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- WHY ATHLETES & HIGH-GROWTH ENTREPRENEURS SHOULD CARE ABOUT DONOR ADVISED FUNDS
A Donor Advised Fund (DAF) is a great tool to consider for those with extraordinary income. Today we will break down what a Donor Advised Fund is, who should consider a Donor Advised Fund, and what tax benefits you will receive. What is a Donor Advised Fund? You may have heard this term before, but wondered what it is. It is an investment account used for giving. When funding this type of investment account, you get special tax treatment on your assets today and in the future. You can fund a Donor Advised Fund with cash or investments. You will be able to shift assets from your personal name into your charitable bucket when funding a Donor Advised Fund. When you move your assets into a Donor Advised Fund, the IRS treats these assets as if you have given them away in that calendar year. Donor Advised Fund assets must be given to a qualified 501C(3). A 501C(3) is a code the IRS uses to designate an organization as a charity. You cannot pull these assets back and use them for your benefit. The benefit is that the IRS allows you to get special tax treatment on the assets you donate, the growth of your assets in the Donor Advised Fund, and a tax deduction today. Example: Bill decides to move $1,000,000 into his DAF from his brokerage account. Bill does this because he wants to get multiple tax benefits in the calendar year that he is funding his DAF. Once Bill moves his assets to the DAF, the assets no longer belong to him personally but to his DAF. Bill can give these assets to any qualified 501C(3). Bill is utilizing this because of the special tax treatment this account allows and to have control over his giving in case he wants to adjust the charities he supports in the future. Recap – What is a DAF fund? An investment account that you can utilize for giving. A way to get special tax treatment on your assets today. A way to get special tax treatment on your assets in the future. Who should consider using a Donor Advised Fund? The two common characteristics of people utilizing a DAF are those experiencing extraordinary income or looking to diversify out of a concentrated holding.. The key to determining the use of a DAF is timing. Example 1: Bill has Apple stock that he bought back on December 1st, 1991, for .60 cents per share. Bill has held his Apple stock until today when the stock is worth 151.60 cents. One of the primary reasons that Bill doesn’t want to sell his Apple stock is because he will incur capital gains taxes on his sale. These taxes are calculated by looking at the difference between what Bill paid for the stock and what it is worth today. In this example, he will pay 151 dollars in capital gains taxes per share. Bill has decided that he no longer wants to hold his Apple stock and is trying to figure out how to minimize his capital gains taxes. If Bill moves his Apple stock from his brokerage account into a DAF, he will pay zero dollars in taxes on his Apple stock. Yes, you heard that right, no tax liability. Example 2: Bob is a professional athlete and has one year remaining on his contract. He recognizes that this might be his last contract and may retire after this year. He wants to know if there is a way to reduce his tax liability in the last year of his contract. By donating cash or appreciated securities to a DAF, Bob can get a dollar-for-dollar deduction on his tax return. Doing this in the last year of Bob’s career may make sense because he will be in the 37% tax bracket. If he retires, his tax rate may be reduced significantly. Let’s assume his tax bracket post-playing career is the 12% tax bracket. In this example, the benefit of using a DAF today versus after his playing career is a 308% increase in value. When you are in the highest tax bracket you get the most bang for your buck. Recap – Who should consider a Donor Advised Fund? If you are trying to diversify assets on your balance sheet and get special tax treatment. If you are experiencing a year or period of extraordinary income and are looking to reduce taxes. What are the Tax Benefits of a Donor Advised Fund? When considering a donor-advised fund there are 3 primary tax benefits. The first benefit is that you get an immediate tax deduction on your taxes. The IRS will treat any contribution as a charitable contribution for tax purposes. The second benefit is that you can mitigate capital gains taxes on assets you contribute to a DAF to zero. In the example outlined, you can see that any appreciated asset you contribute will avoid capital gains tax. The last benefit is that the assets in your DAF can be invested and grow tax-free. Example: Joe is in the process of selling his company while mitigating his taxes and preserving his legacy. Joe is going to sell his company for $20,000,000 this year with the deal projected to close in August. This strategy will need to be implemented in the calendar year that the transaction happens. In a review of Joe’s balance sheet, he has several positions in his investment portfolio that have appreciated. Joe has the opportunity to gift shares of these appreciated securities to a DAF. When Joe does this, he will eliminate the capital gains taxes on these positions at the time of the gift. When the assets hit his DAF, he will receive a tax deduction of that amount. Remember, Joe now controls these funds and can give them away to any qualified 501c(3) over any period. Lastly, he may now invest these funds and they will grow tax-free. This is appealing to Joe, as he wants to create a legacy of giving over the course of his life. Tax Benefits Recap: You can receive an immediate tax deduction on your tax return. You can mitigate capital gains taxes to zero. The assets in your Donor Advised Fund will grow tax-free If you are a pro athlete or entrepreneur who is interested in learning more about how a Donor Advised Fund might fit into your financial plan, schedule a call and talk with a Moment founder. Get in Touch With An Advisor *Moment Private Wealth offers information on tax and estate planning that is general in nature. Tax and Legal advice are not provided by Moment Private Wealth. Consult an attorney or tax professional regarding your specific legal or tax situation.
