Contract Analysis & Insurance for High Net Worth Individuals in Miami

No, it is not legal advice, and we want that clear before anything else. The Reed Corporation is a CPA and tax firm. We do not draft your documents, we do not opine on whether a clause is enforceable under Florida law, and we do not stand in for your attorney. What we do is read the paper you are about to sign for its money consequences, which is a different question from whether the paper is valid. Your lawyer protects your legal position. We tell you what the deal actually produces after tax, and the two reviews belong side by side rather than one after the other.

In practice the work looks like this. A family sends over an operating agreement for a new venture, a purchase agreement for a building, a coinvestment subscription, or a renewal quote from an insurance broker. We read the allocation language, the distribution mechanics, the payment timing, the definitions that decide who bears which cost, and the tax representations buried near the back that nobody reads. Then we write a short memo that says what each clause will do to a return. A profit allocation is not an academic matter. It becomes a number on a Schedule K-1 that lands on your Form 1040, and it is taxable whether or not a dollar of cash ever reached you.

That last point drives most of what we find. Real contract analysis for high net worth clients in Miami is mostly about the gap between allocation and cash. Partnership returns run through Form 1065, and the entity’s own choices sit behind that on the general rules the agency describes at Business Structures. A deal can be perfectly fair in economic terms and still hand you a tax bill you cannot fund. We would rather find that in a draft than in March.

The Florida piece matters here. Florida imposes no personal income tax, so a Miami family’s contract exposure is almost entirely federal. There is no state income tax clause to negotiate around, which simplifies a great deal. What Florida does levy, through the Florida Department of Revenue, is sales tax and reemployment tax on businesses. Those reach a contract in narrower ways, such as which party owes tax on a taxable transaction and whether the agreement says so. Deductibility of the expenses a contract creates runs on federal rules, which Publication 535 lays out.

A worked example makes it concrete. A client was handed a members agreement giving him 40 percent of profits in a development venture. The economics looked fine. Buried in the distribution article was a clause allowing the manager to withhold distributions for reinvestment at his sole discretion. In year two the venture allocated 480,000 dollars of taxable income to our client and distributed 40,000 dollars of cash. He owed roughly 178,000 dollars of federal tax on income he never touched. A tax distribution clause, one paragraph long, would have required the venture to release enough cash to cover the tax on what it allocated. His attorney negotiated it into the next deal after we flagged the pattern.

The mistake we see over and over is sequencing. Clients send us the document after signing, when we become historians rather than advisors. Send the draft. A review that takes two hours before signature is worth more than a year of clever work afterward. Pair it with steady bookkeeping so the entity’s numbers are knowable, and with tax strategy consulting so the deal fits the rest of your year. If you have something on your desk right now with a signature block on the last page, request a consultation before you sign it rather than after.

Families who build this habit stop being surprised by their own K-1s, and that quiet is the whole point of the exercise.

Almost completely, and that is the part most investors underestimate. A partnership does not pay federal income tax itself. It files Form 1065 and pushes every item out to the partners on Schedule K-1 according to the agreement. The document is the instruction manual for your tax bill. Change one sentence in the allocation article and the number that lands on your return changes with it. This is why we read these agreements line by line rather than skimming for the percentage on page one.

Start with allocation versus distribution, because conflating them causes more pain than any other single misunderstanding. Allocation is your share of the taxable result. Distribution is cash arriving in your account. They are set by different articles and they are frequently different numbers. You are taxed on the allocation. A venture that allocates 600,000 dollars to you and distributes nothing has handed you a tax liability of roughly 222,000 dollars at the top federal rate with no cash attached. The fix is a mandatory tax distribution clause, and it has to be drafted before you sign, not requested later when the manager has every reason to say no.

Next look at the character of what flows through. Ordinary business income, rental income landing on Schedule E, capital gain, and guaranteed payments all arrive on the same K-1 and are taxed very differently. A guaranteed payment for services is ordinary income subject to self employment tax. A 250,000 dollar guaranteed payment therefore carries a Medicare component the same money would not carry if it were structured as a preferred return on capital. That distinction is one clause in the agreement and roughly 7,250 dollars a year in tax. Multiply it across a decade and a paragraph nobody negotiated becomes real money.

Then check whether you can actually use the losses the deal promises. This is where sponsor projections fall apart. The at risk and passive activity rules described in Publication 925 can suspend a loss you were counting on. A limited partner in a real estate deal who was promised a 300,000 dollar first year loss may find it suspended in full because the activity is passive and there is no passive income to absorb it. The loss is not gone, it simply waits, sometimes for years. A projection that assumes an immediate benefit is not a projection, it is a hope.

