Deflecting Wealth vs. Divesting Wealth
Medical statistics indicate that approximately 80 percent of the diseases that we contract are degenerative in nature (i.e. heart disease, cancer, high blood pressure, diabetes, obesity, arthritis, allergies, asthma, etc.). In reality, degenerative diseases are self-inflicted diseases that could have been avoided if different life choices had been made over the years. Everyone knows, even though we seldom practice it, that focusing our efforts on doing what is necessary to avoid degenerative diseases is far easier and cheaper than spending tremendously greater effort and money trying to cure them once they show up.
Wealth and the income it generates is much like that for affluent people. It is far easier and cheaper to deflect this wealth where you want it to go before you own it than it is to dispose of it once you have taken ownership of it.
Much of the planning work we do with our wealthy clients is helping them, after the fact, divest themselves of their excessive wealth accumulated on their balance sheets without paying the onerous taxes that accompany divesting themselves of their wealth (i.e., estate, capital gains and income taxes).
Since most of our affluent clients still are in “building mode” in one way or another (that is, they keep adding greater value to their existing assets and adding new assets that will grow), this creates new challenges when trying to dispose this added wealth without the tax penalties required when doing so.
It is far easier and cheaper to avoid taking ownership of wealth and the additional income it produces than it is to attempt to dispose of it once it shows up on your balance sheet and your 1040 income tax form. Like avoiding degenerative diseases, it takes strategic advanced planning to deflect your wealth where you want it to go without it first coming to you.
Let me give you just one example of how we effectively employ the principle of deflecting wealth in our client planning:
Scenario: You have a piece of raw land valued at $1 million and leased by an office building. It is throwing off a steady annual income of eight percent, and you would ultimately like this asset to go to be part of your children’s inheritance. You are currently giving all the income away from this land each year. To make matters more complicated, you are already maximizing your charitable income tax deductions, thereby receiving no charitable income tax deduction for this part of your annual giving.
Deflection Solution: You transfer this asset into an Accelerated Inheritance Trust [AIT] (known in IRS code terms as a Non-Grantor Charitable Lead Annuity Trust). The term of the trust is twelve years, which means for the next twelve years the income from this property will be given directly to your foundation for distribution to the ministries you support (just as it is now). This results in your AGI decreasing by $80,000 because you have deflected the income directly to ministries instead of first receiving it yourself and then giving it away. The effective outcome is that your $80,000 gift is now “tax deductible” because you are no longer reporting this income to the IRS, and your annual tax bill consequently goes down by about $32,000. Actually, your charitable giving deductions now effectively exceed the 50 percent/30 percent Adjusted Gross Income (AGI) limitation.
Look at this table:
Additionally, (and this is truly amazing), at the end of the term of this trust, the land will pass to your children entirely free of any gift taxes, saving you as much as $550,000 in needless gift taxes. These annual gifts to ministries are not only effectively “income tax deductible” to you, they are also doing double duty to create an offsetting gift tax deduction allowing you to divest yourself of the land while deflecting its income to kingdom causes for the twelve years the trust is in effect.
Of course, had this asset originally been acquired with wealth deflection in mind when it was still a relatively worthless piece of farm ground, a Limited Liability Company (LLC) or a Family Limited Partnership (FLP) could have been set up with the children (or a trust for their benefit)? Then when the property exploded in value, its increased value and income would have been entirely deflected to heirs or ministries right from the beginning.
We often employ this wealth deflection concept within the context of developing a comprehensive, Strategic Master Stewardship Plan for our clients. As you can see, it is very powerful and extremely effective when strategically used.
Knowing our clients so well personally and financially and clearly understanding what they really want to accomplish makes this kind of sophisticated planning a common occurrence with our clients. Taking the needed extra time in the planning process to get to know our clients produces a fruit that is sweet and satisfying for everyone in the family.
© 2010 Stewardship Ministries, Inc.
The author, E. G. “Jay” Link, is the President of Stewardship Ministries, a teaching, training, and mentoring ministry for professional advisors and ministry leaders to equip them to effectively serve believers who have accumulated surplus, material possessions. He is the author of three books, “Spiritual Thoughts on Material Things: Thirty Days of Food for Thought,” “To Whom Much is Given: Navigating the Ten Life Dilemmas Affluent Christians Face” and “Family Wealth Counseling: Getting to the Heart of the Matter.” Mr. Link may be reached via email at jlink@StewardshipMinistries.org.
