Editor's Note: This article is part of the Financial Advisor series "How I Solved It." Advisors describe a client with a problem and what they did to help.

Becoming a de facto utility company can sometimes save wealthy investors millions in taxes, according to a Los Angeles financial advisor who helped a client accomplish this relatively rare financial planning tactic.

Judith Lu was faced with a client who had long planned to retire in January 2020, before anyone thought of Covid-19 shutting down the economy.

Lu, who has 25 years of experience in the financial industry, spun off her team to start her own company, Blue Zone Wealth Advisors, which has more than $300 million in assets under management, in December 2019, just before the pandemic.

Lu noted that the pandemic has actually benefited her business. “There is nothing like an economic crisis to get people motivated to think about their finances and turn to an advisor,” she said.

The wealthy client mentioned above, who wanted to retire at the beginning of the year, was facing a multimillion-dollar tax bill.

The client was the CEO of a major publicly traded firm making well over $1 million a year. When he retired, he was given a $2.7 million bonus. On top of that, he had over a number of years invested $4 million in various real estate limited partnerships. Around the time of his retirement, he received news that these partnerships would be sold, effectively converting his $4 million investment into $11 million, which not only increased his wealth, but also his tax liabilities.

The client was faced with two challenges, Lu said: How to creatively replace the income that he was used to receiving from a salary and the real estate investments, and how to retire in the most tax efficient manner?

Lu devised an integrated solution that helped the client, the environment and a nonprofit organization all at the same time.

Solar tax credits are one of the most interesting and relatively unused tools in tax planning, Lu said. Due to accelerated depreciation rules, every dollar of solar energy investment translates into more than a dollar of tax credit. “While many individuals and companies find solar energy attractive, not just for being a sustainable energy source, but also for the accompanying tax benefits, non-profits are also interested in the benefits of lower energy costs. Non-profit organizations, however, as non-taxed entities, have no need for tax credits,” she said.

“We matched a non-profit that was interested in lowering its energy expenses and having greater predictability of energy costs over the next few decades with our client. Our client, in return for investing in the solar assets and selling the energy to the non-profit, could claim the much-needed tax credits. This resulted in lower energy costs for the non-profit, allowing it to redistribute the savings into community programs. This also allowed the client to benefit from a significant and much-needed tax credit in a high-income year, all while knowing that they were helping to battle climate change.

“In this case, my client redirected $1 million that he would have otherwise paid in taxes and invested in solar panels to produce energy to sell to the nonprofit. In return, he received tax credits that reduced his tax bill from 37% to 27%, saving him approximately $1.3 million in taxes for 2020,” Lu said. “The strategy also was good for the environment and fulfilled the client’s desire to use his money to help improve the community. We effectively turned a liability into an income-producing asset which is great for anyone, but is especially valuable for someone who is retiring.

“The client now has excess tax credits, so we are converting his 401(k) to a Roth IRA and using some of the credits to pay the taxes on the converted funds,” she added.

“This solution is not appropriate for everyone, but it can be a really powerful tool for some. It is one of the most elegant, and sophisticated solutions I have found,” she said.