JF2217: Setting Up Your Taxes Like The Elites With Khurram Chohan #SkillsetSunday
Khurram is the founder of TogetherCFO and an expert in high net worth tax structures. KC helps the elites set up their taxes and in this episode, he will be helping you understand how they pay fewer taxes than the majority of the public and how you can do the same.
Khurram Chohan Real Estate Background:
- Founder of TogetherCFO
- Writer for Forbes Magazine
- Expertise in high net worth tax structures
- Based in Los Angeles, CA
- Say hi to him at: www.togethercfo.com
Best Ever Tweet:
“We use the law in a way to optimize the taxes” – Khurram Chohan
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever. We don’t get into any of that fluffy stuff. With us today, KC Chohan. How are you doing, KC?
KC Chohan: I’m good. Thank you so much for having me on, Joe.
Joe Fairless: Well, it’s my pleasure. And a little bit about KC; he’s the founder of TogetherCFO, his focus is on high net worth tax structures, based in Los Angeles. Best Ever listeners, today, is a special segment called Skill Set Sunday, where we talk about a specific skill, and here’s a specific skill that you’re going to learn by the conclusion of our conversation today. It is know-how that that the wealthy are able to pay a lot less in taxes and how you can set that system up for yourself. With that being said, KC, first, do you want to get the Best Ever listeners just a brief background on yourself? And then let’s go right into the tax structure.
KC Chohan: Yeah, I’m KC, born and raised in England, and moved out to America with a big Fortune 500 company. I was working there for over eight years. I worked my way up through the ranks. I was always curious and wanted to understand taxation, accounting, and business. It got to a point where I was pretty fed up with corporate America and then started my own company, TogetherCFO.
I watched this clip once and it really sparked my imagination. Warren Buffett was on, I think it was NBC News, and he was sat right next to his secretary, and he was talking about how he pays a 17% tax rate, which is half of what his secretary pays, and she’s the epitome of kind of the average American. She’s paying over 35% in taxes, and he’s calling for this new tax law to go into effect, which obviously didn’t go into effect. But the takeaway from that was, how is he openly sat on national television, talking about paying such a low tax rate, and he’s not the only one, and nothing’s really been done about it?
That really sparked something inside me to help my clients and myself figure out exactly what he was doing… Because it’s fully legal. He wouldn’t be on national television, CEO of Berkshire Hathaway, one of the richest men in the world, talking about how the system allows that to happen. And then when you look at other big companies like Amazon, and Microsoft, and Google, all these companies have paid very little, if anything, in federal taxes, all fully legally.
What my firm now specializes in is helping the regular average American, the slightly higher net worth middle-income American to be able to do that same thing that Warren Buffett’s doing, legally.
Joe Fairless: I’d love to learn about the process of doing so. Can you walk us through the process?
KC Chohan: Absolutely. There’s different types of taxation in America, right? Every single state has its own set of rules, its own set of guidelines that they follow. Then on top of all 50 of those states with their own legal entities and rules, there are federal rules as well. There are two real taxation systems, if we look at a high level; it’s the 1040 system, which 99% of people use, and then there’s the 1041 system, which the top 1% use.
The difference in the 1040 system is its state and trust structures. And even within that system, there’s nine subsets that all have different rules as well. You’ll hear me talk a lot about different rules and regulations, and it’s all hidden in the tax code, which is over 22,000 pages long. It’s like reading Shakespeare, it doesn’t really make very much sense unless you know how to read it properly.
Hidden within those 22,000 pages is one specific subset in the 1041 system, and it’s called the complex trust system.
The rules within the complex trust are a very different set of rules that apply to any other system out there, and that’s what the top 1% and the top elite people use to legally pay very low taxes. Even Mitt Romney, when he did declare his tax returns a while back, it was 13%. Prior to that, he’d been alleged to not pay any taxes, the same as President Trump. He’s never going to release any of those returns, because he just hasn’t paid any taxes; and the system that they all use is this 1041 complex trust system.
Joe Fairless: You said there’s two will taxation systems 1040 and 1041. Will you educate me? What do you mean by there’s two systems, 1040 and 1041?
KC Chocan: The 1040 and 1041 are just two forms that you’d file with the IRS. The 1040, you [Inaudible [00:08:45]. We’re talking about business owners here, primarily. This system doesn’t apply to people who earn the majority of their income via W-2. So just to put that requisite in there.
Joe Fairless: Good distinction.
KC Chocan: Yeah, so we’re very clear that this is people that own businesses primarily.
Joe Fairless: Why do you say primarily, and not only—does this sometimes apply to W-2?
KC Chocan: Sorry. Let me rephrase that. Because yes, if you are that top few percent that make millions on W-2 income, this could also apply to you, but the likelihood is that’s just a totally inefficient way of doing things. I would not recommend that. But it would also apply as well. Very rare, but yeah, technically, yes, you’re right.
