3 ways to increase your wealth—and maximize your legacy
Published: Dec. 22, 2020 at 10:01 a.m. ET
By Osman Minkara

How to put effective tax, real estate and philanthropy strategies into place

The coronavirus derailed many plans this year but it hasn’t made a dent in two major priorities: maximizing wealth and ensuring a legacy for heirs, loved ones and philanthropic causes.

Unfortunately, much of what’s worked for investors over the previous five years likely won’t work over the next five years.

Taxes are expected to rise. So is inflation. Given that backdrop, now’s the time to consider a three-bucket approach to achieving your financial goals: savvy tax planning, real estate strategies and charitable giving.

To some extent, these three are proven tactics, but they’re more important in coming months than at any other time in recent memory. Why? For one, rising U.S. debt will have long-term economic ripple effects. This year through September, the federal government piled up a record $3.1 trillion deficit as it borrowed to fund its massive coronavirus stimulus packages. Debt levels are now higher than the value of the U.S. economy, as measured by gross domestic product. Another stunning figure: U.S. debt has climbed to totals unseen since World War II.

It’s pretty safe to assume we’re coming into an era of higher taxes as the government seeks to retire that debt. Putting effective tax, real estate and philanthropy strategies into place—now—is more relevant than ever.

Meanwhile, the Federal Reserve is loosening its guidelines on inflation. Their new stance isn’t surprising since the U.S. government has flooded the economy with dollars to fund its stimulus plans. The Fed has almost doubled its balance sheet to $7.1 trillion from $3.7 trillion in September 2019.

As the cost of goods and services rise, investors and savers will likely see cash flow and discretionary income suffer. Their ability to invest, build wealth and fund their legacies will also likely diminish.

Now imagine the higher inflation scenario paired with higher taxes. Disposable income will likely dwindle at the same time the government is asking for more through tax revenue.

Wise investors need to develop financial plans for what may be an era of tax hikes and inflationary prices. A solid three-basket strategy may help you protect wealth and legacy savings. The three baskets are:

1. Tax strategies. Have you done all you can to maximize pre-tax contributions? There are useful strategies for owners and employees alike.

A firm owner may want to investigate an employee profit-sharing plan or cash balance plan. The IRS considers allocations into these trusts as deductible expenses for employers.

An option for some employees could be deferred compensation plans, which allows them to defer a percentage of their salaries—and the taxes they pay on that portion—until they are in a lower tax bracket (i.e. retirement). These plans are generally best suited for highly compensated employees who can afford to put money aside.

Small business owners and the self-employed may consider simplified employee pension IRAs. Known as SEP IRAs, these are tax-deferred retirement accounts.

2. Real estate. In a financial environment with higher taxes and greater inflation, certain real estate sector investments allow investors to take depreciation and amortization deductions over the short term while winning growth and capital gains over the long term. Note of caution however: These types of investments, while tax beneficial, tend to be illiquid, or challenging to sell quickly. The risk is that an investor may have their capital locked up in an asset they can’t immediately liquidate.

3. Legacy. Now may be the time to consider creating a charitable lead trust or family foundation. Donations to these non-profit organizations can provide hefty tax deductions today while allowing assets to appreciate significantly over time to the benefit of favored causes in the future. In recent months, unusually low interest rates have made charitable lead annuity trusts especially attractive.

This three-basket strategy could offer significant benefits, particularly when taxes and inflation are rising. But each strategy must be integrated properly into overall portfolios and it’s important to discuss the overall plan with experienced attorneys or financial planners.

At the same time, remember that changing one asset allocation can have significant but unintended consequences on the rest of the portfolio — when you pull one lever, you invariably move another. It always makes sense to consider the fate of the entire account before rebalancing three individual baskets within.

It’s also important to acknowledge that some of these strategies may cost some liquidity. Investors could receive immediate tax benefits, but at the cost of locking up significant sums for a time. At this stage of life, are you prepared to take some money out of circulation? Are you ready for college tuition for the kids and other major family expenses? How about a retirement home? Major travel?

Some of these protective financial moves aren’t necessarily easy or obvious, but they could be very rewarding. Would you rather put your hard-earned dollars toward something close to your heart, or would you rather pay taxes?

Coronavirus and the government’s response to it will create financial uncertainties for months and perhaps even years to come. With some thought and foresight in a new financial era, you may be able to create a valuable legacy for yourself and your family for a secure future.

Osman Minkara is the founder and managing principal of CIG Capital Advisors in Southfield, Mich.