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In 2019, we were hired by a lovely couple to advise them on the investment of assets and updating of their estate plan. Thirty days prior to hiring us, they had closed on the sale of $7.5 million worth of real estate and a business – and IRS was very excited! Lots of tax dollars for them.

Unfortunately, these clients didn’t know about ways to put a tax “fence at the top of the cliff.” It is possible using special IRS approved strategies to make taxes “optional” on the sale of assets if we do certain things in advance of the sale. Put another way, it is permitted by IRS and state taxing authorities to pay zero in Federal capital gains taxes . . . if we choose a different way to “support the social well-being of America” that is more in keeping with each individual’s own value system.

What??? Since when is paying taxes to IRS (and our state’s tax authorities) optional when we sell assets? Only since 1969 . . . and something called the “Tax Reform Act of 1969” – but that is a subject for a future article.  

So . . . what can be done when someone has already gone over the tax cliff – has already sold an asset? What can they do then? Fortunately, we know how to build nets and bring an ambulance to the valley floor quickly . . . as we did for this lovely couple!

Note: There are seven or eight potential ideas to reduce taxes in the same year as the transaction(s) creating the taxes. To keep this article shorter, I will just mention two ideas which created nearly $3 million in tax deductions for them in the same year as their $7.5 million taxable event.

So . . . just how did we lower taxes – increase income – and bless others all at the same time . . . even AFTER the sale was completed? Read on!

Tax Savings Idea #1 (Gives Income)

Idea #1 was first created in that 1969 Tax Reform Act mentioned above – but received a “fresh coat of paint” in 2017. The donors receive an income for the rest of their lives from a diversified pool of assets created inside a creditor protected trust. This trust is ideally created prior to the liquidity event but can be created post-sale as long as it is the same tax year. We choose an asset mix depending upon the client’s need for current income versus future income. Since the trust principal will likely grow over time, they will receive an increasing income stream as well.

In addition to receiving income for the rest of their lives, our clients received a $1.6+ million deduction in the same tax year – 2019. Because of their ages then, and that the charities receive whatever assets are left when the donors pass away, IRS gives a huge income tax deduction – TODAY!

What’s So Attractive About Tax Savings Idea #1?

Although there are at least six main benefits of using this planning strategy, let’s just highlight two of them for this article:

  • Major Income Tax Deductions—assets placed into the trust generate an income tax deduction in the year transferred. The deduction is based upon donor age(s) as of the time of transfer using the IRS table of estimate life expectancy. Had they wished income to continue for future generations, the tax deduction would have been less – although still quite significant. Tax deductions can be so large that it exceeds the amount which can be taken in a single year. Not to worry! Deductions can be taken over six tax years if needed – the current gift year and up to a five year “carry-forward”
  • Supporting Charities—after both donors (or income beneficiaries) die, the remaining assets are distributed to charities the donors wish to support – which could be your own family giving fund or private foundation instead

Tax Saving Idea #2 (Simple Idea But No Income)

Our clients wish to give their home to three charities upon their deaths. Again, another lovely and thoughtful intention, but one for which they had not received any tax benefits. So – with the clients’ permission, we filed a document with the County Recorder’s Office in San Diego where the home is located. They get to live in the home for the rest of their lives and have the full use of it just as before. Upon the death of the second spouse the real estate automatically transfers to the three charities . . . and avoids the cost and delays of going through probate proceedings.

By simply naming a non-profit organization as the beneficiary (or three in our client’s case), they received a $1.3 million tax deduction on their federal and state tax returns. The actual calculation of the tax deduction is complicated and beyond the scope of this article but takes into account many factors.

What are the Pros of Using Tax Saving Idea #2?

While there are at least five pros of using this planning strategy, we’ll briefly mention two of them for this article:

  • Entitled to All Income—the life tenant(s) as they are called is entitled to receive all income from the property if some or all the property is rented out
  • Income Tax Deduction—naming the three charities as a remainder beneficiary in the document recorded at the County Recorder’s Office results in an income tax deduction in the year of the transaction for federal and state tax returns. If the deduction is greater than can be taken in one year, it can be carried forward for up to an additional five tax years

Conclusion: You CAN Reduce Taxes, Receive Income and Do Good for Others!

We have highlighted two of a myriad of tax planning and income creation ideas. What matters most, however, is what matters to you? What are you trying/hoping to accomplish? What is an ideal outcome for you – your family – your situation? Perhaps you need more income or more tax deductions to shelter income? Perhaps you wish to lower your estate tax exposure given the likely changes at the Federal level (and potentially here in California)? Or, you may have an appreciated asset or business to sell, and wish to do so without paying taxes on the gain? Perhaps you are wanting to include more philanthropic aspects to your planning that can also include other family members and generations?

