Jerod had a very successful career as a top-level executive for a Fortune 100 firm. After his “retirement,” he went on to serve on the board of several companies where he received compensation comprised of cash and equity shares for his work. One of those companies was acquired in an all-cash deal at a very attractive premium, resulting in significant long-term capital gain income.
Between Federal and State taxes, Jerod was facing a multi-million tax bill. Jerod had always been philanthropically inclined, so he decided that he would donate to his donor-advised fund to lower his tax obligation while also benefitting some meaningful causes. He had made many donations in the past so he knew that instead of cash, he would be better off donating appreciating securities. At the Federal level, the donation would provide him substantial savings in capital gains taxes.
While the plan might result in a substantial discount of his tax bill, could he do better?
Jerod was using his charitable deduction to primarily offset capital gains income, already being taxed at the current preferential rate of 23.8% (20% + 3.8% Net Investment Income Tax). That meant that for every $1,000 he donated, he could lower his tax bill by $238. Yet Jerod was still earning ordinary income subject to a higher federal tax rate of 37%. Working with Bordeaux Wealth Advisors, Jerod realized that if he were to use his charitable deductions to offset his ordinary income, he would generate greater tax benefits. One potential idea that BWA considered was to implement a gifting plan over more than one calendar year to take advantage of the charitable deduction against the higher-taxed income he was earning. If successful, the same charitable donation generated would likely yield significant cumulative tax savings over a one-time gift.
Many people who experience a significant liquidity event immediately try to limit their tax bill. One of the challenges is that often these liquidity events are taxed at preferential rates (most often at long term capital gains rates) so identifying further tax minimization opportunities can be challenging.
At Bordeaux, we can help our clients by (1) modeling various scenarios to understand the different tax implications as well as implementing some pre-event tax strategies, and (2) executing the plan post-liquidity event, since detailed and precision execution is critical to obtaining proper tax treatment.