- WHAT PRO ATHLETES NEED TO KNOW WHEN CHOOSING A FINANCIAL ADVISOR
As an athlete, one of the hardest things to do is to make money playing sports. Less than .05% of high school athletes will ever become professional athletes. Choosing a financial advisor for athletes should be easy but unfortunately, it is not. In this article, we will discuss how to choose a financial advisor for athletes. The things to consider, evaluate, and all-out avoid. The first step in evaluating a financial advisor is to understand what questions to ask. While a nice office, big boardrooms, and Fuji water are nice it does not move the needle for you in your career. What does move the needle is finding an advisor that has the necessary combination of competence, experience, and expertise. After all, you are in a situation that less than .05% of the population is in. What to consider, evaluate, and all-out avoid. 1. Who do you work with? Ask most financial advisors who they work with, and you will probably get a response like this: “We work with clients with over $1,000,000 in assets.” The problem with this is it only considers a small part of a client’s financial life. The amount of money someone has does not reflect the challenges that they face in their life. For athletes, managing money at a young age brings about hyper-specific challenges. It is one that few financial advisors have ever seen or dealt with. You want to ensure that your financial advisor works specifically with people like you. A more appropriate response to this question would be: “We serve as financial advisors for athletes, that is our specialty and what we do best.” Consider for a second if you were going in for an off-season procedure on an injury. Would you want a general doctor to be doing the surgery or would you want a specialist who only works on that particular injury? Choosing a financial advisor for an athlete should be viewed through the same lens. 2. What expertise should an athlete financial advisor have? As an athlete, you have a condensed earning window heightened by higher-than-normal earning power. This can be a great combination when executed properly. This formula executed incorrectly has led to the financial downfall of many athletes. The truth is the term “financial advisor” is one of the broadest in professional services. It takes very few qualifications to simply call yourself a financial advisor. This leads to many salesmen parading around as qualified experts. So how do you distinguish between an amateur and a professional? What qualifications does your team have that make you an expert? Real-World Experience: A financial advisor for athletes should be a combination of higher education and personal experiences. Remember, as a professional athlete you are in the less than .5% of the population that will make money playing your sport. For most financial advisors, it is a struggle to comprehend the rollercoaster that is professional sports. This includes the tactical strategies to benefit you as well as financial education. Advanced designations: The highest of these is the CFP, which stands for Certified Financial Planner. This is a combination of education, experience, and ethics. Every athlete should ensure their financial team incorporates a member with a CFP designation. 3. How will you help me build my team? Just like every athlete is a member of the team, your financial life should work the same way. A financial advisor for athletes should have the resources and network to help build the team of professionals. This team should be athlete-specific and world-class. The goal of having this team is to protect you from the unknown (insurance), reduce your lifetime tax bill (taxes), and help you plan for leaving a legacy (estate planning). Your team should consist of: Financial Advisor: Your point person for your family’s financial life. Accountant: The team member that will help you execute tax strategies specific to you that will lower your lifetime tax bill. Insurance Agent: As an athlete, you are an easy target. The goal is to protect what you have worked so hard to earn. Estate Planning Attorney: Athletes have an opportunity to create generational wealth for their families. The key is to build a plan to make that happen. This is the core four of your financial team. As an athlete, there are a lot of moving parts in your financial life, and it takes everyone on your team working together. 4. What areas do you cover? The days of a financial advisor simply helping you pick an investment portfolio is over (at least they should be). As an athlete, your advisor should be serving as the point person for your entire financial life. So, what does that entail? Cash Flow: As an athlete, you have direction around your routine, workouts, and preparation. Your finances need to have that same direction. As money is coming in you want to have a plan for spending, saving, and investing each dollar. Tax Planning: Taxes will be your single biggest expense as a professional athlete. Your financial advisor should be forward-looking to determine what tax strategies you can use to lower your lifetime tax liability. (There are a lot that are specific to professional athletes) Risk Management: Simply, how do you protect what you have worked so hard to earn? The most common forms of protection include proper home, auto, renters, and umbrella insurance policies. Estate Planning: Your financial advisor should coordinate and have core estate planning documents drawn up by an attorney. This provides direction for your assets and allows you to start building a legacy. Investments: As a professional athlete, you have the blessing of having a long runway to invest money. You want to ensure that your investments are diversified, tax efficient, and built to support your lifestyle. 