, and given the locations he would be flying to and breakdown of the planned mixed use, in the end it made more sense for him to purchase a smaller plane, augmented with a jet card.

Horses

For people who love horse racing, jumping or dressage, the idea of purchasing a horse can be quite appealing. And if you come from a family that is passionate about equestrian pursuits, the appeal of horse ownership can be even greater.

If you are serious about buying a horse, there are a number of considerations to take into account. At the top of this list is the purchase itself — be prepared to pay entirely in cash as it is highly unlikely that a bank will be interested in structuring the purchase as a loan. And the purchase price is only the first of many costs involved. You will rack up many ongoing costs as well, including transportation, insurance, stabling, trainers and veterinarian and farrier fees. And these costs may have a multiplier, as in our experience, horses are like tattoos — people rarely stop at one.

In addition, there are tax considerations. Chief among them are that expenses incurred will likely not qualify as business losses. The IRS will allow you to deduct hobby losses (expenses) up to the amount of hobby income (winnings or sale of the horse), but losses beyond that amount typically cannot be deducted. So, if you want to buy a horse, do so because riding is an activity that you enjoy, not as an investment strategy. With any complex acquisition, you must have a full understanding of how the diversion of funds will impact both your current cash flow needs and the growth of your long-term assets, and how the acquisition will be transferred to your heirs. The decision to make a complex purchase is never made in a vacuum, far from it, but when carefully integrated into your long-term strategy, it can be conducted in a way that minimizes the impact to your family’s wealth.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Matt Helfrich is President of Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh, Pa. He leads Waldron's strategic vision, brand and value proposition and overall culture of the firm. Since 2002, Helfrich has served in a number of roles including: Chief Investment Strategist and Chief Investment Officer, where he was instrumental in creating and refining Waldron's investment discipline.