Perhaps the most profound insight about investing (while alive), and estate planning (for later), is that most of our thinking relates to pre-tax considerations when, in fact, the net results realized are ultimately after-tax. Comparing two investments or strategies based on their pre-tax expected returns seems reasonable, but in an incredibly important number of ways, that analysis obscures what the actual comparable net results will really be. The tax impact on one investment might be dramatically different from the impact on the other, and what looks like a winning strategy in a pre-tax world ends up being the losing strategy in the after-tax world we actually live in.

Not only do relative tax rates come into play, but also the timing of when taxes are payable. The concept is so fundamental that a single example should illustrate it: Let’s say that two investments have expected lives of 20 years. The first is a $10,000 bond that pays 8 percent interest each year. The interest is taxed at a combined 50 percent federal and state income tax rate. Assuming the interest can be reinvested at the same rate, the $10,000 investment grows to $21,900 after taxes. In the second case the $10,000 is invested in a stock that grows by 7 percent each year and is sold at the end of the twentieth year. The stock grows to $38,700. After paying the various taxes related to a capital gain, which total around 35 percent, the investor nets $28,650. On an after-tax basis, the stock investment that grows at 7 percent per year is worth 30 percent more than the bond investment that grows at 8 percent per year! Moreover, if an investor has a charitable intent, he could donate the appreciated stock before paying the tax and could make a $38,700 contribution, whereas he would have only had 56 percent of that amount to donate from the bond, even though the bond had grown at a higher rate. In addition, the contribution would result in a further charitable tax deduction.

It seems simple enough. But how many people would actually pick the stock that is expected to earn 7 percent instead of a bond that will appreciate 8 percent per year over the same 20-year period? And this is a relatively simple example of how easy it is to be fooled by pre-tax assessments.

Most entrepreneurs don’t have to focus on this issue during the years they are building a business because the single largest asset they have is the equity in their business, which is growing tax free until the time of a sale. This is also the case for many real estate owners who don’t fully appreciate the extra benefit that depreciation gives them compared to friends in other businesses, who don’t have those same tax benefits. But there are opportunities to further minimize the eventual tax burden when the sale occurs or the owner dies.

Most entrepreneurs fail to structure their businesses to maximize the after-tax proceeds that might be earned from a sale or if left to their heirs, says Ron Weiner. Ron is the senior partner at a highly regarded boutique accounting firm in New York and is a master at structuring investments and estates. “Entrepreneurs are, by their very nature, highly target focused,” he explains, “and for most entrepreneurs, the bull’s-eye is the business.”¹ The irony of such single-mindedness is that income taxes may consume about 50 percent of earned income, while estate taxes can gobble up to about 50 percent of what’s left. The result: 75 percent of what you earn could be paid in taxes before your heirs will receive the remaining 25 percent. Even if the earnings are capital gains, your heirs might only inherit one-third of what you earned.

With just a modicum of estate planning, entrepreneurs could leave their heirs with much more. “The smart person,” notes Ron, “generally can solve problems for themselves that the wise person would have avoided in the first place.”

Wise estate planning can also ensure that your wealth will generate greater social benefits. For example, in 1998 I knew I would be selling my interests in a series of real estate partnerships, along with my share of the company that managed those partnerships. Prior to the sale, I was able to donate my interest in the management company to my foundation so that when the sale eventually occurred, the proceeds would be realized by the foundation. As a result, the foundation has been able to grant millions of dollars to philanthropic projects that otherwise would never have been funded—and it didn’t have to wait until I died to do it.

Some cynics will argue that such tax schemes are partly responsible for our high government deficit, but I don’t think the evidence supports that charge. Those dollars saved from taxes were invested, and our family foundation has now granted multiples of those saved dollars to projects that will improve education, enhance our national security, and fight climate change. Socialist governments around the world levy higher taxes to pay for most of those things, but that is not the American way. For me and many passionate philanthropists, the amount we pay in taxes plus the amount of charitable contributions we make far exceeds the taxes we would likely pay (if the government took care of such social needs, so we didn’t have to), even with higher tax rates.

