Episode 56: Structured Installment Sales | Guests Chad Ettmueller and Monty Walker
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Welcome to the REALTORS® Land Institute Podcast, the Voice of land, the industry's leading land real estate organization.
Justin Osborn: This is Justin Osborn, ALC with the Wells Group in Durango, Colorado. On today's episode of the Voices of Land Podcast, we're talking to RLI associate member, Chad Ettmueller and tax expert, Monty Walker about structured installment sales. Chad Ettmueller has served for 24 years as the vice president of JCR Settlements, a national settlement planning firm and leader in the structured installment sale transaction. Chad is based in Atlanta, Georgia and licensed in all 50 states. He is a former board of director for the American Association of Settlement Consultants and a four-year sponsor of RLI. Chad attended both Hillsdale College and Arizona State University, has been married for 32 years, has three adult children, one grandchild, and two dogs.
Monty Walker is a certified public accountant and chartered global management accountant. Monty practices nationally and has over 35 years of experience managing the unique financial, tax, planning, and procedural matters associated with buying and selling of businesses and associated real estate. Due to his background in the area of business transfers, business transitions, and business real estate, he is often referred to by his clients and colleagues as a business transaction CPA. Monty is a graduate of Midwestern State University. He and his wife Melissa reside in Texas. They have four adult children, three of whom are married. Welcome to the podcast, fellas.
Chad Ettmueller: Thanks for having us.
Monty Walker: Thank you.
JO: Two dogs, Chad. I got to know, what kind of dogs do you have, man?
CE: Yeah. So I've got an English Cream Golden Retriever, and then I've got a Lab Boxer mix. So, we're field dogs for sure.
JO: Well, I guess field dogs make sense when you're living in Georgia, huh?
CE: Yep. You bet, you bet.
JO: Well, good. Well, I'm looking forward to talking about this stuff today, guys. I've been in the real estate industry for quite a while now, 23 years, and I got to tell you, I've honestly never done a structured installment sale. So, looking forward to kind of talking about that and the capital gains, the tax-deferral solutions, and how these are different than what most of us are probably familiar with, a 1031 exchange or a DST.
CE: Yeah. Well, I'm not surprised, Justin, to hear you say that you've not done one. It's come into vogue here again in the last four years. Started originally in 2004, 2005, and Monty was instrumental in getting this product to market. But we're excited to talk to you about it, explain it to you and your listeners, and help them in their future transactions when and where it's appropriate.
JO: Why don't we just kind of start at the basic 101 level? Somebody kind of tell me what it is and how my clients can benefit from it.
CE: Yeah. I'm happy to do that. And I'm going to forewarn you that I'm going to start in what is going to seem like left field. But if you bear with me for 30 seconds, it will all come full circle and make a lot more sense. So, you mentioned in my bio that I'm the vice president of JCR Settlements. We are a national settlement planning firm. And for most people, they would be familiar with us in a personal injury capacity. You may have heard of structured settlements. You've probably seen really cheesy commercials late at night for a company called JG Wentworth, where they buy structured settlements from folks. That's what we've done, and we do mostly on a day-in, day-out basis, is help folks who've been catastrophically injured. We help them settle their litigation and then invest portions of their settlement into structured settlement annuity products, where they can design payments over their lifetime, so that they know that all of their needs have been met. If they've been hit by a semi-truck, made a paraplegic, their life's been turned upside down, we need to make sure that all of their needs are met.
We do that by placing their settlement proceeds into structured annuity products with leading life insurance companies. Those same life insurance companies have now jumped into the land and business sales game, using Section 453 of the Revenue Code, which deals with installment sales. You're undoubtedly familiar with a traditional installment sale, right? I agree to buy your property for $10 million. I'm going to give you $5 million at closing and then five annual payments of $1 million, right? That's the traditional tried and true installment sale. You as the seller are hoping and praying that I make good on those future five payments and you actually at the end of that five-year term have recuperated the entire agreed upon sales price. You're completely dependent on my creditworthiness and my ability to stay out of debt and stay out of bankruptcy to make those payments.
A structured installment sale transfers all that future payment obligation and risk to a leading life insurance company. So, what we have now is the ability for a seller to take any portion of his or her sale, place it into a structured annuity with a leading life insurance company. They can design the future payments in literally any manner that they would like that's unique to their needs and they don't pay a tax obligation on the portion that's placed into the structure until the future year or years, when those annuity payments are received.
