Tax strategies

[Marco Van Basten]

Clearly taxes take a huge bite out of our investment returns.  Any strategy that reduces or defers taxes without sacrificing performance drastically improves wealth in the long run.  Therefore, let's discuss strategies that people use to defer or reduce taxes.  For instance, I recall somebody, perhaps @thepupil, saying that you can buy an out of the money put spread that matures in January on the S&P, sell the losing leg on December 31st and get rid the of the winning leg on January 2nd.  Any thoughts on this?  Any other suggestions?

[73 Reds]

12 hours ago, Marco Van Basten said:

Clearly taxes take a huge bite out of our investment returns.  Any strategy that reduces or defers taxes without sacrificing performance drastically improves wealth in the long run.  Therefore, let's discuss strategies that people use to defer or reduce taxes.  For instance, I recall somebody, perhaps @thepupil, saying that you can buy an out of the money put spread that matures in January on the S&P, sell the losing leg on December 31st and get rid the of the winning leg on January 2nd.  Any thoughts on this?  Any other suggestions?

@Marco Van Basten the easiest way to reduce or defer taxes is to not incur tax consequences.  With investments focus on long term capital gains and avoid short term trading.  But taxes are just one example of a consistent, drip-like impediment to increasing net worth.  Equal or worse is insurance - of all kinds.  Be it property insurance, auto insurance or even medical insurance, I long since concluded that insuring only against major catastrophic events makes a lot of sense.  Some of the rental properties I own sit on land that is as valuable, if not more valuable without the house and thus I save a lot of money by not insuring them at all.  As an (until now) relatively healthy adult, I've long since only carried major medical insurance with very high deductibles.  Same with auto insurance.   Of course you have to be willing and able to pay for minor or routine incidents, but insurance costs have in many cases become so high that it is worth considering the extent to which you are willing to self insure.    

[Milu]

55 minutes ago, 73 Reds said:

@Marco Van Basten the easiest way to reduce or defer taxes is to not incur tax consequences.  With investments focus on long term capital gains and avoid short term trading.  But taxes are just one example of a consistent, drip-like impediment to increasing net worth.  Equal or worse is insurance - of all kinds.  Be it property insurance, auto insurance or even medical insurance, I long since concluded that insuring only against major catastrophic events makes a lot of sense.  Some of the rental properties I own sit on land that is as valuable, if not more valuable without the house and thus I save a lot of money by not insuring them at all.  As an (until now) relatively healthy adult, I've long since only carried major medical insurance with very high deductibles.  Same with auto insurance.   Of course you have to be willing and able to pay for minor or routine incidents, but insurance costs have in many cases become so high that it is worth considering the extent to which you are willing to self insure.    

Yes that's a good approach regarding insurance. When it comes to insurance I just want to be covered for the crippling black swan style scenario but don't mind paying for all routine stuff out of pocket. 

[brobro777]

With federal, California and Net investment income tax, I gotta pay a good amount but I don't see too many good ways to reduce it 

 

Real estate professional seems way too annoying and oil and gas stuff scare me - those cowboys are gonna take a mark like me to the cleaners

 

Moving to a different state is probably the way to go

[LC]

Anyone ever think of moving residence to Puerto Rico for tax avoidance? I think Kupperman does this? His fund is based there.

[Munger_Disciple]

2 hours ago, brobro777 said:

With federal, California and Net investment income tax, I gotta pay a good amount but I don't see too many good ways to reduce it 

 

Real estate professional seems way too annoying and oil and gas stuff scare me - those cowboys are gonna take a mark like me to the cleaners

 

Moving to a different state is probably the way to go

 

Li Lu moved to Seattle to avoid CA state taxes and then WA state which used to have 0% tax, passed a state capital gains tax which then resulted in Bezos moving to FL. I think FL or TX is the best bet to avoid CA state taxes, all things considered. But the weather in FL & TX is awful. 

 

Many rich in Silicon Valley moved to Incline Village in NV just across the border from CA. You can drive to the bay area in about an hour from there. As a result, home prices in Incline Village went thru' the roof. 

This article may be interest to some of you:

https://smartasset.com/taxes/state-capital-gains-tax

 

CA is the absolute worst state to realize capital gains at 14.4% top tax rate, with federal at 23.8% top LT cap gains rate, you have a cumulate top tax LT cap gains rate of 38.2% for CA residents. 

