Of course, taxes are top-of-mind for billionaires; estate taxes for 2024 kick in on amounts above $13.61 million for individuals and ramp to 40% after just $1 million. But consider that billionaires also have income and capital gains taxes to consider. As the late Senator Everett Dirkson supposedly said, “Pretty soon, you’re talking real money.”
Even if you’ll never have to worry about estate taxes, you are probably concerned about the tax bite from your income and your investment gains. You’d be wise to emulate the decision-making of the family office, and you’re likely to be well rewarded for doing so. Here are six ways the taxes-first approach can benefit you:
It saves time. It’s March, the thick of the annual American tax project, taking over 6 billion hours and over one-quarter of a trillion dollars out of the national enterprise once again. The American tax code is immensely complex and is constantly changing. Many Americans have no idea if they’ll be getting a refund or a tax bill until they file.
In reality, taxes aren’t something that happens just in April; taxes happen all year long, and few people do much of anything to minimize their tax bill beyond saving money in a qualified account or taking out a home mortgage. A comprehensive tax strategy would could not only save you time but could eliminate the worry about a big potential bill come April.
It saves money. One of the oldest adages in all of money management is, “It’s not how much you make but how much you keep.” A taxes-first approach would likely feature strategies like asset location, withdrawal management, rebalancing, and loss harvesting, and taken together, could add an average 1.8% percent or more per year, according to Vanguard’s Advisor’s Alpha white paper.
While 1.8% may not sound like a big number, it can have a massive impact on your retirement security. For example, $100,000 compounding at 5% would yield $265,330 after 20 years, while that same amount compounding at 6.80% would amount to $372,756, 40% more.
It’s proactive. This year, as usual, the overwhelming majority of Americans will be entirely backward-looking about their taxes, seeking only to file an accurate and timely return, with near zero thought to forward-looking strategy.
Think of all the other things in life where advance planning saves you time and hassle. Do you have a navigation system in your car? How many times has an alternate route saved you the agony of traffic pile-ups? Do you take a statin to control your cholesterol levels? For that matter, when was the last time a seat belt or an airbag saved you from terrible injury, yet most of us wouldn’t dream of driving a car without those measures in place.
Planning just makes sense, and it can provide something money can’t buy: peace of mind.
It takes sales pressure off the table. For millions and millions of Americans, there is a fundamental disconnect between the best efforts of tax professionals and the army of salespeople employed by insurance companies, broker/dealers, and banks. There’s another old saying in the world of money: a tax strategy is only as good as its implementation.
This is another situation where the truly wealthy enjoy advantages that the rest of us simply do not. As you go up the wealth ladder, something magic happens: instead of people selling things to you, they start buying things for you. Rather than trying to navigate the mysterious and scary world of the healthcare system, you hire a medical concierge to do all that for you and make sure you get the very best care.
As you look back on the various investment and insurance products you’ve purchased over the years, can you remember that spider sense tingling like an early warning system that you are being sold something? The Bezoses and the Musks don’t have to worry about all that: they have top professionals competing to deliver the perfect solutions, which means very little chance of a surprise tax bill.
It may have the highest ROI of anything in the universe of wealth management. If you own a profitable small business, you could very well be in for a big payday when you sell. That’s the good news; the bad news is you may also have a massive tax bill, the biggest of your life. The Feds will want their 20% and another 3.8% net investment tax from the Affordable Care Act. On top of that 23.8%, your state may also tax capital gains. For Californians, that’s another 9.3%. One-third of your life’s work gone just like that.
There are many different strategies you could employ to soften the blow, and you’d be wise to seek the counsel of a tax professional because every tax avoidance strategy has tradeoffs. If that advice cost you $10,000 but saved you $1,000,000, you’d have a 100X return or an ROI of 10,000%. It’s unlikely you’d ever enjoy an ROI of that magnitude on any other investment. That’s probably enough said about that.
It forces diverse professionals to work together on your behalf. Tax professionals, asset managers, investment advisors, and insurance agents are experts in very diverse subjects, and in the real world, they compete against one another to capture the business of American families. Can you even imagine an insurance agent not recommending an insurance solution to your problem, no matter what your problem is?
By settling tax strategy first, the search for optimal solutions is narrowed greatly. The various professionals have to explain how their product works in the context of your tax strategy, not the other way around. Tax pros are routinely asked to solve tax problems that were caused by the selection of a sub-optimal product. That could be avoided; it’s one of the very few things investors can actually control.
My advice is simple: it’s generally a good idea to check with your tax professional before you commit to any significant investment offer or decision. It’s what the billionaires do and probably what you should do, too.
