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When Is The Best Time To Establish A Tax Planning Trust?

❗ Key Takeaway: The benefits of tax planning are clear. But if your exit event is still months or years away, why set up your trust today? The case for getting started now comes down to two things: (1) It’s better to get your plan in place too early than too late. Plus, (2) it’s very easy–and free!–to get started, and there’s quite literally no downside to setting up a trust now.

Deadlines

Humans respond to deadlines. We let the mess pile up and then throw things into the closet the day of the party. We finally do a load of laundry only when we’re down to our last clean shirt. And we put off financial planning until something forces us to take the first step. But the impetus can often come too late. Maybe you wait to start saving for college until your kid aces her first spelling test and you realize you’re years behind, or you’re playing retirement catch-up because you didn’t set up automatic 401(k) contributions due to the administrative hassle. Those delays can be a big deal, and starting early is always the better bet.

Tax planning is no exception. Every day, we hear from customers who get the value proposition of tax-advantaged trusts but who don’t want to deal with it right now, so they tell us they’ll be in touch as they get closer to their exit event–whether it’s an IPO, SPAC, secondary sale, or something else. Now, that kind of delay isn’t a dealbreaker–our tax planning tools can save you a ton as long as you get set up before you sell your assets. But that doesn’t mean there aren’t good reasons to get moving sooner. In this post, we’ll address some common reasons why our customers may want to wait to set up their trust, and our thoughts on why it’s better to get started now.

The case for acting now

For most people we talk to, the benefits of tax-advantaged trusts are clear: You can defer your tax bill on your capital gains, and that can mean additional returns of 40% or more over your lifetime. But if your exit event is still months away, why set up your trust now? After all, you might not be sure how much your assets are going to be worth when you sell them–heck, you might not even know whether you’re going to have the opportunity to sell for a profit–so you might be content to put this off until the need is more concrete.

The case for getting started now comes down to two (related) things: (1) It’s better to get your plan in place too early than too late. Plus, (2) it’s very easy–and free!–to get started, and there’s quite literally no downside to setting up a trust now.

It’s better to be too early than too late

The number one reason to start tax planning when it might seem too early is that the potential outcomes are asymmetrical. If you move too early, it costs you $0 plus the time it takes you to work through our super simple onboarding process. (More on that below.) But if you wait too long–if you fail to get your trust in place by the time you offload your shares or your crypto, you lose the entire benefit of tax planning. This is because the tools we offer are designed to eliminate your immediate tax bill by pushing your gains into a Charitable Remainder Trust, which is a tax-deferred account that behaves much like a more flexible version of an IRA. If your assets aren’t in the trust, they’re not tax free, and there’s no good way to walk it back–you’re on the hook for your tax bill.

That’s all well and good, you might say, but I can time things right–I can figure out when I’m going to sell my shares and sign up with Valur a few months before that. Maybe. But these things can sneak up on you. Maybe a secondary opportunity arises, or your company announces that it’s being acquired and your shares are now locked up, or the price of your crypto or other liquid assets hits your target price sooner than you thought. Once again, if there’s any uncertainty as to timing, it’s better to get a trust set up now and decide exactly which assets–and how much–to put into it later.

No cost; easy process

This is especially true because there’s literally no cost to setting up a trust today. Our services are free unless and until you put assets into your trust. If you set it up today and only decide to move your assets over in two years, those first two years are free. If you set it up today and it turns out it’s not a good fit–maybe your secondary opportunity disappears, or your company goes bust, or you just change your mind–you won’t owe us anything, ever.

Plus our process isn’t burdensome: Our onboarding questionnaire takes about 10 minutes, you’ll have one half-hour call with a lawyer, and we’ll handle the rest.

There’s also no strategic cost to setting up a trust very early. Say you’re 32 and you choose a lifetime trust. bit you wait a few years to actually fund the trust. Now you’re 35, and the IRS’s interest rate has moved a bit, and your payout rate has gone up–even better for you because you can pull more money out of the trust over time. Are you stuck with the (inferior) terms of the trust you set up a few years ago? Nope! We use technology and our proprietary models to determine when it would make sense to set up a new trust for you and shut down the old one–basically, when the allowed withdrawal rate goes up–and we replace your old trust with a new one with better terms, again at no cost. This is the benefit of bringing technology and a little bit of financial sense to a field that’s always been dominated by lawyers paid by the hour. (At the same time, this strategy is common among people who have the means to hire a team of lawyers and accountants to optimize their tax situation. We’re just making it accessible to everyone.)

A quick example: Alex is an early employee of a startup, and she owns shares worth about $100,000 at the company’s latest 409a valuation, but she expects them to go to about $1 million when the company goes public. She starts to hear whispers about an IPO, so she decides to start tax planning. She’s convinced that a lifetime NIMCRUT is the right choice, so she sets it up (at no cost, since she’s not putting any assets in yet). She’s 32, so her payout rate is 5.64%. Without tax planning, she might expect these shares to turn into about $3.6 million over her lifetime, whereas they could grow to $4.9 million in a charitable remainder trust–an additional return of $1.3 million, or 37% over and above what she’d earn in a taxable account.

Now suppose that the chatter peters out, and three years go by before the company announces that it’s going to go public. What’s happened in the meantime? Valur has been tracking the available payout rates automatically, and we’ve set up a new trust for Alex every year in the background. The trust we set up when she turned 33 would have had a payout rate of 5.79% and slightly better returns; the age 34 trust would have done a bit better still. Now Alex is 35, and the payout rate would be 6.09%–even better for Alex because she can pull more money out of the trust over time, and now her expected additional return is about $1.7 million, or around 45%. Because Valur has been keeping things up to date in the background, that age 35 trust–the one with the optimized payout rate–is set up and ready to go when Alex decides it’s time to move.

Conclusion

There are a lot of reasons why you might wait to get started with tax planning. Maybe you’re unsure if it’s the right fit at this time, or, indeed, if it’s the right fit at all. Maybe there are too many other things going on in your life right now. No matter the reason, though, we’re confident that you’ll be happy that you started now.

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‍About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard to access tax advantaged structures so you can build your wealth more efficiently at less than half the cost of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers. Schedule a time to chat with our team and learn more about how we can help you!