Most company founders I’ve worked with are allergic to taxes. They’ve worked extremely hard to bring useful and valuable products and services to market, and now that they’ve made it, they want to decide who gets to benefit from that money rather than letting Congress decide.
After 20 years in this business, I’ve never met someone who wants to allocate 54% of their wealth to weapons and the military, which is exactly what Congress did with its discretionary spending in 2015.[1] Given the widespread agreement that our unprecedented climate change is caused by people and is responsible for everything from droughts and food insecurity to increased violent storm activity,[2] I’m not meeting many people who would invest only 4% of their discretionary capital in energy and the environment, which again, Congress did in 2015.[1]
So how can a person use their wealth to have more impact on the issues that matter to them while at the same time reducing their tax burden? The tax code provides some incredible tools that allow a company founder or inheritor to significantly reduce or even eliminate taxes whether you’re trying to:
- transition your portfolio to have greater positive social or environmental impact
- transfer wealth or educational funding to future generations
- or sell a company or real estate property with significant capital gains
Let’s say you own investments that don’t align with your values. If you sell and reposition them into more aligned or impactful investments, you’ll likely owe capital gains taxes. What if you instead followed this sequence?
- Compute how much you’d like to leave to charity over the remainder of your life and at death
- Pre-fund much of your charitable giving with your most appreciated assets, thus avoiding capital gains taxes
- Use the resulting charitable deduction to offset gains from a company sale, or the repositioning of other assets in your portfolio towards more impact and values alignment.
My family and I care about medical research, climate change, animal welfare, and eliminating poverty. About a year ago, we used this three-step process to increase the portion of our assets that are aligned with these causes from 43% to 94%, without paying additional taxes. A client of mine cares about educational opportunity and historic preservation. We were able to cut his tax bill by 82% compared to simply selling and repositioning his portfolio into greater alignment with his causes.
This type of financial planning has many variables that all need to be coordinated with your CPA, investment banker, estate planning attorney, and investment managers, including:
- What financial security means to you
- Your required investment returns and risks
- Your values and goals
- Your family dynamics
- How you feel about income taxes
- Your desires for your assets after you die
The earlier you begin, the more options there are to increase the positive influence your resources can have without paying a giant tax bill to do so.
[1] Source: OMB, National Priorities Project: https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/
[2] http://www.ipcc.ch/report/ar5/wg2/