Entity choice sits underneath all of it. If the venture is an S corporation instead, it files Form 1120-S and the allocation rules are rigid, strictly pro rata by share count, with no special allocations available at all. Investors who negotiate a bespoke split into an S corporation operating agreement have negotiated something the tax law will not honor. Careful contract analysis for high net worth clients in Miami catches that mismatch while it is still a draft.

The mistake is signing on the strength of a summary. The sponsor’s deck says 40 percent. The agreement says 40 percent subject to a preferred return, a catch up, a clawback, and a manager discretion clause, and those four articles together may mean you see nothing for six years. Read the document, not the deck. Keep your own bookkeeping current so your basis is tracked from day one rather than reconstructed at exit, and let the K-1 flow into properly prepared individual tax returns instead of arriving as a shock.

Before your next subscription closes, ask for the tax distribution language in writing. That single question, asked early, changes more outcomes than anything you can do once the ink is dry.

The price is the least interesting number in the document. What decides your after tax result is allocation, timing, and character, and all three are set by clauses that buyers rarely fight hard about because they cost the buyer nothing. Purchase price allocation is the first place we look. In an asset sale the parties assign the price across the assets being sold, and each bucket carries its own tax treatment. Amounts assigned to equipment can trigger depreciation recapture taxed as ordinary income and reported on Form 4797. Amounts assigned to goodwill generally produce capital gain reported through Form 8949 and Schedule D. The buyer wants weight on the ordinary buckets because he depreciates them fast. You want weight on the capital buckets. The rules for these dispositions sit in Publication 544, and the allocation is negotiated, not discovered later.

Basis is the second item, and it is the one clients least often have documented. Your gain is price minus basis, and basis is a historical fact you have to prove, not a number you assert. Publication 551 covers how basis is built and adjusted over the years of ownership. For a building held twenty years through two refinancings and a renovation, reconstructing basis at closing is painful and expensive. Build it before the deal, while the invoices still exist.

Third is timing. An installment sale spreads gain across the years payments are received, which can hold you out of the top bracket and defer the Net Investment Income Tax, but it also means you are financing a buyer and carrying his credit risk. Recapture income generally cannot be deferred under the installment method regardless of when cash arrives, so a deal heavy in equipment can produce tax in year one on money you will not see until year four. That is a modeling exercise, and it should happen before signature.

Earn-outs deserve their own paragraph, because they are where good deals go strange. A worked example. A client sold his business for 12,000,000 dollars, structured as 8,000,000 dollars at closing and a 4,000,000 dollar earn-out over three years tied to revenue targets. The draft agreement called the earn-out a consulting arrangement, which would have made all 4,000,000 dollars ordinary income subject to self employment tax rather than capital gain, a swing of roughly 640,000 dollars. It also gave the buyer sole discretion over the sales budget that drove the targets. Both problems were fixed in a redline. Thoughtful contract analysis for high net worth clients in Miami is largely this, catching a definition that converts capital gain into ordinary income before anyone signs it.

The Florida angle is a genuine advantage. With no state personal income tax, a Miami seller keeps the state layer that a seller in a high tax state does not. That makes the federal characterization decisions carry proportionally more weight, because federal is the only layer there is to manage.

The mistake is treating the tax review as a closing task. By the time a letter of intent is signed, the allocation and the earn-out mechanics are usually settled in principle and reopening them makes you look like you are retrading. Bring your CPA in at the term sheet, alongside your attorney, who handles the legal terms we do not touch. Pair that with tax strategy consulting in the year before a sale and clean individual tax returns that reflect the transaction properly when it lands.

If a sale is anywhere on your horizon, start the basis file this quarter. The work is dull and it is worth more per hour than anything else you will do in the transaction.

We do not sell insurance and we hold no producer license, so nothing here is a recommendation to buy a product. Your broker places coverage. What we bring is an accountant’s habit of comparing what a policy actually says against what the balance sheet actually holds, and those two documents disagree far more often than families expect. A schedule of insured values written in 2016 and renewed on autopilot every year since is not coverage. It is a decade old guess.

The review starts with replacement cost against insured value. South Florida construction costs have moved sharply, and dwelling limits set years ago have not kept pace. A worked example. A Coral Gables house carried a 3,800,000 dollar dwelling limit against a replacement cost that had risen to roughly 6,200,000 dollars. The policy contained an 80 percent coinsurance provision, which meant the owner needed at least 4,960,000 dollars of coverage to be paid in full on a partial loss. He was under that line, so a 900,000 dollar water loss would have been reduced by the coinsurance formula to roughly 690,000 dollars, leaving 210,000 dollars uninsured on a claim he thought was fully covered. The premium difference to correct the limit was about 4,100 dollars a year. That is the arithmetic clients want to see, and no one had ever laid it out for him.

