We have some tips and tricks for those of you who may be in transition mode. If you’re tired of a daily commute and want to make a life change, reach out to us so we can try to help you decide on that. The conversation of the moment is what to do when we’ve got a situation where a client has quite a bit of taxable gain. Taxable gain is a positive thing, but also a negative thing.
If you make a bunch of money, that’s great, but if you try to collect the money, you pay a steep toll to the IRS tax monster. As I mentioned earlier, we had a client who gained $2 million from Amazon stock. He’d invested for many years and wanted to retire. He needed to reposition his stock to do that. He was willing to sell it but didn’t want to pay a huge amount in taxes.
He knew he would have to pay some tax, but he wanted to know how to keep it to a minimum. I asked him if he’d considered selling smaller pieces at a time, which is generally a stupid idea, in my opinion. I feel it’s often a bad idea because you don’t know what Amazon stocks might do. You don’t know what any stock could do. You don’t know what a piece of real estate or a business could do. In his case, he had the money to retire and wanted to lock in his gains so he could walk away from it. He wanted to go into retirement and not worry about checking the price of Amazon stock every day. He wanted to sell it all now and secure his retirement.
He had the right mindset. The last thing you want to do in retirement is to have to watch the stock market and hope that everything works out. He wasn’t emotionally attached to this stock. He was ready to make the smart decision to let go. His response was unusual because many people struggle to let go. If you look at someone like Warren Buffett, you’ll notice he doesn’t get emotionally attached.
I’ve got two comments to make. Number one, our client was smart. If you look at what happened to Amazon stock in 2022, it lost half of its value. If this client hadn’t sold his stock, his $2.4 million would have been cut in half. He would have lost over $1 million in stock value in a year.
Number two, there’s a big difference between truly wealthy people and those who are not. Never let the tax tail wag the investment dog. If a truly wealthy person decides it’s time to sell a stock, they don’t blink. They sell it. They might use strategies to reduce the taxes, which I’ll talk about in a minute, but they won’t let it stop them from selling stock when necessary.
People who are not wealthy do the exact opposite. They let the tax tail wag the investment dog. They don’t sell stock they need to sell because they want to avoid taxes. If you had an account worth $2.4 million, instead of thinking that you have $2.4 million, recognize that you have an investment, and the joint owner of the investment account is the IRS tax monster. Your share of that investment is $2 million. The IRS has a share of $400,000.
There are some things you can do to soften the blow. I asked my client, “do you need all that money now?”I asked if he needed all that money now. Did he need $2 million to buy a place in Colorado? He told me no. He wanted to turn the money into retirement income. We took his stock before he sold it and transferred it to a special type of trust. That trust sold the stock with no capital gain. Then, we reinvested the money inside the trust, but instead of trying to pull the money back out immediately, we set it up to where the trust paid out the proceeds of that sale over five years. After five years, all the money is back in his pocket.
If he had sold the stock outright and paid all the tax, he would have had to pay about $425,420 in taxes. By paying it out over five years, he reduced his tax burden to around $260,000. Sometimes you can pay the money out more quickly. It might be two years, three years, or even ten years, but it depends on the situation. He still had to pay the IRS a sizable amount, but it was over time, and he still paid about $163,000 less to the tax monster. This is to be used only as an example of one possible way taxes may be reduced using various strategies. This is one client’s unique story which is not indicative of future results and does not guarantee similar results for another individual.
One thing to consider is that he had to pay to create a trust. It cost him about $10,000 to create the trust, so instead of saving $163,000, the net amount he saved was about $153,000. I have a math question for you. Should you give an attorney $10,000 to save $163,000, or should you pay the IRS the full amount? That should be an easy answer for you.
There are a lot of ways to do this. In the example of this client, it was Amazon stock. What if it wasn’t Amazon stock? What if it wasn’t a stock at all? Perhaps you inherited some acreage from your parents that is worth a few million dollars. You’d love to sell it, but you have a problem; your tax bill would be $600,000 or more. If you want to sell, but don’t want to pay all the taxes, maybe you should talk to us first. It’s free to talk to us to see if you qualify.
Wouldn’t you want to find out if we could help you with your situation? All you need to do is call us. Our phone number is 512-886-5850. Let’s get you in touch with one of our advisors and get you a Retire Right Report.
If you’re one of these people with assets like stock, real estate, or even a business, and there’s a huge capital gain, some of these trust plans might make sense for you. Make sure that when you call us you mention if you’re trying to sell one of those types of assets. We would love to talk to you and see what we can do to reduce your tax exposure. We’ll get you in touch with our tax planning team and do our best to try and save you from paying a boatload of taxes to the IRS tax monster.
Past performance is not indicative of future results. The material above has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Centennial Advisors, LLC makes no representation or warranty as to the accuracy or completeness of the information, which should not be used as the basis of any investment decision. Information contained on third party websites that Centennial Advisors, LLC may link to are not reviewed in their entirety for accuracy and Centennial Advisors, LLC assumes no liability for the information contained on these websites. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Centennial Advisors, LLC. For more information about Centennial Advisors, LLC, including our Form ADV brochures, please visit https://adviserinfo.sec.govor contact us at 512.265.5000.