Sometimes advisors look “outside the box” in order to help clients retire in a tax-efficient manner. Judith Lu, a Los Angeles financial advisor with Blue Zone Wealth Advisors, helped one wealthy client create his own personal utility company in order to save millions in taxes.
Lu’s client was the CEO of a major publicly traded firm, and he had planned for a long time to retire in January 2020. He was making well over $1 million a year at his company (which had nothing to do with creating or selling energy). When he retired, he was given a $2.7 million bonus.
On top of that money, 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 says: How to creatively replace the income that he was used to receiving from his salary and the real estate investments, and how to retire in the most tax-wise way.
Lu devised an integrated solution that helped the client, the environment and a nonprofit organization all at the same time by creating a public utility—one created solely to provide solar energy for the nonprofit.
The client, of course, did not know anything about heading a utility company and had never considered running one until Lu explained the tax and environmental benefits, she says.
It works like this: People who install solar panels on their homes or businesses receive a tax credit from the Internal Revenue Service. Lu uses that program, but takes it to the next level.
“Solar tax credits are one of the most interesting and relatively unused tools in tax planning,” she says. “Due to accelerated depreciation rules, every dollar of solar energy investment translates into more than a dollar of tax credit.”
Nonprofit organizations don’t need or think about tax benefits. However, like individuals and companies, nonprofits find solar energy attractive as a lower-cost, sustainable energy source.
When an investor provides the solar power, he gets to use the tax credits while the nonprofit can use the lower cost energy.
Without this innovative tax strategy, Lu’s client would have faced paying taxes on approximately $7 million from the real estate investments, plus taxes on the retirement bonus he received. The client was also interested in helping a nonprofit organization and helping improve the environment. So the solar energy tax strategy met those goals.
Lu says the clients she has helped through this strategy knew nothing about public utility companies or the solar energy business.
“It is a complex concept, and I often draw illustrations for the clients,” she says.