Ever wondered how some wealthy families manage to pay surprisingly low tax bills? It’s strategy. They carefully arrange investments, property, and income so everything works within the rules while trimming what they owe. Keep reading to see the specific practices that quietly shape how the rich preserve more of their money.
Carried Interest
Think of it like this: fund managers take a 20% slice of profits. Now, instead of that money getting taxed like regular income, it’s treated like a long-term capital gain. It gives them a massive tax break, avoiding both higher income taxes and self-employment taxes. Lawmakers have spent years pursuing changes, but the loophole stands wide open, even after repeated efforts.
Step-Up In Basis
Imagine a family passes on a house that’s gone way up in value. Thanks to a “step-up in basis,” the heirs get to start with a clean slate. They won’t owe a dime in capital gains tax. The tax value is “stepped up” to the current market value. They use this method in order to safeguard family wealth.
Qualified Small Business Stock (QSBS)
QSBS was designed to get people to invest in small businesses, but today, it’s a tax-free goldmine. Hold certain small business stock for five years, and you can exclude up to $10 million in gains. It’s a massive perk, and a favorite of venture capitalists and tech founders who have big wins.
Like-Kind Exchanges (1031 Exchange)
A 1031 exchange lets a real estate investor sell one property and buy another of “like kind.” The capital gains tax gets pushed down the road, and smart investors just keep rolling the money into new properties and postponing taxes indefinitely. One exchange is useful, but a series of them can become a powerful strategy.
Charitable Remainder Trusts (CRT)
Charitable Remainder Trusts give donors the chance to contribute money while retaining income benefits for themselves. You donate a valuable asset, get a tax deduction right away, and still get income payments for a set time or for life. The capital gains are deferred, and eventually, the charity receives everything left.
Borrowing Against Appreciated Assets
Some call it “buy, borrow, die.” This is a genius move to get cash without selling your assets and paying tax. Take a loan out against your stock or real estate portfolio. You get money to use, you keep the assets that are still growing, and you avoid the tax bill altogether. The loan is paid off by your estate.
Grantor Retained Annuity Trusts (GRAT)
GRAT is a strategic way for affluent families to transfer wealth. Put an asset into a trust, and you get fixed payments back for a number of years. If the asset grows faster than the IRS’s assumed interest rate, the leftover value is passed on to your heirs, tax-free.
Captive Insurance
Companies can now create their own insurance companies. It’s called captive insurance. The premiums are tax-deductible, and whatever isn’t paid out in claims stays in the captive as a source of wealth. The IRS monitors these arrangements carefully to ensure they’re set up for legitimate insurance purposes.
Opportunity Zone Investing
Originally pitched as relief for struggling neighborhoods, the program turned into a wealth shelter. By selling assets and reinvesting proceeds into a qualified opportunity fund, investors delay taxes. And the longer they hold, the higher the reward. Critics argue profits flow upward, fueling debate over whether the rich gain far more than intended recipients.
Mega Backdoor Roth IRA
High earners often find Roth IRA rules frustrating, since contribution limits keep tax-free savings capped. That’s where the “Mega Backdoor Roth IRA” comes in. Putting after-tax money into a 401(k) and then converting it to a Roth account is a legal way to save beyond the usual limits in your Roth.