Edited August 25, 2025 by Munger_Disciple

[brobro777]

8 hours ago, Munger_Disciple said:

 

Li Lu moved to Seattle to avoid CA state taxes and then WA state which used to have 0% tax, passed a state capital gains tax which then resulted in Bezos moving to FL. I think FL or TX is the best bet to avoid CA state taxes, all things considered. But the weather in FL & TX is awful. 

 

Many rich in Silicon Valley moved to Incline Village in NV just across the border from CA. You can drive to the bay area in about an hour from there. As a result, home prices in Incline Village went thru' the roof. 

This article may be interest to some of you:

https://smartasset.com/taxes/state-capital-gains-tax

 

CA is the absolute worst state to realize capital gains at 14.4% top tax rate, with federal at 23.8% top LT cap gains rate, you have a cumulate top tax LT cap gains rate of 38.2% for CA residents. 

 

Thanks for the wonderful reminder bro, you're the tops

 

 

[Munger_Disciple]

16 minutes ago, brobro777 said:

 

Thanks for the wonderful reminder bro, you're the tops

 

 

 

I feel your pain bro! I too am a suffering CA resident.

[fareastwarriors]

13 hours ago, Munger_Disciple said:

 

I feel your pain bro! I too am a suffering CA resident.

Thanks for subsidizing people like me, RE Pro sitting on mountain of "losses."

 

Honestly I will happily take some GAINS/income to be taxed on right now. 

 

 

[adesigar]

Remember to consider total taxes for your personal situation and not just income taxes for the state. 
 

eg

My property taxes in California are $4500. For a similar priced house in Texas the property taxes would be about $17,000. It’s cheaper for me to pay the property+income+sales taxes in California than just the property taxes in Texas. 

[Munger_Disciple]

16 minutes ago, adesigar said:

Remember to consider total taxes for your personal situation and not just income taxes for the state. 
 

eg

My property taxes in California are $4500. For a similar priced house in Texas the property taxes would be about $17,000. It’s cheaper for me to pay the property+income+sales taxes in California than just the property taxes in Texas. 

 

While you are at it, add the sales tax too. The reality is that taxes aren't the sole consideration for most people in choosing a place to live. The weather sucks in TX especially when compared to coastal CA. But the govt is CA is trying their best to mistreat its citizens so more and more middle class Californians are leaving for other states because they simply can't afford to live here. Sadly the state is becoming like many latin american countries; a very few rich/ very upper middle class at the top being served by vast servant class, with no middle class to speak of. 

Edited August 26, 2025 by Munger_Disciple

[adesigar]

1 hour ago, Munger_Disciple said:

 

While you are at it, add the sales tax too. The reality is that taxes aren't the sole consideration for most people in choosing a place to live. The weather sucks in TX especially when compared to coastal CA. But the govt is CA is trying their best to mistreat its citizens so more and more middle class Californians are leaving for other states because they simply can't afford to live here. Sadly the state is becoming like many latin american countries; a very few rich/ very upper middle class at the top being served by vast servant class, with no middle class to speak of. 

I did add sales taxes into my calculation for California and did not include it for Texas and California is still cheaper than Texas.
 

The California is in decline is a bunch of bullshit. I’ll take Newsom over Abbott any day. The population dipped for a bit during Covid when the no mask, antivax people left. California is all the better for it. Population has been rising in 2024 and 2025. 

Edited August 26, 2025 by adesigar

[brobro777]

2 hours ago, fareastwarriors said:

Thanks for subsidizing people like me, RE Pro sitting on mountain of "losses."

 

Honestly I will happily take some GAINS/income to be taxed on right now. 

 

 

 

Just trade stock index futures and options, you'll have capital gains in no time

 

Don't be one of them never-sell-anything value investor types, don't be like those guys, they have weirdo vibes man

 

haha

 

[Munger_Disciple]

11 minutes ago, adesigar said:

The California is in decline is a bunch of bullshit. I’ll take Newsom over Abbott any day. The population dipped for a bit during Covid when the no mask, antivax people left. California is all the better for it. Population has been rising in 2024 and 2025. 