Generally speaking, the vast majority of people will be business owners, they will be paying their taxes through a K-1, and that care one goes through the 1040 system. When you file your taxes with the government, the form you fill out is actually called the 1040, for the vast majority of people. The smarter people, they’ll research what they can use in the 1041 world, which is just another different form, which is the next form that the IRS provides. And then at the top of that form, there’s a section that’s split into nine different checkboxes, and those nine different checkboxes are the different subtypes of the 1041 system. And they all have their own different rules and legalities within them. The one that we use specifically and exclusively is the complex trust system.
Joe Fairless: Got it. So there’s 1040 and 1041. Is there 1042, 1043, 1044, etc?
KC Chocan: There’s multiple forms, but they’re the only two that you really need to worry about.
Joe Fairless: Okay. With the nine subtypes of the 1041, if you couldn’t do the complex trust system, which we will talk about a lot during this conversation, but if you couldn’t do the complex trust system, what’s the next one you would look at?
KC Chohan: I wouldn’t look at any of the others. But the types of systems that we were talking about, if you don’t qualify to set up a 1041 complex trust system, then I would look at other types of policies and procedures that you could do in the 1040 world… Because part of getting into the 1041 world, there is a lot of setup costs, a lot of legal fees, because we’re dealing with a lot more complex vehicles, and that isn’t always cheap.
Joe Fairless: Okay. Well, let’s talk about the complex trust system. What is it?
KC Chohan: The complex trust, like I said, it’s one of nine types of system that you can use in the 1041. The way we build our trusts, it’s a three-tier system. There’s a reason for that, in terms of you want to segregate out business expenses with family expenses, and then charitable foundations as well. It’s a three-tier system that allows you to fully optimize your taxes.
Joe Fairless: Okay. How does it do that?
KC Chohan: Well, the proof is in the pudding, as we say in England. I don’t know if you use the phrase over here. But generally speaking, it’s down to the laws that apply in that system, and the verbiage and the way that the trusts are written. There’s a certain wording and phrasing in the trusts that we write in with our legal teams that allow us to use the law in the way to optimize the taxes.
Joe Fairless: What’s an example?
KC Chohan: An example would be—let me just run through the way we kind of set someone up and maybe this will answer that for you. Let’s just say a regular person comes into the system, that paid $200,000 plus in taxes using the 1040 system. Generally speaking, the first thing we do is we do a side by side analysis, saying, “Hey, regularly you pay 200k in taxes, this is how you do it. These are the general write-offs that you have, all the loopholes that are current at that given time, and that’s your end taxable liability.”
We do the same thing through our system. We go through, “Hey, this is how we would run it through our system of trusts and foundations, and this would then be your taxable liability.” Generally speaking—we don’t guarantee anything, but generally speaking, we can save people a considerable amount of money, 60 plus percent.
Joe Fairless: Okay, so noted on the generalization for what you could save potentially, but we’d love to get into more of the nuances of it, either how that’s possible or just some details that you can provide?
KC Chohan: Well, the details are the tax code itself. So if anyone wanted to comb through that information, it’s all public knowledge. You could go on the IRS website and see that, and it’s all really spelled out there. If you type in 1041 complex trust, and you can see the way that the laws are written — and there’s not just one law, there are multiple laws here that allow you to allocate funds differently in the 1041 complex trust system than you would in any other system that I know of.
Through that allocation, and the way you can dictate how the revenue or the income is classified, and what the governing body of the instruments actually says, and the way it says it… And a lot of it is semantics, and it’s very much in the literature, and the secret sauce of kind of what we do is it’s the way that the trust documents are actually written. It’s several different types of law. We’ve got taxation law, we’ve got business law, and it’s all based around common law.
Our legal team has spent a lot of time tweaking, testing, perfecting the verbiage of the trust documents to get them to a point at which we can then lean on the law the same way Warren Buffett does, Bill Gates, Jeff Bezos, all these guys, the Rockefellers, all these elite people and their teams, and do exactly the same thing so that you get to a point where you can openly say on national television that you pay 17% tax, and that’s perfectly fine.
Joe Fairless: When you’re speaking with a new potential client, what are some common questions that he or she has?
KC Chohan: How is this possible? Because a lot of people just don’t know… And it boils down to — this is not really information that’s supposed to be out there. This is written by the powerful and for the elite, for themselves. They haven’t written this, for everyone to use this, because then taxation would take a big hit.
The whole reason why it’s hidden in the tax code is just for them to use it for themselves, and not have to play by anyone else’s rules. A lot of the time people don’t believe that it’s true, which is why we have legal counsel, opinion letters and external firms that consult with our clients to ensure that, “Hey, this is exactly what we say it is,” just because it’s such a new idea, and not many people know about this, and that’s by design.