Collections get their own pass, because they fail differently. Art, jewelry, wine, and watches usually sit under a blanket personal property limit unless they are scheduled individually. Blanket limits carry per item caps that are almost always far below what a serious piece is worth. A collection appraised at 1,900,000 dollars sitting under a 250,000 dollar blanket with a 25,000 dollar per item cap is functionally uninsured. Values also drift upward, so an appraisal from six years ago understates the exposure. We flag the gap and hand it to the broker, who does the placing.

Then there is the tax side, which is squarely our work. Whether a premium is deductible depends on what the policy covers and who owns it. Business coverage generally follows the ordinary and necessary standard in Publication 535. Coverage on a rental property is a deduction against rental income reported on Schedule E, with the rules described in Publication 527. Personal homeowners coverage is not deductible at all, and the treatment of various personal outlays is covered in Publication 529. Families who own a house through an entity and deduct the premium without a lease or a business purpose have created an exposure that costs more than the deduction was worth.

Liability limits round out the review. A household with substantial assets and an umbrella limit of 1,000,000 dollars has bought the protection that a middle income family buys. Umbrella coverage is cheap relative to what it protects, and the limit rarely gets revisited after the first purchase even as net worth multiplies. Careful contract analysis for high net worth clients in Miami includes reading that declarations page against a current statement of net worth, because a limit is only meaningful next to the number it is meant to protect.

The mistake is autopilot renewal. Policies renew silently, values move, and nobody reads the declarations page until there is a claim, which is the worst possible moment to learn what a clause means. Put the schedule on an annual review beside your books. Keep the asset records current through disciplined bookkeeping, and fold the deductibility questions into your regular tax strategy consulting rather than discovering them during an examination.

Pull your declarations pages this month and compare two numbers, the dwelling limit and a current replacement estimate. If they are far apart, you have found next year’s most useful conversation with your broker.

The entity that signs the document is not a formality. It decides who owes the tax, who bears the loss, and how far a claim can reach when something goes wrong. A family that owns four properties, a private company interest, and a boat inside one limited liability company has connected every one of those exposures to every other. A claim arising from the boat can reach the buildings. Structure is the quiet part of every contract, and it is decided long before the contract exists. The federal framework for these choices is described at Business Structures, and the practical operating rules are covered in Publication 334.

Classification is where the tax follows. An LLC is a state law creature, and the tax result depends on an election. Filing Form 8832 chooses corporate treatment. Filing Form 2553 elects S corporation status, which brings its own return on Form 1120-S along with a rigid pro rata allocation rule and a single class of stock requirement. That last point catches people. An operating agreement with a preferred return and a waterfall, dropped into an entity that has elected S status, can create a second class of stock and put the election itself at risk. We have seen an agreement drafted for a partnership signed by an S corporation because nobody checked which entity was on the signature page.

Florida shapes the calculus in a helpful direction. With no personal income tax at the state level, entity choice here is driven by federal outcomes rather than by a state layer, which removes a variable that complicates the same decision elsewhere. Florida businesses still deal with the Florida Department of Revenue for sales tax and reemployment tax, and a contract should say which party bears any such tax on a taxable transaction rather than leaving it to argument after the fact.

Indemnity clauses are where structure meets reality. An indemnity is a promise to pay someone else’s loss, and it is usually the shortest paragraph with the largest number attached. We read for three things that actually move money. Is the indemnity capped, and at what figure. Is it capped at all, because an uncapped indemnity can exceed everything you were paid. Who signs it, the entity or you personally, because a personal indemnity from a member erases the liability protection the entity existed to provide. A worked example. A client sold a company and the draft agreement carried an uncapped indemnity for tax matters, backed by his personal signature. A routine payroll question from a prior year later produced a 900,000 dollar claim against a man who had received 2,400,000 dollars at closing. His attorney negotiated a 15 percent cap and an escrow, and the eventual claim resolved inside the escrow. That kind of contract analysis for high net worth clients in Miami is joint work between counsel and the accountants, and neither of us can do it alone.

The mistake is signing personally out of politeness. A buyer asks for your signature as an accommodation, it feels rude to refuse, and in one stroke you have undone years of structuring. The right answer is that the entity signs, and if a personal guarantee is truly required it should be capped and priced into the deal.

Keep the structure legible. One entity per meaningful risk, books kept current through real bookkeeping, and elections reviewed during tax strategy consulting rather than remembered at filing time. Before you sign the next document, check two lines, the name above the signature block and the cap on the indemnity. Families who make that a habit find their structures still standing when a claim finally tests them.