Whatever your needs – goals – concerns – objectives . . . no two clients are the same. Please contact us for a 30-minute complimentary conversation about your situation. We can discuss additional pros (and cons) of the ideas above – and “unpack” other strategies that could apply to your circumstances and help reduce your tax bill. How can you best balance your financial plans with ways to direct money for good that would otherwise have gone to “involuntary philanthropy” also known as taxes?

It is possible to do well by doing good . . . “Imagine That™!”

Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.

R. J. Kelly, Wealth Legacy Group®, Inc. – August 2022

COURTESY OF

R.J. Kelly  ChFC, CLU, IAR, RICP. CAP, MSFS, AEP, CEPA Wealth Legacy Group

R. J. Kelly

Founder & Chief Visionary Officer

R. J. Kelly is Founder and Chief Visionary Officer of Wealth Legacy Group®, Inc. in San Diego, California, a company specializing in the diverse needs of closely-held business and professional families. Creator of the Wealth Legacy Assessment™ and the Critical Actions Roadmap™, R. J. and the WLG “tribe” develop comprehensive plans that maximize investment and asset growth, mitigate risk, create clarity in family legacy & issues of philanthropy, and facilitate business succession and exit strategies. He also Co-Founded and was Program Manager for twelve years of the non-profit, The Center for Wealth & Legacy™, an organization which presented over fifty community events, including the annual “Lasting Legacy & Inspiration Awards™” and the tri-annual “Leadership Insights Forum™”.

R. J. has been in the financial services industry since 1977. He is a Chartered Life Underwriter®, Chartered Financial Consultant®, Retirement Income Certified Professional®, a Chartered Advisor in Philanthropy®, has a master’s in Financial Services with an emphasis in taxation, and is an Investment Advisor Representative of Wealth Legacy Group®, Inc., an independent Registered Investment Advisor. Additionally, he has earned the Accredited Estate Planner (AEP®) designation recognizing a graduate level specialization in estate planning, and the Certified Exit Planning Advisor designation, an executive MBA-style program that trains and certifies qualified professional advisors in the field of exit planning for business owners. R. J.’s latest education is the Wealth Management Certified Professional designation, which provides training in the intersection of retirement planning and wealth management skills to address the complex needs of financially successful clients.

He is nationally recognized for his technical skills in:

  • tax
  • estate planning
  • business succession
  • national and international risk management
  • wealth/asset appreciation
  • executive benefits
  • charitable strategies

As well, R. J. has been regularly called upon as an expert witness in various litigation matters. Further, as a Life Coach™ and accredited Interplay™ facilitator, he is skilled in handling delicate interpersonal matters and facilitating family communication.

R. J. is a frequent speaker and author. Various publications such as the San Diego Union Tribune, LA Times, Yahoo Finance, Round the Table Magazine, San Diego Magazine, San Diego County Physician’s Magazine, Life/Health Pro, Insurance Forum, have run feature articles on R. J. or published articles by him, to name just a few.

Speaking audiences have included the: Vistage International Conference and various Vistage CE groups; the Strazzeri/Mancini Gathering; Advisors in Philanthropy National Conference; Nothing Bundt Cakes National Conference; The Dwyer Group Annual Conference; Main Platform – Million Dollar Round Table Annual Meeting; numerous NAIFA (National Association of Insurance & Financial Advisors) State conferences; and many more. He was featured on the PBS series “The Financial Advisors”, for three years was co-host of the San Diego radio program, “The Wealth Building Hour” and was a guest speaker on the American College’s Wealth Channel program.

R. J.’s interests include a commitment to being a wise and fun husband, dad, grandfather, performing periodically in a contemporary Christian band, and being active in community, church and international volunteer work. He has traveled to Guatemala, Mexico, Myanmar, Cambodia, Vietnam and Russia on various volunteer and humanitarian projects. He has raised over $30,000 to help Cambodian landmine victims and the Cambodian Children’s Fund. An eight-time marathoner, R. J. has raised thousands of dollars for Leukemia-Lymphoma research through his running. His life goals include facilitating $1 billion for charity (crossing the $100M mark in August 2012 and well underway to reaching the second $100 million), volunteering internationally 2-4 weeks/year, and travels to Bhutan, Iguaçu Falls, Machu Picchu, Tibet, India and the Amazon among many other places!

Most memorable life events thus far include a tail-hook landing and catapult take-off from the aircraft carrier, USS Abraham Lincoln, trekking in Nepal to an altitude of over 18,000 feet, performing solo to an audience of 7,500+, speaking for an audience of 13,000+, the individuals met through and running of various marathons, the lasting impact of a wise, loving and godly mother, and being married to my extraordinary wife, Vymean, a survivor of the killing fields of Cambodia, and one equally committed to making the world a better place.