Elon Musk, the CEO of Tesla and SpaceX, is no stranger to headlines. With all his many financial maneuvers, the sale of $2 billion worth of Tesla stock in 2021 stands out. But what if Musk had used a Deferred Sales Trust (DST) to manage his capital gains tax liability? Let’s explore how this strategy could have saved him millions.
When you sell an asset for more than you paid for it, the profit you make is considered a capital gain. For high-net-worth individuals like Elon Musk, the federal capital gains tax rate can be as high as 20%, not including the 3.8% Net Investment Income Tax (NIIT) for those earning above certain thresholds, and applicable state taxes.
In Musk’s case, assuming he faced the highest federal rate, the calculation looks something like this:
- Federal capital gains tax: 20%
- NIIT: 3.8%
- California state capital gains tax: 13.3% (since Musk was a California resident at the time)
Let’s do the math on Musk’s $2 billion stock sale to understand the potential tax liability.
- Federal Capital Gains Tax**: $2,000,000,000 * 20% = $400,000,000
- NIIT**: $2,000,000,000 * 3.8% = $76,000,000
- California State Tax**: $2,000,000,000 * 13.3% = $266,000,000
Total potential tax liability: $742,000,000
How a Deferred Sales Trust could have helped? A DST is a legal strategy for deferring capital gains tax. By placing the proceeds from the sale into a trust, the seller can defer paying capital gains taxes until the funds are paid from the trust.
If Musk had utilized a DST, he could have deferred the $742 million tax liability.. The deferred tax liability would only come into play as Musk took distributions from the trust, potentially spreading the tax liability over many years and possibly reducing his overall tax rate due to lower annual income.
While the Deferred Sales Trust might not be the perfect fit for everyone, it represents a powerful tool for to consider. By leveraging a DST, Musk could have potentially deferred hundreds of millions in capital gains taxes, allowing for greater financial growth.
If you have an appreciated asset, contact Reef Point for a free analysis to see if a DST could benefit you. Our expert team will review your analysis and provide personalized insights on how a DST can help you defer capital gains taxes.
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Contact Greg Reese or Paul Brar to schedule a DST consultation by calling (866)-867-8633 or info@reefpointusa.com.