5. Things to Avoid Conflicts of Interest – A financial advisor should be serving in a fiduciary copacity 100% of the time. Insurance First Firms – Many firms market as financial advisors but focus mainly on insurance products. Insurance has its place but it is insurance, not an investment. Shiny Object Syndrome – Your finances are personal; they should stay that way. Be aware of advisors parading around their client list. Soon they will be telling everyone they work with you. Layered Fee Structures – Financial advisor fees should be transparent. If you can’t understand how they are getting paid ask. Many financial firms have layered fees on top of what they market, meaning more fees for the end client. Choosing the right financial advisor for you is a combination between fit, feel, and firepower. A financial advisor for athletes needs to have competence, experience, and expertise in understanding your unique situation as an athlete. Remember, you are in the .05%, is your financial advisor? Get in Touch With An Advisor *The tax and estate planning information offered by Moment Private Wealth is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
- TAX STRATEGIES FOR PRO ATHLETES
7 Ways for Professional Athletes to Reduce Their Tax Bill Professional athletes are blessed with large incomes in short windows. The downside of that large income is a large tax bill. One that often becomes the single largest expense for any professional athlete. These tax strategies for professional athletes can help to reduce them. Pro Athletes Tax Savings Strategies Explore the sidebar on the left. You can add media to add color to your post. You can also change the cover image, optimize the SEO Settings, add categories or tags, and much more. Spend some time discovering each tab and learn how you can enhance your future posts. 1. Know Your Income Types To understand taxes, we must start at the beginning, with income. Professional athletes earn two types of income, W2 and 1099. One is a result of work you do on the field and the other is the result of work you do off the field. The type of income will drive the rules, strategies, and placement of income as it comes in for an athlete. W2 income is the money you make as an employee of the team. This is the salary for the work you perform on the field. With that, many of your strategies and deductions under the current tax law are limited. While limited there are still several ways to reduce your W2 income Charitable Contributions SALT Deduction – State, City, and Local Income Taxes Mortgage Interest Tax Deferred Retirement Accounts – 401(k) and in some cases IRA contributions 1099 income is the money you make as your enterprise off the field. This is treated as if you’re a business owner which opens the door to further tax strategies. All costs related to earning this income are deemed tax-deductible expenses. Agent Fees – In Negotiation of Off-Field Income Travel Costs – Ones Incurred in Fulfilling Contract Obligations Self Employed Retirement Accounts – Solo 401(k) and/or SEP IRA contributions 2. State Residency Income is generally taxed at two levels, the federal level, and the state level. While the federal level applies to all US citizens, the state level varies depending on your state of residence. These range from 13.3% for California residents down to states with zero income tax such as Florida and Texas. Establishing residency in a low or zero-income tax state can save athletes hundreds of thousands to millions of dollars in lifetime taxes. So, how can you establish state residency in a low-income tax state? State residency is determined by a series of facts and circumstances. The following is a good starting point for athletes considering a change in state residency: Establish A Full-Time Address – Lease or Purchase Obtain a State Driver’s License Change the Mailing Address for All Bills Register Any Vehicles with The State – Includes Insuring Vehicles in the New State Register To Vote Live There State residency is not a black-and-white issue. As an athlete, you should consult with a financial advisor and CPA with specific knowledge of multi-state and athlete taxation. 