Spotlight On: Specialty Tax Planning For HNW Clients – The Preeminent Financial Advisor Podcast – Episode 51
The affluent sometimes need advanced tax mitigation and estate planning. Having that expertise at the ready can be hugely important to helping both that client and your own bottom line.
At CEG Worldwide, we work with Roger Silk at Sterling Foundation Management as part of our Virtual Family Office Network of highly specialized professionals. Sterling is one of the nation’s leading authorities on the use of tax-exempt trusts—a solution that can be very helpful to affluent investors in certain situations, and one that too many advisors are unfamiliar with.
Here’s what he had to tell us about these trusts.
Tax-exempt trusts
With a tax-exempt trust, a grantor transfers an asset into the trust. Often, that grantor is also a beneficiary of the trust (along with a spouse and/or children). The trust sells that asset and, because the trust is tax-exempt, there’s no tax owed.
This solution is most often seen in a few situations involving assets that aren’t advisors’ typical AUM-type assets. For example:
* Low-basis real estate holdings
* Concentrated stock positions
* Entrepreneurs selling their business
* Cryptocurrency
Consider someone with $10 million and essentially no basis. It might be stock, real estate or a privately held business. Selling outright might (depending on combined state and federal taxes) eat up 25% or more of the proceeds.
So typical example, we see this regularly: You’ll have someone with $10 million and essentially no basis. So it could be stock, it could be real estate, it could be a business. Put it into a tax-exempt trust, however and the client gets the benefit of that $10 million. And, of course ,the advisor gets the benefit of that $10 million, too.
The charitable catch
This particular kind of trust qualifies under a particular section of the tax code: section 664, which is the same section that gives charitable remainder trusts their tax exempt status. So some of the money in tax-exempt trusts ultimately need to go to a charity. However, these trusts can be structured so that the family benefits from the money for many decades before it passes to charity.
Clients who could potentially benefit
Advisors should be aware of various situations where clients could possibly benefit by exploring tax-exempt trusts in more detail. The most broad-based example is clients who have large amounts of assets that you’re not being paid to manage.
Drilling down, business owners might explore this option. Many entrepreneurs never think about selling their companies and never do any pre-planning or scenario planning—and then one day find themselves getting an offer out of nowhere. It usually makes sense to consider how to react to an offer long before it happens and consider tax-advantaged ways to sell, even if the client says they have no intention of selling.
Also, clients with significant real estate holdings should be made aware of this trust, given the hefty tax bills that often accompany real estate sales.
Clients with highly concentrated stock positions are another example. While there are multiple ways to diversify, tax-exempt trusts should be part of the discussion.
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