Income Splitting for Wealthy Investors

For wealthy investors, managing investment income goes beyond merely staying within favorable tax brackets. When personal income from dividends and interest is substantial, traditional income splitting between spouses may not suffice, as both parties could still end up in higher tax brackets. Therefore, it’s crucial to think more broadly about income splitting and consider strategies that align with long-term financial and personal goals.

1. Forming Investment Holding Corporations

One effective approach is to create corporations for holding investments. By allocating growth shares to next-generation family members, capital gains taxes can be deferred, allowing wealth to be passed down more efficiently. This strategy also enables control over income distribution, making it an attractive option for investors seeking long-term wealth transfer. Plus, corporations aren’t subject to the same constraints on AMT when charitable gifts are made to eliminate income taxes owing.

2. Utilizing Donor-Advised Funds (DAFs) and Charitable Foundations

For those passionate about philanthropy, DAFs and charitable foundations present a way to manage income-generating assets. By placing capital in these entities, investors can fulfill their philanthropic goals while efficiently handling their income tax liabilities. The income produced is used for charitable activities, offering both tax benefits and personal fulfillment.

3. Employing Family Trusts and Strategic Gifting

Family trusts and the gifting of capital or real estate to children can spread the income tax burden across generations. This approach not only helps in managing taxes but also aids in wealth succession planning. Trusts offer flexibility in how and when income is distributed, making them a vital tool in the high-net-worth investor’s toolkit. Loans can also be made to trusts (and investment holding companies) that can transition income (and growth) to future generations.

4. Providing Low-Cost Loans to Charities

Another innovative strategy is offering low-cost loans to charities. This allows investors to support charitable causes while deriving some tax benefits. The charities can use these funds for their purposes, creating a win-win situation where philanthropic goals are achieved alongside tax efficiency.

5. Investing in Growth Stocks, New Ventures, and Making Impact Investments

Once personal income needs are met, investors might consider assets that do not generate immediate income, such as growth stocks or shares in new businesses. While riskier, certain growth stocks may offer the ability to achieve greater capital gains coupled with a “donate to eliminate” strategy which takes advantage of favourable rules for the donation of appreciated securities. Alternatively, impact investments may carry more risk, but they also give investors the ability to support non-economic goals that prioritize values over profits. Examples of these values include supporting environmental sustainability or fostering entrepreneurship.

The Reality of Investment Income Splitting

It’s vital to acknowledge that if investment income is earned, taxes must be paid. The goal for wealthy investors should be to generate enough income for personal consumption, without excess that leads to a higher tax burden. Investments should be structured to achieve specific objectives beyond just income generation.

How Markdale Financial Management Can Assist

At Markdale Financial Management, we understand the unique challenges faced by wealthy investors. Our family office specializes in helping clients determine their goals and structure their income and capital to support these objectives. Whether it’s aligning investments with personal values or optimizing wealth transfer across generations, our team offers tailored solutions to manage your financial landscape efficiently and effectively.