It’s no secret that successful business owners and executives want to be wealthier. In fact, in a survey conducted by AES Nation, polling 262 successful business leaders, 94.3% confirmed that was true. What’s surprising is why. It wasn’t about fast cars, jets, and more expensive watches, but instead 93.9% of those surveyed wanted greater wealth to take care of loved ones, and 71.3% wanted to be meaningfully more supportive to charitable causes.
Meaningful success often comes later in our careers. We’ve spent our time collecting toys and nice places to live, and as we near our working exits we are ready to be serious. The good news is that we’ve collected wealth. The bad, is that much of it may be trapped in non-exercised options or low basis businesses we’ve spent a lifetime growing. What can be done to reduce our tax burden, while still taking care of loved ones, and the causes that matter most to us?
A long-time client came to me mid-last year with this very question. He wanted me to run some projections on his cash flow in retirement, asked that I build in consistent charitable donations to see how they impacted his cash flow, and to model some numbers on the tax consequences of mandatory stock option exercises, a similar scenario to the sale of a business. Many advisors, and almost all clients would view these as separate questions. We took a different approach that we want to share here.
By using these tools, we were able to double the amount given to charity, maintain ongoing tax efficiency in the Trust, eliminate the income tax on the option transaction and pass the entire amount exercised to the next generation estate tax free.
As it turns out, the tax on the option exercise was going to be over $1MM, cutting that portion of his net worth in half. Added to that, the necessary funds that would have needed to be set aside to continue the annual charitable contributions were going to be another $1.2MM. The outcome was that in order to give away $5,000/month to causes he cared about, the cost to his permanent income stream was roughly $110,000 a year.
Enter the idea of a Charitable Lead Trust, Private Placement Insurance, and some thoughtful planning. By using these tools, we were able to double the amount given to charity, maintain ongoing tax efficiency in the Trust, eliminate the income tax on the option transaction and pass the entire amount exercised to the next generation estate tax free.
The end result was that $2MM was put to work in a Trust set aside for charitable use for the next 20 years. Over that time, the causes that matter to this client will see over $2MM in total funds. By using private placement insurance vehicles, the client avoided commissioned life sales and avoided additional income tax on the invested assets while they remain in the trust. Lastly, the trust was designed to revert to the client’s heirs after 20 years, allowing that money to pass to the next generation exempt from any estate tax that may or may not exist at the time of his passing. Better yet, because the client is only 65 years old, it’s likely that he will be alive to see his children get the benefit of over $2MM of his estate, while enriching the community, avoiding tax, and building the next generation’s wealth.
The key to finding this success comes from looking beyond a question and fully understanding the long reaching goals of those asking. As advisors, the most important thing we can do is to ask questions that uncover the desires of our clients. We have a ton of tools that may or may not work for any situation, and without getting deep enough into our relationships we would never be able to know which tool to use. The solution that worked in the above example, only worked because it resonated with the client. For a client to “give away” that kind of money, it’s not enough for it to pencil out. The tools used have to resonate with the deepest wants and needs of that person or family. We need to be willing to collaborate with professionals outside of our areas of expertise. Simply having an idea and making an introduction to an attorney to draft a document rarely works. In the case above, the attorney, the life agent, and the wealth manager, all worked together with the client each step of the way, and in the end made a difference for their family as well as in the communities we all serve.