What do tax planning and international espionage have in common? More than you may think!
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Tax Planning Lessons From the CIA

Thirty-five years ago, right around now, I was getting ready to graduate from Hamilton College on a snow-covered hill outside cosmopolitan, sophisticated Clinton, NY (population: 1,830 people and an exponentially larger number of farm animals). I had majored in history and minored in government. But the history companies weren’t hiring that year, so I was taking a series of entrance exams for various government agencies, including the Foreign Service and the CIA. And I found myself one Saturday morning in a classroom at nearby Syracuse University with a group of fellow would-be spooks.

The exam itself was mostly conventional – a 3-hour SAT-equivalent with a bunch of psychological screening profiles. (One question I remember: which job would you prefer; juvenile probation officer or dog trainer?) But one section stuck out in particular – a two-minute test called “considerations.” We were given a sealed envelope and told that when we opened it, we would be presented with a mission, and we would be given two minutes to write down as many things as we could think of that we would need to “consider” to accomplish that mission.

When I opened the envelope, I was told I had to break into an office and steal files from a safe. So: what security did the building have? The office? The safe? Were there guards? People? Dogs? How would I get in the safe? How would I get the files from the building to wherever they needed to go? What format would the files be in? (We actually did have computers back then, kids.)

I ended up passing the test, along with the Foreign Service exam. But I wound up taking a job on Capitol Hill, where I ended up in Rep. Jack Kemp’s office for passage of the Tax Reform Act of 1986. Who knows where I would be now if I had wound up behind the Iron Curtain for a career of undercover skullduggery? Certainly not at the helm of the USS TMN!

That “considerations” test still guides the work we do today with our clients. Tax preparation is a matter of following the rules. There may be wild cards and uncertainties. Will the IRS accept our client’s conservation easement valuation? What about our deduction for captive insurance premiums, do they qualify as bona fide insurance? But tax planning, by contrast, is a matter of weighing different considerations as we examine how best to minimize our clients’ bills.

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Tax Planning and Considerations

Let’s look at a specific example. Last week, I spent some time with a 41-year-old real estate entrepreneur. He earns about $500,000 and stashes about $200,000 of that in a cash balance plan. He also has about $400,000 in traditional IRA assets. And he’s charitably inclined – he gave about $30,000 in 2019.

At first glance, the cash balance contribution looks like a home run. But at his age, the Rule of 72 tells us that investing his existing IRA balance at 8% should grow to $800,000 around age 50, $1.6 million around age 59, $3.2 million at 68, and $6.4 million at 77. Would he really want or need more traditional assets, considering how much the IRS would take of those balances?

Here’s what we had to consider:

  • The entry-level question was how much he’s saving by contributing to the cash balance plan. Without the plan, he’s “in” the 35% bracket. But of course that doesn’t mean he’s saving 35 cents on every dollar he contributes. Dropping $200,000 into the plan takes him all the way down to the 24% bracket. Plus, there’s a cost to administering the plan and contributing on behalf of an employee. We figured he well under 30 cents on the dollar today.
  • What will his tax rate be when he starts pulling money out of the tax-deferred bucket? Your guess is as good as mine – if we’re lucky, the earth will be hit by a comet before then. But odds are good that rates are going back up over time, and he’ll actually pay more than he saves today. Es no bueno.
  • What about his charitable giving? How much is he really saving with that? The plan contribution means he’s deducting 24 cents on the dollar at the federal level. Is there a way, perhaps, to concentrate some charitable gifts to get a bigger deduction?
  • What opportunities might we have to eliminate the enormous future tax bill on his current tax-deferred account balance?
  • How will the Biden administration’s tax proposal affect these calculations? Would it make sense to accelerate any deductions into 2021 if the top rate is going up in 2022? Do we want to recommend any major moves before we see some specific legislation, or have some assurance that it’s going to pass?


Take a couple of minutes to gather your own considerations. Play the home game before you finish the rest of this column!

Ok, what did we come up with? I have a terrific plan that can leverage current deductions to eliminate literally millions of dollars in future taxes and help assure the client’s legacy for his two young children.

My specific recommendation was to establish a charitable lead annuitrust to accelerate future charitable gifts. Then, instead of squandering those deductions at 24-ish cents on the dollar, use them to offset the income from converting the $400,000 in traditional IRA assets to Roth assets. The account will grow to the same eye-popping numbers we discussed earlier – but now they’ll be tax-free. That move alone could easily save $2 million or more in lifetime tax. (Along the way, it’ll make the $10,000 planning fee he paid the best investment he’ll ever make in his life.)

Of course, we’ll want to wait until later in the year before pulling any triggers. And the client is suddenly less excited about his cash balance plan. So we’ll talk about shifting some of his retirement savings into cash-value life insurance for even more tax-free retirement income. His kids are young and he needs a ton of coverage anyway.

Granted, this sort of planning isn’t as fun skulking around behind the Berlin Wall in 1980s East Berlin. On the bright side, tax pros rarely get a bullet in the brain while working. But the lesson from the CIA test remains. Tax planning isn’t an exercise in following the rules, or even making the most of the rules. It’s an exercise in creative thinking, and gathering all the considerations in one place to come up with the best results for your client!

Edward Lyon

Edward Lyon

Edward A. Lyon is CEO of the Tax Master Network, where he's coached tax professionals to add planning and financial services to their business since 2005. Go here to join the network. Go here to upgrade your membership or discuss opportunities in financial services.
Edward Lyon

Edward Lyon

Edward A. Lyon is CEO of the Tax Master Network, where he's coached tax professionals to add planning and financial services to their business since 2005. Go here to join the network. Go here to upgrade your membership or discuss opportunities in financial services.

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