Chris was a senior engineer at a technology company in his early 50s and had accumulated a net worth over $30M. He and his wife, Susan, and had one young child. After 20 years at his company, Chris had developed an investment portfolio worth $25 million, approximately 90% of which was held in company stock. Additionally, Chris enjoyed a substantial annual salary, which was taxed at nearly 50%, including federal and state taxes.
Before coming to Bordeaux Wealth Advisors, Chris had been a “do it yourself” investor. Now Chris and Susan wanted to ensure that they were maximizing their stock’s value. They knew that selling the stock would result in large gains but did not know the full effect of taxes on this wealth.
Was there a more tax efficient way to diversify? Would some type of trust, perhaps a charitable remainder trust (“CRT”), achieve their personal and financial goals? Would they need to add a clause to the CRT specifying a certain amount of minimum distributions to their estate? Chris and Susan wanted to make sure that if neither of them could collect the distributions, the money would automatically transfer to their beneficiaries.
Following the recommendations of their advisor, Chris and Susan established a CRT to enable Chris to liquidate 75% of his equity position and donate to charities, while providing annual distributions to Chris and his wife for the rest of their lives. The CRT removed the shares from Chris’s estate but allowed the cash flows to be passed onto the couple’s beneficiaries in the event both Chris and his wife passed away prematurely. The CRT also allowed for immediate diversification and reinvestment while deferring taxes over a number of years and allowing the assets within the CRT to grow tax-efficiently.
Chris’s wealth concentration in the company was immediately reduced from around 90% to approximately 25%, which allowed Chris to unlock the value of his equity, minimize taxes, maximize assets, and generate a larger impact for philanthropic causes. The formation of the CRT allowed Chris to take an upfront tax deduction of $1 million, which was used over the next several years to offset Chris’s ordinary taxable income.
When high earners also hold significant equity compensation (common within the technology industry), tax planning is crucial.
The challenge is to find the solution that diversifies the wealth as tax-efficiently as possible while adding safeguards in the event of the client’s passing to ensure the wealth will transfer seamlessly to the beneficiaries.
At Bordeaux Wealth Advisors, we prepare financial plans for our clients to assess whether they’re on the right track for a comfortable lifestyle and can efficiently transfer wealth to their beneficiaries and /or charitable causes. We review spending plans, diversification, and portfolio re-allocation. Once a plan is in place, we continue to work with them on retirement and tax planning while continuing to monitor the original analysis.
