While taxes are technically an expense, a well-crafted strategy can allow families and business owners to use tax law to their advantage. But how could taxes – an expense – possibly be turned into an opportunity?

As usual, we start with goals. Depending on each set of personal, family and charitable goals, there are four high-level approaches for shifting your tax dollars in a different direction to better enjoy life, provide for loved ones and make an impact on causes you care about.

Tax Shelters for Families

First, let’s consider a few basic strategies available to most individuals and families. The more of your money you can save in places where taxes are either deferred until retirement or, even better, completely free from taxes, the better off you’ll be. $10,000 invested at 7% for 30 years would grow to over $75,000 – that growth stretches much further if you don’t have to hand over a big chunk in taxes.

  • Pre-tax accounts like 401(k)s, Traditional IRAs and profit-sharing plans provide you an upfront tax deduction for your contribution and allow you  defer taxes until you’re retired and start taking money out.
  • Tax-free accounts like Roth IRAs and Roth 401(k)s, on the other hand, don’t provide a deduction for what you contribute but offer 100% tax-free withdrawals if you wait until retirement age.
  • Health Savings Accounts (HSAs) combine the best of both worlds – a tax deduction for your contribution and access to the entire balance tax-free for health-related expenses. $5,000 per year invested at 7% for 20 years would grow to over $200,000 in tax-free funds to support your health care costs!
  • Some accumulation-style life insurance plans also build cash value and, if designed properly, can provide tax and creditor protected growth for those looking to shelter even more from taxes to meet their retirement or legacy goals.

Professional planners can make a huge impact in this area by recommending an ideal mix of these basic strategies to set the right foundation before diving into more sophisticated concepts to address more complex financial situations.

Tax Shelters for Business Owners

If you own a business, as it grows and become more successful, the tax bill just gets bigger and bigger. So, focus on minimizing taxes becomes as important as topics like risk management. When the business planning and personal wealth management are considered as two parts of one plan, we see a few opportunities open up.

  • Buy-sell agreements protect a business in case a partner dies unexpectedly, leaving the surviving spouse as the new partner regardless of desire or experience. Taken alone, this plan simply agrees that the other partner(s) has the right to buy this share of the business from the deceased partner’s spouse. These agreements must also be funded somehow, either with cash, life insurance or other capital. However, when considered as a part of the bigger picture, a buy-sell agreement can double as protection for the business and a long-term, customized retirement transition plan that creates tax deductions and builds tax-deferred wealth.
  • Once the business owners are protected, key employees must become part of the plan as well. Rewarding and retaining vital employees is crucial to maintaining ongoing business success. The right strategic plan can protect the business against the risk of losing a key employee, tie employees to the company in a positive way and reward them for their unique contribution all while creating tax write-offs for the company along the way.

We know most business owners are already looking for ways to invest in their company. When they can use resources to invest into vital team members, make benefits to employees more efficient and protect the company, the result is a win-win for the owner and the team.

Charitable Giving Strategy

Charitable giving provides a prime opportunity for turning taxes into opportunity. A contribution to a 501(c)(3) non-profit is generally tax deductible and many people simply write checks from their cash, which is just fine for some. Those selling stock or real estate, paying required taxes and giving from the proceeds could potentially give 15-23% more by setting up and contributing those assets directly to a family charitable fund, called a Donor Advised Fund. This allows them to sell with no taxes due, give the full amount to charity and increase their own tax deduction!

Anyone with a potentially taxable estate who wants to leave a large charitable gift after they’ve passed away but wants to retain some level of income from those assets while alive might consider several forms of Charitable Remainder Trusts. These provide an upfront deduction for a portion of the contribution and can be designed to provide income to the donor with the balance passing to the charity of choice after the donor has passed.

Leaving a Legacy and Your Financial Chessboard

You will leave a legacy, whether by default or design. By default, the government may take a bigger slice of the pie in taxes than you’re comfortable with, leaving less for loved ones and causes you care about. But, by combining your legacy vision and tax strategy, you create an opportunity to increase your legacy impact. For anyone with a big legacy vision and a desire to make a long-lasting impact after they’ve passed on, you’ll want to consider a variety of strategies that allow you to shift dollars from the tax slice of the pie to loved ones and charities. And through strategic planning charitable trusts and other tools to create additional wealth, you can shift potential tax dollars to other beneficiaries and increase the size of the pie itself!

In the financial planning world, everyone has the same chessboard and the same pieces – we’re all subject to the same rules. But, by visualizing and planning all the moves ahead of time, you can turn taxes into opportunity and increase your legacy impact.

Perhaps it’s evident why we enjoy this work so much. We get to help clients build and refine their legacy visions, then strategically position their pieces on the board to ensure the impact they intend is the impact they make!

Alterra Advisors - Josh Whelan

Grant Monson

Partner, Financial Advisor

About the Author

Grant grew up on a working wheat farm in eastern Washington. Today, he credits his family – who still manage the farm – for preparing him to build a business serving others. His vision to lead Alterra is built on relentless dedication to the success of his clients and the team – his extended family.

Grant’s dad says that he hasn’t worked a day in his life because “it isn’t work when you love what you are doing.” When combined with his mom’s view that “helping others should be part of every day”, Grant’s view of financial planning comes into focus. Alterra Advisors is very much a reflection of Monson family values.

Grant earned a bachelor’s degree in business and a master’s in economics at Washington State University. He launched his own financial advising practice over a decade ago, an entrepreneurial quest has become one of the most impactful things in Grant’s life. He loves coordinating the complex financial lives of business owners, bringing a depth of understanding that is rooted in his family’s own experience.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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