Business owners have the most flexibility of everyone to not pay their taxes. I personally think these things are questionable but its what I have seen others do over the last few years and what has been recommended to me by every top accounting firm in New York.
It is incredibly simple to spin up an LLC or C corp and expense all kinds of things. Employees don’t get this benefit.
Peter Thiel famously bought his Paypal shares (which were valued at a few cents when he founded the company) into his Roth IRA account. When he turned 65, he was able to access the billions that the Paypal equity was worth with 0 tax on it.
But what if you want the money sooner? Are there other methods?
Of course there is. The first one is QSBS Tax which many startup founders still don’t seem to know about.
This is the Qualified Small Business Stock Tax Exclusion. Basically as long as you wait 5 years before selling the business, you won’t be taxed on the first $10 million dollars. This isn’t some loophole, this is exactly what it was intended for so that people are encouraged to take risks.
Let’s say your company is hot and you can sell it within 2 years though. Is there a loophole?
Of course there is.
When you get acquired you simply sell yourself extended options which you don’t activate until the 5 years have passed.
Let’s say you are going to make more than $10 million dollars though. Let’s say you sell for $100 million. How do you avoid that pesky tax on the other 90?
It’s called Trust Stacking. QSBS let’s you exclude up to $10 million in taxes “per person.”
So you simply create a trust for everyone else you know and fill it with what you think will become about $10 million worth when you exit.
If you have a wife and kids for a long time you can just make one for each. Super easy.
If you are single, you can create one for future relatives and kids with a placeholder beneficiary. That would likely be someone like your current or future spouse.
If you end up never having kids, you can spend it on the placeholder.
Let’s say that covers only $40 million in tax avoidance, who else can you ping?
This is where it gets into much murkier waters.
You ask your parents to create a Trust for you. A “trust for me?” you ask? But you are the one with the money, not them! They put in say $1000 dollars and use that to acquire just enough of your shares that you think will add up to another $10 million. Now you’re up to $50 million easy.
Now it’s free reign. You look at your siblings, your cousins, anyone you can trust.
Now every trust you make needs a Trustee. They can’t be related or married to you. Ideally its just a business partner of yours who you trust to do whatever you want.
- The following states will have tax complications with these methods:
- Arizona
- California
- Colorado
- Indiana
- Kansas
- Utah
- Lousiana
- Missisippi
- New Mexico
- Oregon
- South Carolina
What if you run out distant relatives and future children? You still have more money you want to avoid tax on!
Well you likely can’t completely avoid it, but you can reduce it.
It’s too late to give up your USA citizenship. Instead, the same year you plan on selling your stock, buy a house and move to Puerto Rico. Long-term capital gains are reduced only in that area for the USA. Don’t worry you can just move out of Puerto Rico a year or so later.
By the way these various loopholes are encouraged by Universities. If you want even more potential loopholes, talk to your University Alumni Association about how “flexible” their donation system is. The earlier in the exit process for your company, the better. They have a myriad of ways to help you reduce taxes in exchange for a some % of the money getting donated to them.