 

Well I don't want to get into politics here but I have been in CA since 1987 & the infrastructure has degraded dramatically. I live in San Diego & the city is full of potholes that are never fixed. And I know LA isn't better. Almost every city in CA has a massive homeless problem. Let's not even talk about things like the bullet train which has been a huge waste of money with nothing to show for it. LA clearly didn't have firefighting infrastructure (no water or enough fire trucks) during the Palisades fire in January. 

 

I love CA. Nothing would make me happier to have a decent infra where I live but I have given up looking to my govt. 

Edited August 26, 2025 by Munger_Disciple

[charlieruane]

If you are quite wealthy, or will be some day, and face a big estate-tax burden, zeroed-out/"Walton" GRATs are the way to go. 

[Marco Van Basten]

4 hours ago, charlieruane said:

If you are quite wealthy, or will be some day, and face a big estate-tax burden, zeroed-out/"Walton" GRATs are the way to go. 

Thank you.

[charlieruane]

You're welcome. They're insanely powerful, but only useful to people who plan to pass on an amount greater than the lifetime gift exemption. 

[Munger_Disciple]

15 minutes ago, charlieruane said:

You're welcome. They're insanely powerful, but only useful to people who plan to pass on an amount greater than the lifetime gift exemption. 

 

Thanks @charlieruane! Can the annuity payments to the grantor be made with in-kind securities in the GRAT?

Edited August 27, 2025 by Munger_Disciple

[charlieruane]

I believe so, yes. As you've probably read by now, there are many layers to this strategy... the most evolved involves "rolling" shorter-term GRATs with increasing annuity payments that were "zeroed-out" at the start. But the cherry on top, which fewer people know about, is doing the following: 

 

-Create GRAT

 

-Put securities (say, public equities) into GRAT; make sure it's setup to be "zeroed-out"

 

-Give the securities time to grow

 

-Here's the magic: If the securities grow a lot while the GRAT is active, swap the securities in the GRAT for a promissory note that *you* write, i.e. move the appreciated securities back to your taxable estate and fill the GRAT with a promissory note of value equal to the appreciated securities being removed. This essentially locks in the gains that've happened within the GRAT

 

-Immediately move the securities you removed into a new GRAT to start the process all over again; if the securities fall in value while they're out of the GRAT, perhaps because they got a little bubbly before you made the note swap, that's all the better for capturing future appreciation

 

-Before the original GRAT expires, pay off the original GRAT's promissory note with T-bills or cash; these will go to the beneficiaries and will have essentially 0 unrealized capital gains (unlike the appreciated securities), on top of the 0 gift-tax consequences
 

So, GRATs basically create a free option on the securities contributed to the GRAT. You can set these up so that all of the appreciation in the underlying securities passes to beneficiaries free of gift tax, locking the size of your estate (at least the piece of your estate represented by these securities) in the process. Ultimately, you can try to time your promissory note swaps so that you die with the securities in your estate, so they receive the step up in basis upon death; meanwhile, your heirs have received regular distributions of high-basis T-bills/cash from your series of GRATs. 

 

It's nutty stuff and may not always be allowed, but for now, it's the real deal. If you keep your eyes peeled, you'll see lots of references to GRATs in the SEC filings of wealthy folks. Propublica covers this topic pretty well, too—famous examples beyond the Waltons include Mark Zuckerberg and Jensen Huang. Munger did something a little similar to the promissory note swap with a bunch of Berkshire A shares at the depths of the GFC—that filing is worth checking out if you haven't already.

 

EDIT: You do want to be judicious with the promissory note swaps—that's a relatively aggressive (albeit totally legal) strategy. Just don't go crazy with them, e.g. writing new notes and new GRATs every five days. Wait for real appreciation, then make the swap. 

Edited August 27, 2025 by charlieruane

[fareastwarriors]

11 hours ago, brobro777 said:

 

Just trade stock index futures and options, you'll have capital gains in no time

 

Don't be one of them never-sell-anything value investor types, don't be like those guys, they have weirdo vibes man

 

haha

 

My options trading have been adding to my loss pile .  

 

ok fine I’ll try futures. 

