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Tax Strategies and Asset Protection for Beginners
Level 1 - NGMI
Welcome Avatar! Many of you are aware of the extreme lengths people take to reduce their tax burden. BowTiedBrain and other jungle members made the move to DeGen Island USA a couple years ago (source). Generally speaking, the majority will never be in a financial position to do it and most won’t reach a scale where it is practically a necessity. Tax havens are largely for people well north of 8-figures since you’re tired of dealing with constant audits, compliance and other fees that end up taking away your freedom.
Instead this post is going to cover a lot of the basics.
Basic Tax Items (Under $1M) - Simple
401K Stuff: As you know a 401K will never make you rich (source). A 401K is only useful up to the match on this side of the web. If you get a 100% match up to 5% of your income and make $100,000 a year, this means you’d contribute $5,000 and the employer would give you a free $5,000. This is a guaranteed 100% return. Anyone with a W-2 and matching program would be a fool to ignore this.
The Problems outside of the match
As you know, tax brackets can change. While a 401K can grow tax deferred, there is no guarantee that your tax rate will be above or below your current tax rate
Limited options - generally speaking you’ll be limited in terms of what you can invest in
ROTH 401K/ROTH IRA: Basically the same stuff except you put money into an account *after tax*. This means the gains would be growing tax free and when you withdraw at “retirement” (another scam), you’d owe no taxes on the money.
Main risk here is they change the rules on the product
Same as a 401K *generally* limited options
Self Employed: For those that are self employed, you can use self directed IRAs and solo 401Ks where the contribution amount is significantly higher. In the end though, if you’re making enough to easily put away $66,000 in a solo 401K, the “retirement account” is a rounding error anyway.
Quick Conclusion: All of these items are basically “If i fail at least I will survive” options. No one rich cares about any W-2 retirement product and you’re free to leave the same old Peter Thiel exception to the rule answer out of the comments box. 99.9% of people who make it will not care one bit about any of this stuff.
Basic Asset Protection Items (Going Past $1M)
While most are probably most interested in other tax items, we have to go through basic asset protection as well. Once you’re starting to build wealth (draw a line at around $1,000,000), you don’t really have the tools, time or money to create complex structures to protect your assets. Instead, here are some basic ways to make sure you don’t get crushed.
Your House: Generally speaking, your primary residence should never be “paid off in full”. While we think you should always have a primary home paid off, the trick is to take a **mini** loan against the house. If people pull the information on the property it says “the bank owns it”.
As a simple example, you bought a $1M home and you paid it off in 10 years. You go to the bank and you borrow a meaningless sum against it (make it up say $100K over 30 years). Now on paper it says “the bank owns it” so if someone dislikes you and pulls the information, they will think you don’t have much money. If they see that you own it outright, there might be good reason to set you up for a lawsuit.
If you think this doesn’t happen, think again. As you move up the net-worth ladder, more and more and more people will do anything in their power to steal it from you.
Your “Name”: An easy solution to diversify your assets is to simply hold it under a different name or even entity. For the typical person who has a small family, you can take advantage of the gift tax rule.
As of 2023 the gift tax exclusion is $17,000. Therefore it would be quite easy to cash flow out money to your kids, parents, grand-children etc. Every year you simply gift them the maximum and unless you have a terrible relationship with your kids/parents/grand parents the assets are no longer yours. If anything happens to you, the bailout is there since your entire support system has money (yes this assumes they are responsible people)
Umbrella/Life Insurance: The last item to tick off is probably some umbrella or life insurance at this level. These things don’t mater for people worth hundreds of millions of dollars (since their kids will be fine no matter what). However. In the real world you could have a heart attack tomorrow, you could have a sudden disability. No one knows and life is messy. You’d add an umbrella/insurance policy as a last line of defense for “asset protection” (yes we’re being loose with this term!)
Above $1M but Below $10M
This is generally the toughest range to manage. You likely have a living trust and as you accumulate new assets you will need to set up new LLCs to protect yourself from potential liabilities.
LLC Example: While we wouldn’t be touching rental properties with a 100 foot pole at this point (outside of extreme examples), Real Estate is a well known avenue for LLCs since you can: 1) protect yourself from liabilities - if you get a bad renter and it goes to litigation they can’t go after your personal assets, 2) LLCs have the ability to expense which includes depreciation, management fees and other recurring costs, 3) by owning say four units - two in separate LLCs - you could streamline your inheritance/will/trust planning and 4) if done correctly - Wyoming being the most obvious example - it can help create anonymity on your behalf.