3. Quarterly Estimates It pays to be up to date on your projected tax bill. Remember, athletes have two types of income, on-field and off-field. It is your responsibility as an athlete to make sure the government gets its share on time. While the team will withhold taxes from your salary, this does not mean it is the correct amount. In addition, off-field income is generally the athlete’s responsibility to report to the IRS. This is where quarterly estimates come into play. A quarterly estimate is a payment of projected taxes each quarter by an individual. This is something that your financial team (Financial Advisor & CPA) should be working together on each quarter. To ensure a penalty-free year you must reach the Safe Harbor Rule. For high-earning athletes this means paying: 90% of Current Year Income Tax Liability OR 110% of the Previous Year’s Income Tax Liability This is where a qualified team of advisors can save athletes thousands of dollars in penalties and fees. Pay what you owe on time and save money. 4. Order of Operations If earning money is step one then investing money is step two. The foundation of investing is to understand what accounts benefit you the most as an athlete. Contribute to the correct accounts and save money on taxes every year. *NOTE – Every athlete situation is unique and the below will not apply to each situation. A good baseline is understanding what account contributions save you the most in taxes in the current year and future years. A proposed order of operations for an athlete earning 5,000,000 dollars with access to a team-sponsored 401(k) plan. 401(k) Contribution – Tax Deductible Contribution of $22,500 in 2023 SEP IRA Contribution – 25% of Off-Field Income Up To $66,000 Taxable Brokerage Account – Unlimited Contribution This order of operations would save this athlete tens of thousands of dollars in current-year taxes while deferring investment gains on the 401(k) and SEP IRA contributions. The advantage athletes have is the time to compound. Money invested at 25 has a far higher expected future value than money invested at 45. Proper order of operations allows for current-year tax savings and future deferred growth. 5. Invest Tax Efficiently The two best times to pay taxes are never or later. A tax strategy for professional athletes is to ensure your decades of compounding happen tax efficiently. As an athlete, you will have 40+ years of compounding for your investment portfolio. The thing that matters far more than your rate of return is your AFTER-TAX rate of return. Said more simply, what you KEEP matters more than what you MAKE. As an athlete builds their investment portfolio, the focus should be on AFTER-TAX return. We do this for athletes by focusing on the following investments: Exchange Traded Funds Municipal Bonds Direct Indexing Every investment you make has a tax consequence. Professional athletes should be educated on the best ways to invest. 6. Philanthropy As an athlete, you certainly have not reached the pinnacle of your sport on your own. There have been countless resources poured into your journey. One way to give back AND reduce your tax bill is through strategic gifting. The key term here is “strategic”. An athlete’s earning lifecycle is condensed into roughly one decade or less. The benefit is money today and the downside is increased taxes. One way to significantly reduce your lifetime tax bill is to consider a Donor Advised Fund. What is it? A Donor Advised Fund is an account that allows you to donate money, take a current-year tax deduction, keep the money invested, and give it out over future years. Example: An athlete making $5,000,000 wants to give away $10,000 each year over the next twenty years. To maximize his tax benefits, we might recommend he gives $100,000 or more in the current year to a Donor Advised Fund. This money is in turn invested and given away in $10,000 chunks over the next two decades. The athlete saves more money in taxes due to his current high tax rate and achieves the desired charitable outcome. Done correctly, a properly timed and executed Donor Advised Fund can save athletes tens of thousands of dollars or more. 7. Estate Taxes Estate planning is for old people and athletes are young, right? Wrong. Estate planning is simply deciding where your assets go, when they go there, and how they get there. It is a financial roadmap for when you are no longer able to articulate the plan. Estate planning is even more critical for high-earning athletes due to something referred to as a Death Tax. Did you know there is a tax for dying? If your estate (everything you own added up) is more than 12.92 million in 2023 the government taxes you at 40% over that amount. The good news? You can plan now to avoid it in the future. A properly executed estate plan can help to mitigate, reduce or fully eliminate the estate tax liability. The best time to start planning for this as an athlete is today. You set yourself up for future flexibility and a lowered lifetime tax bill. Taxes will almost certainly be the largest lifetime expense for a professional athlete. These tax strategies for professional athletes are things to consider to reduce that lifetime tax bill. To learn more about how our advisors coordinate athletes’ financial lives and reduce their tax bill, learn more about my own experience navigating this. Get in Touch With An Advisor *The tax and estate planning information offered by Moment Private Wealth is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.