I recently had the challenge of being lunchtime speaker in Lubbock on “Creative Income Tax Strategies.” The speech was to the South Plains Trust and Estate Council. I knew I couldn’t hold their attention by reciting a bunch of tax code sections and technical concepts. Solution? Turn each technique into a catchy story and keep them laughing. With my law partner John Hunter’s help in creating the stories, I pulled it off. No one was drifting asleep. Success!
My typical speech topics are about ways to save estate tax. Estate planners are so good at that, to the point some dub the estate tax a “voluntary tax” (paid by those who volunteer not to plan). I live in the world of “squeeze and freeze” transfers to DGTs, SLATs, and 678 Trusts. But in this speech, I shifted gears to saving income tax. The audience was all ears.
I understand why. As much as people want their family to avoid paying a 40% estate tax when the inheritance comes their way, people get even more excited about saving income tax—now, today, while they’re alive.
One way for people to save income tax is to own appreciated assets and get a stepped-up basis on them when they die. But once again, people prefer to save income tax without having to die. My speech revealed 10 ways to save income tax without having to die.
Some of these tools may sound “too good to be true.” That’s not the test under the law. Bottom line—if the law allows it, you can do it, regardless how it smells. Don’t take my word for it. The Fifth Circuit famously said it doesn’t use its “olfactory senses” in deciding tax cases. Furthermore, here’s the word from the esteemed Judge Learned Hand in Gregory v. Helvering (2nd Circuit Court of Appeals 1934): “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
You can click on this link to read my 10 stories in my PowerPoint on “Creative Income Tax Strategies.” Here’s a brief overview:
- Overfund your Roth IRA. Transfer appreciating assets (like a carried interest in a private equity fund), to a Roth IRA and the permanent income tax avoidance will likely greatly exceed the temporary pain of excise taxes on the overfunded amount.
- Section 1202 Qualified Small Business Stock. Almost any business owner (other than service businesses or oil and gas, including those who think they don’t qualify under Section 1202) can restructure their business and end up avoiding tax on gains ranging between $10 million and $500 million.
- Private Placement Life Insurance (“PPLI”). Income earned on investments inside a PPLI can escape income tax forever.
- Mixing Bowl Partnerships. Transfer high basis assets to a partnership, along with low basis assets (like a building), and achieve a “basis swap,” ending up with a high basis on the building that you can later sell or depreciate.
- Installment Sales. Sell assets to a related party (like an S Corporation or Trust) for a 25 year, interest-only note, who then sells it two years later for cash. Defer paying income tax on the gain for 23 years.
- Upstream Planning. Give an elder relative or friend a general power of appointment over your low basis assets and get a free stepped-up basis on the assets when they die.
- Basis Bump Swap. Swap out low basis assets in a grantor trust in exchange for high basis assets of equal value, and get a step-up when the grantor dies.
- Conservation Easements. Impose an easement on land you love to preserve it as is, achieving a charitable deduction now and saving estate tax later.
- Charitable Remainder Trust (“CRT”). Before selling a low basis asset, transfer it to a CRT and let the CRT sell it, deferring tax on the gain.
- Qualified Opportunity Zone (“QOZ”) Funds. Within 180 days after incurring a gain, transfer proceeds to a QOZ and defer tax. Hold the QOZ for 10 years and never pay tax on the QOZ gain.
This is obviously a quick overview. Don’t engage in these 10 tools without careful tax counsel to guide you through the ins and outs. The Blum Firm would be honored to assist you in your planning.
Marvin Blum speaks on “Creative Income Tax Strategies” to South Plains Trust and Estate Council in Lubbock.
