Avoiding Capital Gains Tax Causes Family Conflict! (or Don’t Let Tax Decisions Drive All of Your Decisions)
Yes, the title reads somewhat like a National Enquirer headline, but it’s true – focusing solely on avoiding taxes (whether capital gains tax, income tax, or estate taxes) can lead to family conflicts.
This past week I had the opportunity to meet with a family, to review their wealth transfer plan and their plans for giving to charity. As is the case with many astute investors, this couple has experienced some significant growth in their assets as a result of some of their investments doing quite well. For example, one of their investments over the past year provided a 100% return on their initial amount invested (that is, they doubled their money). Plus it looks like the company they invested in will sell and they may receive as much as eight times their original investment! Obviously, this is “once in a lifetime†scenario which has gone well for them – it will create millions of dollars in investment income they were not planning on. (“Not a bad problem to haveâ€, as most people reply.)
Here’s the real problem. In discussing what they should do with the extra $5 million they will be receiving, it became clear there was a difference of opinion on what to do with money. From the point of view of minimizing the capital gains tax they will be paying, there is one set of action steps they should take. From a philanthropic perspective – all of sudden having a large sum of money and seeing an opportunity to share with others, there is another set of potential action steps. And from a long-term planning point of view (investing the sum so that it creates additional income, allowing the “breadwinner†to retire early), there are other steps which could be taken.
So what is the right direction? What should this family do with their windfall profits?
It depends. On them. On their values. On their future plans and goals. On their worldview and life priorities.
That’s the point. And that is the discussion we started to have together (it is not finished yet). What is important to you? How do you want to “invest†this gift to you? Maybe we should look at balancing needs and perspectives, rather than use an “all or nothing†approach.
Unfortunately, however, most financial advisors focus solely on the financial aspect of financial decisions (and specifically, on taxes) – and miss a very important part of decisions involving money: values.
So, next time you are making a financial decision (I hope it is one where you have lots of extra money), remember – don’t base it solely on its impact on your taxes. There are a lot of equally important variables to consider as well.
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