Years ago, the partner at the law firm where I worked at the time approached me about working on a presentation for a major client. The client had significant business and personal holdings and was looking to do both income and estate tax planning.
We prepared for this meeting for about two weeks and came up with a plan that would address all of his concerns. Part of our plan involved getting his children more involved in his business (which he claimed he wanted) and we also suggested a gifting program to donate significant pieces of his impressive art collection to a local museum (which he also claimed he wanted).
The meeting was an hour away from our office and the partner and I took separate cars. The partner’s car was filled with charts, diagrams and projections illustrating how the various components of the plan would save the client potentially millions of dollars of income and estate tax over time. The plan was that the partner would make the presentation and I would nod and smile as back up.
The partner made the presentation and it sounded impressive. Only we didn’t get quite the response that we were anticipating. The client’s answer? I don’t like it. I’ve changed my mind.
The partner looked ill. He had no immediate response.
Despite the fact that my job was supposed to be to sit on the sidelines and play cheerleader, I piped up. I asked the client what part of the plan he didn’t like and in what regard he’d changed his mind. The long and short of it was that he did not trust his children to make decisions about his business – and he wanted to hang on to his art collection for a bit longer (in reality, his wife wanted to, but that’s a whole other story).
I nodded, my mind racing. What if… I said. And I pitched him several different ideas there on the spot. The ideas that I pitched would allow him to keep control of his business by recapitalizing it and hold onto his art collection while still reducing his tax burden by creating a family foundation and a trust. These ideas would still save taxes though arguably not as much as in the first plan.
I waited, hopeful that I had not made matters worse by suggesting something so radically different from the first plan. It was a risk – this was one of the best clients at the firm and I didn’t want to appear scattered.
Silence for a moment. And then an answer: the client loved my suggestions. By the end of the meeting, there were lots of smiles and hand shakes and plans for a follow-up meeting.
I walked away from this meeting having learned two very important things:
1, Don’t second guess yourself. The part that I left out of this story was that the meeting was held on the last day that I ever worked for this firm. Two weeks before, I had submitted my resignation so that I could start my own law firm. At some point during those two weeks, I began to question whether that was a smart move. What if, I thought, I wasn’t good enough to make it on my own? On the long drive back to my office, I had answered the questions about whether I was good enough – I also anticipated that my firm would ask me to reconsider my resignation. I was right on both counts.
2, You shouldn’t change your lifestyle for tax reasons. The client had initially thought that he wanted to give up control of a business that he had worked for years to establish just to save a few dollars come tax time. Similarly, he thought he was willing to give away this remarkable art collection that his wife had spent years amassing for the same reasons. He was wrong on both counts.
In the end, it wasn’t the client’s job to change his life in order to accommodate a tax strategy. It was our job, as tax professionals, to develop a tax strategy around his life. Those are very different things.
Over the years, I’ve had clients that have questioned whether to get married, have a child, buy a house, a boat or a building, retire, start a business, sell a business, hire an employee, change jobs, move to another country… all for tax reasons. Tax should not, in my opinion, be the sole reason to do any of those things.
Whether you’re a small business owner, a CEO of a large corporation or just a regular taxpayer, this is good advice to remember. Don’t do anything just because it looks good on paper. Don’t rely on an accountant, a lawyer or a financial advisor to make your life decisions for you. Do things because they’re what you want to do.
I’m not saying to avoid tax and financial planning – far from it. I believe that good tax planning and good tax advice is money well spent. But rely on the professionals to sort out the details, not plan your life. If you want to sell your business or your house or whatever, do it. And yes, consult with a tax professional to sort out the best way to structure the sale and the timing of the sale and all of those important details. But the big picture – the decision – is always yours to make, irrespective of the tax consequences.
Maybe this is odd advice to find on a tax blog, this idea that you shouldn’t consider tax first when making life decisions. But it’s the best advice I have. Life isn’t about numbers. At the end of the day, it’s about being comfortable with the choices that you make – and that includes taking chances when it matters and sorting the rest out later. Trust me. I’ve worked with folks from all walks of life, from destitute to uber-wealthy. And I’ve never been to a funeral where the eulogist said, “He made the best tax decisions ever, God bless him.”
Makes perfect sense. I currently live in a state with no state income tax. I’m going to cross out “income tax” of the con side of my pro & con list of moving to California, and will mull the idea over a little longer.
Kelly, this is fantastic advice. Thank you!
Awesome post, Kelly. You mentioned that “I waited, hopeful that I had not made matters worse by suggesting something so radically different from the first plan”. While it was radically different from the first plan, it was actually a lot similar to status quo, which people often don’t like to change (if they haven’t already).