The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
In our previous article in the series, we shared a story about Annie, an engineer at Coinbase, who set up a charitable remainder trust to minimize her tax hit when she sells her shares after the company’s IPO. Today, we’ll learn about Barney, who joined a startup that’s been growing like crazy since it started a few years ago. Barney expects there will be a Series B round in the next few months, and he hopes to sell some of his shares shortly after that for a gain of $500,000. (Before you read about how a Charitable Remainder Trust can help Barney with his tax bill, feel free to take a moment to review the foundational posts in our series on CRTs: Our primer on the basics, why CRTs are more flexible than you think, and our first example, which focused on an employee planning for a massive IPO.)
Our next example, and one we see very frequently, is Barney, who lives in Brooklyn and joined his company in 2018. The company has done very well—it’s a B2B2C future-of-work play, and (silver lining!) the work-from-home boom of the last 18 months has sped things up considerably. Barney is looking to take some money off the table—just to hedge his bets—but he doesn’t want to take the massive tax hit that will accompany the $500,000 sale.
Cost basis: $5,000
Current/sale value: $500,000
Chosen trust: 20-Year Term NIMCRUT
Like all of our users who choose a Charitable Remainder Trust, Barney will get an immediate tax deduction. Consistent with the IRS’s rules, he’ll get to deduct about 10% of the current value of the shares he puts into the trust, or about $50,000. Since Barney lives in New York City, which is a high-tax city in a high-tax state, the tax savings are substantial: That $50,000 deduction translates into cash savings of about $19,000 on next year’s taxes.
That’s $19,000 extra in Barney’s pocket before things even really get going. Next, of course, Barney gets to defer the state and federal taxes he would otherwise have owed on the shares he’s selling. That’s about $160,000 in taxes deferred to a later date.
Like Annie, the Coinbase employee, Barney is a little bit concerned about his money being stuck in a trust for the long term. After all, this is his first big liquidity event, and he doesn’t yet have a big nest egg for retirement (whenever that is).
Fortunately for Barney, he has several options for creating liquidity. First, there’s the easy liquidity he can get out of a NIMCRUT: 11% per year if he chooses a Term trust, or $260,000—over half of the initial funding value—after just 6 years. What’s more, Barney has other tools at his disposal. One that our users have found especially easy to utilize is a simple line of credit: Although Barney can’t borrow against the value of his CRT, since that value belongs to both him and his chosen charity, he can open a line of credit using the future income from his CRT as collateral. What this means in practice is that Barney can access as much as the full value of his expected payouts from the trust at a reasonable interest rate, should he need more than the liquidity he would normally be able to take out of his trust.
Despite his general thinking on liquidity, Barney is a young guy, and he doesn’t need much right now, so he’s happy to leave most of his money in his trust to grow for the full 20-year term. Let’s suppose his only withdrawals are $125,000 in year 3 (to take a year or two off, say), $175,000 in year 9 (down payment), and $225,000 in year 15 (fun money).
How much would Barney have at the end of the trust term? After those 20 years, if Barney has her money in a Charitable Remainder Trust, he’ll end up with about $1,380,000 in total payouts. About $475,000 of that will go to the charity of his choice, so he ends up with about $910,000 in his pocket. (For reference, the numbers for a Term Standard CRUT are lower: He’d end up with about $570,000 in his pocket at the end.)
If, instead, Barney had kept his money in a regular, taxable investment account, he would have instead ended up with about $690,000.
In other words, even after his charitable donation, Barney still pockets an extra $218,000 on his initial $500,000 secondary sale.
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Visit our next article on how to prepare for an IPO. And if you haven’t tried our Charitable Remainder Trust (CRT), click here to check it out! Or schedule a meeting with us to analyze your situation in-depth.
We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.