JO: All right. So yeah, installment sale earlier that you just mentioned, we kind of call that owner financing out here or a land contract. And so what you're talking about is, all right, instead of selling the farm for a million dollars and somebody putting 500 grand up front, making payments at a certain percent interest over the next five or 10 years, you're saying, all right, Mr. Farmer, we're gonna sell your farm right now for a million dollars. And then instead of taking that and rolling it into a 1031 or a DST, they're investing the money with you, and then they can basically be paid over a course of time from that money and it defers their taxes?
CE: Yeah. You hit the nail on the head. So, we serve as the placing broker with a leading life insurance company. The investment is actually with the life insurance company, an A+ rated life carrier. They can begin to receive payments as early as 30 days post-closing or they can defer their first payment up to 50 years. They don't pay a penny's tax until they receive future annuity payments. So, first and foremost, this is a tax-efficient solution. It creates a deferral of their capital gains tax obligation but secondarily, it really amplifies the net sale proceeds to the seller through the growth of the annuity. There's fixed and indexed annuity options available, with internal rates of return anywhere from 4% to 14%, depending on the product that the seller ultimately chooses and the payment design that they ultimately put in place. They can be paid monthly, quarterly, semi-annually, annually. They can also have lump sums paid on future identified dates and in predetermined amounts or any combination thereof.
So, if somebody wants this as a retirement platform, we can do that. If somebody says, like yourself, hey, I've got a kid who's going to college, right? You just dropped off your son. If you know that that event is coming five years from now, and you want to make sure that you have financial wherewithal to pay for that college education, we can coordinate payments to coincide with that. There's literally nothing that a seller can throw at us that we can't accomplish for them in a payment design. It's a great way as well to create generational wealth, right? I have a lot of folks in their late '70s, early '80s who have finally decided that they're going to sell the farm and they want to set up basically legacy payments for their kids, grandkids, great-grandkids. And they'll set up payments for 50 years, knowing that they will likely have passed away before those payments have completed. But when they do pass away, all remaining payments go to their named beneficiaries. So, it's a great way to amplify the sale and create generational wealth as well.
JO: All right. I got so many questions. I'm sure our listeners too. Monty, I'm going to get to you here in just a second with some tax questions. But since Chad just brought this really close to home for me personally, yeah, listeners, Chad and I were talking before we started. My wife and I just recently dropped off my son Hunter or our son Hunter, I should say, down at Baylor in Texas. And so talk about generational wealth. I need to know this stuff, Chad. I've got college tuition to pay. And so walk me through this. Who decides and how do they decide how much is going to be issued per month or per quarter or per year? And then I guess my second question is, I would imagine that would have to then be taxed once that's issued. And so maybe Monty can talk a little bit about that after you answer kind of that question.
CE: Absolutely. And Monty is the tax pro. I'll brag on him a little bit here. He actually worked with Allstate Insurance Company back in the early 2000s, to help craft the infrastructure for this product in conjunction with IRS guidelines to make sure that it comports with IRS guidelines. And he can tell you more about that here in a moment. But to answer your question about who decides how this is designed and how the payout is actually determined, that's completely up to the seller. And so we've got some language that agents and brokers, I'm happy to send it to them. It's basically a one-sentence statement that I encourage them to put in their listings that simply says, the seller reserves the right to place a portion of his or her sale into a Section 453 structured installment sale, and will rely on the cooperation of the buyer to effectuate the same. By putting that in the listing, it's no different than what you would do with a 1031 or DST, just kind of putting the buyer's agent on notice that, hey, look, we're going to be looking to take advantage of some tax-deferral solutions here.
We're going to need the buyer's participation in that. From there, we will work with the seller to determine the dollar amount that they want to place into the structure, right? Sometimes they put everything in there. Most times they don't, right? Most times they need to keep a portion of the sale for their immediate liquid use. They'll pay taxes on that as they would in any other transaction. But at the closing table, we will have directions for the portion that they've determined to go into the structure. We'll have the escrow office send that money directly to the life insurance company. By doing that, they have not taken constructive receipt of the funds. IRS can't tax you on what you haven't taken constructive receipt of. From there, our office will draft an addendum to the purchase and sale agreement that says, a portion of the sale is going into a 453 installment sale, and here's the future payment schedule. The generosity of the IRS has its limitations, right? They understand, hey, you're doing an installment sale. We're not going to tax you in 2025, but we do want to know when we can tax you.