[Munger_Disciple]

On 8/26/2025 at 10:21 PM, charlieruane said:

I believe so, yes. As you've probably read by now, there are many layers to this strategy... the most evolved involves "rolling" shorter-term GRATs with increasing annuity payments that were "zeroed-out" at the start. But the cherry on top, which fewer people know about, is doing the following: 

 

-Create GRAT

 

-Put securities (say, public equities) into GRAT; make sure it's setup to be "zeroed-out"

 

-Give the securities time to grow

 

-Here's the magic: If the securities grow a lot while the GRAT is active, swap the securities in the GRAT for a promissory note that *you* write, i.e. move the appreciated securities back to your taxable estate and fill the GRAT with a promissory note of value equal to the appreciated securities being removed. This essentially locks in the gains that've happened within the GRAT

 

-Immediately move the securities you removed into a new GRAT to start the process all over again; if the securities fall in value while they're out of the GRAT, perhaps because they got a little bubbly before you made the note swap, that's all the better for capturing future appreciation

 

-Before the original GRAT expires, pay off the original GRAT's promissory note with T-bills or cash; these will go to the beneficiaries and will have essentially 0 unrealized capital gains (unlike the appreciated securities), on top of the 0 gift-tax consequences
 

So, GRATs basically create a free option on the securities contributed to the GRAT. You can set these up so that all of the appreciation in the underlying securities passes to beneficiaries free of gift tax, locking the size of your estate (at least the piece of your estate represented by these securities) in the process. Ultimately, you can try to time your promissory note swaps so that you die with the securities in your estate, so they receive the step up in basis upon death; meanwhile, your heirs have received regular distributions of high-basis T-bills/cash from your series of GRATs. 

 

It's nutty stuff and may not always be allowed, but for now, it's the real deal. If you keep your eyes peeled, you'll see lots of references to GRATs in the SEC filings of wealthy folks. Propublica covers this topic pretty well, too—famous examples beyond the Waltons include Mark Zuckerberg and Jensen Huang. Munger did something a little similar to the promissory note swap with a bunch of Berkshire A shares at the depths of the GFC—that filing is worth checking out if you haven't already.

 

EDIT: You do want to be judicious with the promissory note swaps—that's a relatively aggressive (albeit totally legal) strategy. Just don't go crazy with them, e.g. writing new notes and new GRATs every five days. Wait for real appreciation, then make the swap. 

 

Great detailed information, thank you @charlieruane!

 

I will need to go thru' this a couple of times carefully to digest it fully. GRAT definitely seems like a great wealth planning tool. 

Edited August 28, 2025 by Munger_Disciple

[brobro777]

On 8/26/2025 at 11:44 PM, fareastwarriors said:

My options trading have been adding to my loss pile .  

 

ok fine I’ll try futures. 

 

Just do nuffin until Vix goes 40+ and all those Reddit funboys start celebrating the world ending - then buy ES and NQ, EZ baby

 

haha

 

 

[Munger_Disciple]

@charlieruane I spent a little more time on your excellent follow-up GRAT post. Very interesting stuff. What does it cost to create a GRAT? If you prefer you can reply via a DM. 

 

You mentioned Charlie Munger's promissory note swap with his children. As I understand it, Munger received a promissory note from his children in exchange for the very cheap (post -GFC) BRK stock he gave them so I don't think that transaction is part of a GRAT but I am not sure. I assume it was a non-taxable exchange. 

 

[charlieruane]

@Munger_Disciple If you and your partner stand any chance of passing on more than the lifetime gift exemption, GRATs are no-brainers. Compared to the savings, the costs are trivial—like, a few thousand dollars in legal fees to a trusted estate tax lawyer. And if the GRAT fails (i.e. if securities in the GRAT do not appreciate), there is no non-legal-fee cost to you; you just start a new GRAT. 

 

And yeah, you're correct—here's the Munger filing. Nothing GRAT-y here, I just flagged it because it involved some interesting estate-tax maneuvering centered on trading promissory notes for equities. 

 

Feel free to DM me if you end up doing it! 

Edited August 28, 2025 by charlieruane

[LC]

How do taxes inside the GRAT work? 

 

Assume I put 5M of Berkshire stock in a GRAT, zero'd out over 5 years (1M per year). 

 

Presumably every year selling 1M of Berkshire stock generates some capital gains - where does that liability reside?