Mini Case Study: Wealth Transfer Tax Planning
This week, we helped one of our high-net-worth clients in Eagle Idaho sell a huge chunk of concentrated stock with minimal tax consequences! Here’s what that looked like:
Keith received shares in a private company that he worked for many years ago and when that company was bought out by a public company, his shares converted to the new public company’s stock. Fast forward 30 years later and his stock is up over 7,000%!
Keith called because he was worried about having an overly concentrated portfolio and asked how he could trim it without creating a tax nightmare.
Knowing Keith as well as we do, and knowing that he is both a family man and charitably inclined, we gave him 4 options for how we could reduce his stock position by 50%, raising $2M with the least amount of tax.
Option 1 – Gift shares to their adult children who are in a lower tax bracket and let them sell the shares (aka downstream gifting)
Option 2 – Donate shares to their donor advised fund (DAF) and let Schwab charitable sell the shares
Option 3 – Create a charitable remainder trust (CRT), donate shares in it and then let the CRT sell the shares
Option 4 – Combine the shares with other holdings and complete a section 351 exchange, which is essentially a tax-free exchange
Like many things in life, the best approach was a combination of all 4 options:
Each of their children will receive $250,000 in appreciated stock and can decide how much of that they want to keep vs. sell. Our firm will assist them with the tax projections, and will assist Keith and his wife with the 709 gift tax return. And since we manage the kids’ Schwab accounts, we can facilitate the journal of stock being transferred.
$150K is being sent to their DAF. Since their DAF is already at Schwab and we are managing it, we can facilitate that gift as well and incorporate the projected tax benefits on their tax projection for 2026.
$1M is being donated to a new CRT, which we are currently setting up with their estate planning attorney. This will give the entire family a chance to sit down and discuss what charitable organizations are most important to them, and what this looks like from a tax and estate perspective.
Finally, $400K will be allocated to a Section 351 exchange. And while the 351 exchange is fairly new concept, our firm has done several of these already and what we like most is that the entire thing can be done within one’s existing Schwab account, so the funds remain visible and with a trusted custodian.
Between the tax arbitrage of the downstream gifts, the upfront deductions from the DAF and the CRT, and the tax deferral on the 351 exchange, Keith was able to take over $2M worth of concentrated stock off the table with minimal tax consequences.
This is the power of comprehensive wealth management and what Family Office type of planning looks like for high-net-worth clients.
Send me an email (rob@swrpteam.com) or book a time on my calendar (https://calendly.com/rob_summit-wealth-calendar) if you’re dealing with a similar situation and need a trusted Advisor that can help.
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.