So, they require that that future payment schedule be incorporated into the sale agreement as an addendum. The second document that gets signed at closing is an assignment or delegation agreement. Different life companies call it different things, but it's in essence an assignment from the buyer to the life insurance company for those future annuity payments that the seller has put in place. And so it creates the paper trail to comport with IRS guidelines that says, we've agreed to this sale amount. A portion is going into a structured installment sale, and I, as the buyer, am assigning the future annuity payment obligation in totality to the life insurance company with whom the annuity has been placed. So, from their perspective, they do have to sign that document, but they close escrow as they would in any other transaction. They get the deed or title to the property, and they walk away from the closing table as the owner of the property, with the assurance that the life company is making off those future payments.
JO: And so all this has to happen at closing. It's not going into an account like a 1031 exchange, and you can change your mind in a few months and say, oh, I couldn't find a good place to park the money. Give me my money now, and I'll pay taxes on it. This is, it's all happening at closing, and it's a done deal?
CE: You're exactly right. That's a great clarifying point. So unlike a 1031, where you've got 90 days to identify that property, and if you can't, then to your point, you just, you pay the piper, you bite the bullet and pay your tax obligation. With this, everything needs to be done prior to closing, and the documents get executed at the closing table. Now we provide all those documents that I just mentioned to you well in advance of closing so that the buyer, the seller, the closing office, the title office, everybody has seen the documents. Everybody's had an opportunity to ask us any questions that they have, about what they're signing. So that when your folks sit down at the closing table, nobody's caught off guard, nobody's surprised, and closing runs smoothly. So yeah, but once it's done, it's done, and it cannot be changed.
JO: Gotcha. Okay. Well, thank you for educating me on this, Chad. Monty, educate me on kind of the tax advantages of this compared to other, I guess, opportunities that sellers might have in their toolbox when it comes to comparing this to 1031 exchange, DST. Are the tax advantages similar or are they vastly different?
MW: Well, the big issue on the deferral, let me just say this. If somebody has worked as long and hard as the people who would be selling these properties, especially farming, I mean, you think about the blood, sweat, tears that's gone into that, you certainly don't want to all of a sudden put that money somewhere where the chances are it's going to evaporate. So, putting it in an non-risk area is kind of a key issue. So, when you look at opportunities in the tax world, there are aggressive people everywhere, and those aggressive people will benefit themselves by getting individuals to move money into a tax-deferral strategy, that very likely is going to benefit the party that's getting the money put in there, not necessarily the individual that owns it. So, let's think about this issue of a structured installment sale. People are able to take their funds and place it with a highly rated insurance company. The highly rated insurance company is being overseen. There's a lot of regulatory enforcement going on with that insurance company. And insurance companies will often reinsure products. So, there's a broad base of people supporting this, not only the federal government, but you get into the states. They're monitoring this too.
So, what is so good about this is you have a lot of regulatory enforcement that's happening. So, let's think about the deferral technique. Somebody has chosen, as opposed to doing a 1031 or maybe a DST, they have chosen to defer their funds out using a structured installment sale, which will enable them, if they want to, to do that up to 50 years. And so if somebody enters into a structured installment sale, they are not going to pay tax currently. The benefit here is that they retain the dollars that would be paid in taxes both federally and statewide. So, wherever the state location is, take that into consideration as well. And if those funds are retained, then those funds are being used internally to generate a return for a long period of time. So, the deferral technique here is you keep 100% of the dollars and then you are able to use those dollars to generate a return. And I'm not going to say it's in a riskless environment. There's no such thing in the finance world as riskless. But highly mitigated risk environment, where it has been refined down to where the risk is very minimal compared to any other option that I personally would think about. And I do a lot of advisory work in the tax field.
JO: Let's talk about that for just a second because I heard Chad, I think he mentioned it can be anywhere between 4% and 14% return. And that's a huge difference. And so where are y'all parking the money that's generating, I guess, the 4% return compared to the 14% return? Because if I can go park money from a sale at a 14% return and never have to deal with renters or tenant farmers or guides that are hunting on properties, that's a no-brainer to me. But like you said, there's obviously going to be risks. So, tell me a little bit more about that.