Forced Into Liquid Collectables: Anyone who gets to the higher end of this range (call it $5-10M) will be forced to acquire liquid collectables simply for emergency use. If you have a complete disaster (see war in Russia & Israel), you have to find a way to convert something to cash. This is the only time you’ll ever see us write about gold coins (dying money), expensive watches - Rolexes, or art/collectables such as comics, sports cards or stamps.
In the end none of this stuff should be taken seriously. Meaning, you should buy the most stable and the most liquid item within each group. A 1oz gold coin is a 1oz gold coin. A Mickey Mantle rookie card will always be a Mickey Mantle rookie card.
As soon as you go down the rabbit hole of trying to figure out “what is the next valuable card, comic, stamp, artist etc.” you’ve missed the point. You want something liquid to fit into a carry on bag so if you’re forced to leave from a foreign country you can barter for something you actually need - like shelter and food.
Buy, Borrow, Die: Now we’re getting to the top end of this range. If you are sitting on large appreciation you should consider the buy, borrow and die strategy to avoid a capital gain tax hit.
Examples include: 1) borrowing against heavily appreciated assets such as real estate from 20+ years ago, 2) debt to asset ratios in trading accounts and 3) box spread strategies *emphasis only for experienced people with significant amounts of money* Source
For simplicity, just use the Real Estate Example
Option 1: Say you spend about $100,000 a year. You could sell everything and incur a $1.5M tax hit. This would leave you with $8.5M liquid. You then spend $100K based on the $8.5M you have.
Option 2: You borrow $1,000,000 at age 75. You know that homes probably go up about 3% a year (so it’s a wash roughly), you end up having $9M and $1M in hand to spend.
Net: $500,000 spread.
Before the haters come in here. We’re aware that the price of the asset might not go up. We’re aware interest rates might not be as low (although they would be extremely low with that type of debt to asset value).
The trick? Notice in the first column we assume no living expenses.
No way to convince us that the math wouldn’t work out! This is known as the buy, borrow, die strategy. When the assets get handed over to your kids/relatives/pet dog or whomever… the asset gets re-based to the current value so you’re good to go!
Standard Nepotism: No real need to go into detail here. If you’re a biz owner it is common to go ahead and hire your kids for the standard tax purposes listed in the first section. They could begin maxing out all of their retirement accounts.
$10M and Beyond
At this point you’re already going to have a specific situation to deal with. Unless you were born into money or you had a top 0.001% career, the people who make it here are biz owners. Since you’re a biz owner, your structure is going to differ massively.
Trusts (More Specifically Blind Trusts): This is a common option since it hides information from the public. It also protects against creditors and could even be used as a way to avoid conflicts of interest.
A simple reason for trusts is the estate tax north of 8-figures or so.
40% tax rate on millions would be enormous. By having it in a trust you could have the trust pay out income over time and the trust could earn income as well (not you since the trust owns the assets). This allows you to make an entirely new structure where you could pay out $5M to each of your kids then $5M to each of their kids with specific vesting periods. Since neither individual gets an amount over the estate tax, it would incur a 0% tax. (Estate tax numbers here)
Also you can create vesting schedules (most common trust cliff is around age 35 or so).
A Piece of Paper with Words On It: You could also have a piece of paper hidden between the floor board with multiple words on it. Those words would be in conjunction with a website link. They would lead to a new financial system controlled by no one.
This is a simple summary, we’re considering doing a more complex one later but figured it would be good to know the basics so you’re well prepared as time goes on.
A few things that will happen as you move up? You will become a lot more neurotic and obsessed with tail events. Below are some examples:
Notice no mention of social security. Majority of rich people just assume it is a zero
You begin to worry about tax law changes. If you have a 401K or even Roth, what happens if the tax rate changes or they adjust the rules since we’re massively in debt to the tune of $33.6 Trillion dollars
We saw all the crazy rules during COVID, you probably don’t want all your assets in any particular seizable asset
One of the largest ways to protect yourself is to convince people you don’t exist and are broke
On that note… Stay toon’d!
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce. We’re an advisor for Synapse Protocol 2022-2024E.
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