00:01:25 · Molly O'Shea, Michel Del Buono
[00:01:25] S1: So I guess there are a lot of people that need pre liquidity advice. [00:01:29] S0: Sure. With all the things happening between SpaceX IPO, a lot of secondary transactions, tender offers and things like that. People are really focused on what to do, and a lot of that of course has to do with how you structure yourself from a trust and estate perspective. But it also has to do, or you can optimize your situation also with different investment strategies that can be complementary to that, and then finally philanthropy. So there's kind of three elements to preparing yourself for a liquidity event, right? Structuring your trust and estate, thinking about how to sort of make key investments that help offset taxes to some degree, and then donating into a donor advised fund or some other charity. Those three are kind of the nexus of how to optimize yourself prior to a liquidity event. [00:02:15] S1: I feel like philanthropy can be an entirely another episode. That's a big one.
00:02:15 · Molly O'Shea, Michel Del Buono
[00:02:15] S1: I feel like philanthropy can be an entirely another episode. That's a big one. [00:02:20] S0: It can be. The beauty of the donor advised fund is that you can sort of detach your decision when to give with your decision of when to tax optimize. So you can donate things into a DAF and immediately get a tax benefit. But if you're young and still working, people aren't necessarily ready to dedicate their lives to how to spend that money and donate it, but you can defer that decision for a while in the DAF if not feeling ready. So it helps you detach a bit the difficulty of tackling the problem. How do I give versus should I give for optimization of my balance sheet right now? [00:02:57] S1: So to bring it back to center, so you are the CIO of A16z Perennial. I like to call this Mark and Ben's multifamily office is the wealth management fund of A16z. So in terms of all of the events coming up, I guess the number one topic that I was asked was on tax optimization. Can you break down I know this is a loaded topic too because there's so many different things. But okay. Let's say you have a liquidity event. 90% of your net worth is in one position. What do you do? What is step one?
00:03:32 · Michel Del Buono
[00:03:32] S0: So, again, if you remember, I I talked about three sort of components, but step one is absolutely your trust and estate optimization construction. So there's a lot of nuance and complexity around there. But if you sort of step back, it's all about creating trusts. And there is, as you probably know, like a whole bunch of different trusts. You can create Charitable remainder trusts, spousal access trusts, revocable or irrevocable trusts, grantor, non grantor trusts. There are all these different things you can do. I'm not an attorney, so I don't know all the details about them, but I know enough to tell you that it's a very complicated situation. In parallel, you can also take some of your proceeds and put them into different strategies that generate losses, so called tax loss harvesting. And there's several flavors of that too that you can do. Where I find that people have difficulty is you hire attorneys, right, and they're gonna tell you everything about, or CPAs, about these trusts, but they're not gonna have the knowledge to compare that and contrast that to an investment strategy that generates loss. The real challenge, I think, for people is how do I trade these things off? And that's where having a multidisciplinary kind of background is really important because each of those silos doesn't know enough about the other one to trade them off, right? And so that's, I think, something that's very much overlooked because sometimes just barreling down the I need a bunch of trusts and doing all this stuff is not necessarily better than having a tax loss generating investing strategy that doesn't require you to do all those trusts, And that trade off is not obvious to figure out and navigate.
00:05:16 · Molly O'Shea, Michel Del Buono
[00:05:16] S1: So I guess to put it a little more directly, what would happen if you don't do that? How much of your capital would be at risk? [00:05:25] S0: Well, I mean, so if you're a founder of a company, basis, the price which your IRS uses to assess your stock is zero. So that means 100% of your gain is subject to at least long term capital gain tax, which, you know, depending on the state you're in, can be upwards of 35%. Right. If you're in a non tax state, then you just have the federal, which is, I think, 23.8. So either way, you're talking about a lot of money and trust and state attorneys love to say that there's really only three places your money can go. Right? It's your family, it's charity and it's the IRS. It's generally speaking, I don't know anyone who prefers the IRS. Right? Maybe there is some of it. Right. So so as a result, everyone's trying to avoid that. And that's where either these investment strategies come in, these trusts, the trusts are really for your family or then the charity element, which is a kind of a trust in some ways. It's putting money somewhere else that you can't access personally, but it still removes it from your taxable base. [00:06:33] S1: And then what are the types of instruments and, I guess, tools that you use when you set them up? If it's like, you know I don't know. If you set this up, could you just, like, break down alright. We're in a liquidity event. We're gonna put all the money into a trust. Alright. How do we then construct the portfolio and what comes off of there?
00:06:33 · Molly O'Shea, Michel Del Buono
[00:06:33] S1: And then what are the types of instruments and, I guess, tools that you use when you set them up? If it's like, you know I don't know. If you set this up, could you just, like, break down alright. We're in a liquidity event. We're gonna put all the money into a trust. Alright. How do we then construct the portfolio and what comes off of there? [00:06:54] S0: Yeah. Yeah. So you you're probably gonna have several trusts. Again, full disclosure, I'm not an attorney. Right? But you're gonna have several trusts that'll be dedicated to different members of your family or different entities. And each of those should probably have a different investment strategy. So if you're young and you inherit or your parents set up for a trust with a lot of stock in it, you have a very long time horizon, right, because you're young. So there, the appropriate investment strategy is different than for an individual who's older and has cash needs to fund their life. So it's all about figuring out for each piece of that mosaic of trust that you're creating, what's the optimal strategy, investment strategy to operate inside of them. You can't just photocopy the same thing for all the different trusts. And that's where it gets complicated. I think that's where people sort of get confused. And it's not unusual to see people with many, many trusts. So that makes the problem that much more complicated. [00:07:55] S1: How do you approach QSBS?
00:07:55 · Molly O'Shea, Michel Del Buono
[00:07:55] S1: How do you approach QSBS? [00:07:57] S0: I mean, QSBS is an incredible benefit for small and so for founders who start early in the life of the company, they get 10,000,000 now actually starting, I guess at the beginning of this year, to 15,000,000 off their tax, or 15,000,000 of proceeds from their stock sale would be not taxed. So it's a huge benefit, it's a huge motivator for people to actually go into startups. I was recently speaking to some people abroad in Asia who wanted to sort of create you know, an entrepreneurial community. They said, what's so special about America? And one of the things I think is the tax code, the environment, the culture of trying to start something is very important, including this QSPS benefit. It's a very important motivator to think that, hey, you know, if I work like crazy and dedicate myself to something, you know, I get to keep some of the proceeds in an advantaged way. So a lot of these strategies of having multiple trusts are to try to multiply these QSPS benefits across the different trusts. [00:09:01] S1: And people say they talk about stacking them. So how does stacking them? [00:09:05] S0: That's what stacking means. [00:09:07] S1: Oh, okay. [00:09:07] S0: Right. So you can have several trusts for your kids, your parents, what whatever. And each of those, depending on how you structure them and it's complicated and probably above my legal knowledge. But each of those can get if it's structured right, its own QSBS exemption.