Imagine you know a member of the capitalist class who invested $10,000 in Wal-Mart Stores, Inc. back in the 1970's. Today, those shares, with dividends reinvested, are worth more than $10,000,000 and pay out cash dividends of approximately $210,000 each year. If he wanted to come up with money without selling any shares, he'd likely know his options included:
- Depositing the stock into a brokerage account and borrowing small amounts on margin against the underlying shares. The debt could be withdrawn without triggering the capital gains taxes. As the dividends were received into the account, they would lower the margin balance.
- Using the shares to fund a limited liability company or a limited partnership and then gifting equity in this partnership below the gift tax levels to children and grandchildren. If he is married, between him and his spouse, he could give up to $26,000 per year to each person without triggering taxes. If he had 4 children and 16 grandchildren, this could result in a transfer of $520,000 annually. Over time, he'd be able to get a lot of wealth into the hands of his family without capital gains tax consequences.
- He can setup a charitable remainder trust funded with the shares. The trust document will call for a certain percentage, say, 5% annually, to be paid out to a beneficiary of his choice (a child or grandchild), with instructions that when that person passes away, the remaining money in the trust will go to a charity he has defined as the death beneficiary. He gets a tax write-off for donating the shares, his child or grandchild gets a regular "paycheck" to help them build their life or purchase a home, and later, the charity benefits from a large donation because it's possible the account has grown in value through compounding.
These are just a few examples of how the capitalist class is able to achieve its objectives, support charity, and still end up with more money in its pockets by knowing the tax rules.