CE: Yeah. So, there are two annuity options. There's a fixed annuity product and an index-linked annuity product. The fixed annuity product is offering between 4% and 5.25%, right? And it's exactly what you think it is. In exchange for your invested premium dollars, the life insurance company agrees to pay you X dollars per month for the term of the contract, right? So if it's, let's just, for round numbers, let's just say you're depositing a million dollars and they agree to pay you $5,500 a month for a 30-year period or a 20-year period or a 10-year period, whatever it may be. It's fixed, it's determinable, it never changes. And so that interest rate is stagnant. It will never change as well. It doesn't matter how the market is performing, good or bad. You're locked in on a fixed rate at 4% to 5.25%, depending on where rates are when the sale occurs and the seller is locked in. Then we also have an index-linked annuity option. We have three different indices that are available to us. We have the Franklin Templeton Bank of America Global Index, we have the S&P 500, and we have the NASDAQ-100. The S&P 500 and the NASDAQ are kind of the benchmark indexes, obviously, that we're all familiar with.
When you see the ticker going across on the news at night, that's the S&P 500, right? So, you can invest in those indexes. You have a guaranteed floor payment that can never go down. At its worst, it's designed to give you your invested money back plus simple interest, say 2%, same that you would get at your local bank, right? So, you have zero risk of loss. But every year that the index performs with a positive yield, you get 100% of that growth. That becomes your new floor payment. It can never go down from there. And so if somebody's invested in the indexed option over a 20, 30, 40, 50-year time period, those yields can easily approach 10% to 14%, right? And so the longer the investment, the higher the interest rate is going to be, and that rate of return is going to be with this product. And so that's why there's such a variance between 4% and 14%. It just depends on the product that the folks are investing in. By the way, they can do both. They can say, hey, I want to put half into the fixed annuity option and half into the indexed annuity option.
JO: Okay. Great. My mind was wondering that exact thing you just referenced there at the end. So Monty, when these payments are coming out, let's take Chad's example of $5,500 a month. Is that then taxed at the rate that the person was at when they sold the property? Or let's say they retire and they're not earning as much and they're in a lower tax bracket, or let's say they move to a state like California where there's a high state income tax. How does that money then get taxed over the years?
MW: The money, as it actually comes out, it's going to be taxed at the tax rates at that point in time. So, if somebody had a 20% capital gain rate, as an example today, and then they use the structured installment sale and they time it out properly, and if that money is getting paid when they can receive a 15% capital gain rate, they will get that 15% capital gain rate. If there are any elements of this that would create some ordinary tax, typically in the future, those tax rates would be lower when people are making less money. So the issue at hand is, if you're thinking about tax rates, is you're looking for long-term comparing to where the tax rates would be today by recognizing 100% of all the gain compared to where it could be in the future. But there will be a blend. And for people in the real estate area, they're familiar with multiple blends. Ordinary tax rates, maybe on a building that's got some prior depreciation on it, older buildings, the code section 1250, unrecaptured 1250 gain, everybody in the real estate has heard some of these terms, the unrecaptured 1250 gain, and the normal capital gain, those defer.
So, both of those will defer out, and based on the tax rates at the time, it will be effective at that point. And Justin, just one point I'd like to make on the state issue. You mentioned California. And it's good for people to know these things as well. In California, if you live in California and you sell a property on an installment note, California is one of the best states in tracking you and making sure they get paid. So, what happens there is the party that sells it is responsible for making a payment to the state of California when the payments are being issued. So, there's some creativity that has to go in when we're dealing with some of this planning in California. But you do have to consider state as well as federal matters when you're making these plans.
JO: Okay. All right. So, does step-up basis apply to Section 453 like it does 1031? If the person dies and it passes on to their kids, do they inherit the funds from this at a step-up basis?
MW: No. What happens on Code Section 453 is you've got a deferral of the gain. You've already sold something. So, you have no capital item that's available there for a step-up, as you would think in normal estate planning. You've got an actual capital asset that's available for step-up. In this area, there's already been a decision that we're selling, we're monetizing, and we're no longer going to hold a piece of real estate. So, the deferred gains that are there, they do eventually come out and they get taxed, and that's called income in respect of a decedent. A lot of people haven't really applied that term for installment notes, but that same term does apply. So, any deferred gain does come out and eventually get taxed. It will not step up.
JO: Okay. All right. So, let me flip the script on you. I'm the guy that you're giving this pitch to, and I'm saying, wait a minute. I've been hearing all over the news about these insurance companies that are struggling, and all these insurance quotes are getting raised across the country, and you expect me to trust a million dollars or more to be invested with an insurance company? How am I going to know that that money is safe?