And then also from a professional standpoint, when you speak with lawyers and accountants, they don’t know about this either, because they’re all trained at a state level. So they all do state bar or state CPA, and they’re very good at knowing what’s going on in their own state. But this structure is at the federal level, and even within that federal level, it’s a subset of nine different types of federal law. So to find experts that know this system inside out is very difficult.
Joe Fairless: What’s the average investment or cost to implement this system?
KC Chohan: It depends who you do it with. So you could go to BNY Mellon bank in New York, for example. You’d have to have liquid assets, I think they’re asking for at least 10 million in liquid investable assets before they would even have a conversation with you. Their set of fees was 700,000 plus, the last time I checked, on top of their annual fees. That’s quite expensive; or you could find a more boutique firm like ourselves, but we do it for a lot less than that.
Joe Fairless: Approximately how much on average?
KC Chohan: Around $150,000 in setup fees, and then we have a yearly percentage on what we save; so the way we prices on value, and the value is a percentage of whatever we would save you compared to the way you were previously doing it.
Joe Fairless: To do that analysis, to determine if it makes sense or not, how does that process work? Is there a cost to it? Do you reach out on your website? What’s that like?
KC Chohan: No, there’s no cost to it. We do that completely upfront. We want to build long term relationships and we do that for free, eat all of that cost in time. Normally, it takes around a week for us to run those numbers and get it back to people. But that’s the way we let people look inside our house and see, “Hey, this is what we do, and this is how we do it, and this is how it would work for you before you even make any decision.” We want people to be fully informed before they make a decision to move forward with us, and that’s why we do that side by side up front for free.
Joe Fairless: What information do you need from that prospective new client in order to run your analysis?
KC Chohan: Just their personal and their business tax returns.
Joe Fairless: That’s it?
KC Chohan: That’s it.
Joe Fairless: For the last year, or last two years?
KC Chohan: Last year. As long as we’ve got at least one year, but last five years is probably the best. And then we can literally go down that and say, “Hey, you paid X amount doing this. If we run it through our system, this is how much you would pay.”
Joe Fairless: Our audience are real estate professionals and investors – what if the real estate investor is already getting significant depreciation losses passed through and is paying basically nothing? Let’s say they’re paying a little bit in taxes. Is your system still able to help that individual, since they’re already paying a low or no amount in taxes, to begin with?
KC Chohan: Yeah, specifically for kind of your audience in the real estate world, the advantages of our system is paying no capital gains tax. When you come to sell a property or if you’re looking to do a 1031 exchange and upgrade, if you did it through our system, there’d be no capital gains involved at all.
Another thing is inheritance, the probate, all of passing on wealth to future generations – none of that is taxed either, because it’s all the way we write it in the body of the trusts, so there’s no taxation there. And then more importantly, the real estate professionals are the ones that we’ve worked with a lot here in LA. A lot of them are buying properties because they do need to get that tax write off. They do need to depreciate down, or they’re doing conservation appeasements… There’s a lot of different things that people do to write down the taxes. You wouldn’t have to do any of that anymore. So you wouldn’t feel the rush of, “I have to close on this property by the end of the year or a property by the end of the year so I can depreciate it, get my tax write off.” You’re not forced into being in that game, unless you really want to close on a deal, because the way we write our trust system allows you to optimize the taxes without having to use depreciation as a vehicle.
Joe Fairless: And since it is called a complex trust system, my assumption is that you would be creating a trust for them to run things through. First off, is that an accurate assumption?
KC Chohan: Yes, two trusts and one foundation is the way our structure works.
Joe Fairless: Okay, which aligns with business expenses, family expenses, and charitable donations.
KC Chohan: Yeah, that’s right. Yes, so there’s three new entities that are created.
Joe Fairless: Okay. Now, one perceived disadvantage of a trust, or in this case two trusts, would be your loss of control over the assets if they’re put in a trust. What are your thoughts on that?
KC Chohan: It depends on the way you write the trust service. Over 85 different types of trusts, and yet a lot of them, you have that disadvantage, but not in the way that we write ours. Ownership stays with the trust, but you have complete control at all times. That’s not an issue. That’s the way we do it.
Joe Fairless: How can the best ever listeners learn more about what you’re doing?
KC Chohan: They can reach out to me at https://togethercfo.com/ or they can email me directly at email@example.com.
Joe Fairless: KC, thanks for being on the show, talking about this system and the 1041 taxation code for complex trust systems and talking to us about some details around it, why you champion it, and some potential advantages for doing so. So thanks for being on the show. I hope you have a best ever weekend. Talk to you again soon.
KC Chohan: Thank you so much.
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