CE: Good question. We're talking about highly, highly rated life companies. MetLife, as an example. Everybody knows MetLife. They're A+ rated. They have trillions of dollars under asset. And what I think you're alluding to are circumstances like Florida, right? They're ravaged by hurricanes on an annual basis. Or California, they've got fires and earthquakes and such. And so as a consumer, our insurance premiums creep up and up and up. And some companies are going out of business because they did a poor job underwriting the homes in those areas, and didn't collect enough premium to cover those losses due to those tragic events. What we're talking about is the investment arm of these insurance companies. And they are behemoths, right? They manage more money than any entity in the United States. And they've been around for hundreds of years. But you heard Monty mention earlier, states are keeping their eyes on this as well. And every state has a fund, the state guarantee fund, that is in place exclusively should a life insurance company or an insurance company go out of business. So, not only do you have highly rated life insurance companies and their assignment and their acceptance of these. By the way, before I get into that, let me back up.
My very first comments were about the personal injury space, right? And folks using this product. That's a 55-year industry. And this product is built on the chassis of that 55-year industry. There are literally millions of Americans who are participants in structured settlement products, annuity products like this. I'm very proud to say in that 55-year period, not one annuity payment has ever been missed. So, this, to Monty's prior comments, is an incredibly conservative and safe, not riskless, like he said, but as close to riskless investment as one could hope for. Now that said, if the worst thing did happen, then the state guarantee fund will step in and assume payments as well. It varies on a state-by-state basis as to what the state guarantee fund will cover. The state guarantee fund, by the way, is kind of the insurance equivalent to the FDIC for a bank, right? So, it can be anywhere from $100,000 to $500,000, depending on what state you reside in.
JO: Gotcha. Okay. Well, man, I could geek out on this for another hour, but I know for the sake of time, we need to kind of start wrapping up. But, man, this is so educational. So, Monty, for the sake of time, anything else here that you'd like to throw out that you think would be really important for our listeners or our clients to know about from a tax advantage standpoint?
MW: Mainly to know that regardless of your entity type, if you're carrying a piece of property individually or if you happen to have that piece of property in like a partnership or a limited liability company, I have actually seen some farming activity in C-Corps and S-Corps. And I know somebody could say, well, who would do that? I have seen all of those things. And so every one of those can apply here. And there can be restructuring issues that can happen. So regardless of how you have your property held right now and regardless of what you want to have going forward with that, if this is an avenue that you would like to consider, there is a way of making this happen. So, for tax planning, don't believe you're limited. It's almost an unlimited area. We just got to get the fact pattern and you make the decisions based on your unique fact pattern.
JO: Man, that's so well said. And I think it was Kasey Mock actually that said this one time, but it was not about how much money you make or how much you earn. It's about how much you keep, how much you can keep per year and legally still abide by your IRS and your state income tax payments. And this is just such another great tool for us to have in our toolbox when we're talking with our clients, when we're having these conversations. Listeners, I guarantee you, if you show up on a big listing appointment and you're talking about the next step the sellers are going to do in life and you bring up this as an option or an opportunity, you will likely be the only realtor that even brings this up. And it's going to make you stand just way apart from your competition. And so if you do want to understand more about structured installment sales, how they work, you can reach out to Chad. And Chad, what's the best way for somebody to get hold of you?
CE: Yeah. So, they can reach me any number of ways. They can go to our website, which is jcrsettlements.com. There's a button up there at the top that says structured installment sales. They can view case studies. They can view marketing literature from the various life companies. There's different podcasts. There's IRS literature there as well. They can reach us through there. They can call me at 770-886-7400 or they can email me, of course, at cettmueller@jcrsettlements.com. And they can find me through the member directory at RLI as well.
JO: Okay. Great. And Monty, what part of Texas are you in?
MW: I'm in the northern part of Texas, right on the Oklahoma-Texas border.
JO: Oh yeah? What area? I grew up down there.
MW: I am about 120 miles northwest of Dallas-Fort Worth.
JO: Okay.
MW: And as you're aware, that's just like driving across the street. This is a big place.
JO: Yeah. It is, definitely. Well, the reason I'm asking is because we're going to be down in San Antonio, Texas in March for our National Land Conference. And man, this is something I'd love to pick your brain a little bit more on. If you could make an appearance at that, it'd be great to actually meet you.
MW: I heard that. I heard San Antonio was going to be the location. So, you can be assured I will come and visit.
JO: Excellent. Well, I look forward to that meeting. Folks, for more expertise on land real estate topics, be sure to check out the RLI blog, follow us on social media, and of course, tune in for upcoming episodes of the Voices of Land podcast.
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