Here is one of Ron’s examples of how tax planning can make a huge difference: The foundation on which much of America’s wealth has been built is equity ownership of stocks or companies. The current tax code incentivizes private business owners who are ready to exit their businesses to sell them to their employees through a legal structure known as an employee stock ownership plan (ESOP). In certain cases, the seller who sells to an ESOP can avoid paying gains taxes at the time of the sale if his stake in the business is exchanged for other investments. Of course, when those new investments are eventually sold, the full tax will be payable. In the meantime, however, those pre-tax proceeds can be reinvested to generate additional returns from the new portfolio. How many more entrepreneurs, ready to sell, would go out of their way to enhance their employees’ futures if they knew they would receive a significant tax benefit for doing so?

Here’s another benefit if you’ve been thinking about bringing children into the business as partners. If the parents own the business outright, it is quite possible that estate taxes can either force the sale of a business or diminish the value of the portion of the business inherited by the children. But if the children had been part owners of the business from the beginning, or even bought a part of the business when it was worth much less, then the estate tax on the portion of the business remaining in the parent’s estate at the time of death will be far less. If a wise plan for transferring a family business to the children is put in place and enough time elapses to execute it, a significant portion of the estate taxes that would have otherwise been payable will be avoided, and there will be far less disruption to the family’s business than if the parent’s death forces a sale or a liquidation. For some owners, considerations of what their heirs will inherit are secondary to other issues more relevant during their lifetime (such as retaining absolute control and access to all one’s assets, although these issues also can be addressed). However, reducing the net value of proceeds ultimately received by children, other heirs, or beneficiaries by 25 to 50 percent is something that should only be done consciously and after much thought, and certainly not by default. These are just a few very simple examples, but there are many other structures and techniques that minimize taxes and maximize what heirs and charities can reap from an entrepreneur’s success. But regardless, unless you start thinking about after-tax returns (income, gains, and inheritance), you will be focusing on the wrong ball.

Why am I dwelling on this? Because, as Albert Einstein purportedly said, “The strongest force in the universe is the power of compounding.” By way of example, let’s say the patriarch of a family died in 1986 and the three buildings in his estate were worth $1 million. Let’s simplify our example and stipulate that the estate taxes were 50 percent of the $1 million, or $500,000. (I am not including the current lifetime exemption, so consider this a marginal analysis.)

Fortunately, the patriarch had taken out a $500,000 life insurance policy three years before his death, on which he paid $15,000 per year in premiums (this patriarch was young, so the premiums were low). Without that insurance, there would have been an additional $45,000 in the estate, which would have totaled just over $1 million before estate taxes were paid. Now, however, the $500,000 of insurance proceeds (because the insurance was held in an insurance trust for the children, and yes, I am avoiding discussing how the trust was funded) fully pays the estate tax. And the heirs get to keep the buildings without the need to encumber the buildings by borrowing money to pay the estate taxes.

Thirty years go by. Because the buildings were kept intact, the son took over the portfolio and grew it aggressively: the assets have grown at a 14 percent compounded rate, which turns $1 into $50 over a 30-year period. That portfolio of three buildings that was worth $1 million in 1986 is now 20 buildings worth $50 million. This kind of appreciation has actually been available to top-tier real estate entrepreneurs in gateway cities such as New York in the last generation.

Contrast that with the same $1.05 million estate with no life insurance. Estate taxes turn the $1.05 million into $522,000. The cash to make the estate tax payment was generated by borrowing money in the form of mortgages against the three buildings, which prevents the son from growing the portfolio as aggressively. Worse still, one of the buildings lost its sole tenant in the crash of 1987, and the bank foreclosed on the mortgage and repossessed the building. After many years of hard work, and after making up for the loss of that one important building, the son is still able to deliver a compounded growth rate of 9 percent. (Who wouldn’t want that today?) Over 30 years, that 9 percent turns $1 into $13 dollars, which turns that $522,000 estate into $6.8 million.

Fifty million dollars is more than seven times as much as $6.8 million. All because of a life insurance policy that cost $45,000 over the final three years of the patriarch’s life.

“I am amazed,” Ron says, “that when it comes to their estate planning, some very astute entrepreneurs approach it as if they were in first grade.” Emotional issues related to mortality are hard to deal with. They paralyze some people from doing what is so clearly in their family’s best interest.

The lesson that our entrepreneurs learn is that the sooner they can switch their focus from, as Ron put it, “the bull’s-eye of their business” to an evolved, broader perspective about family asset accumulation, the sooner they will be en route to maximizing what their heirs or charities will inherit (if that’s important to them).

The key to that transition is recognizing that you really live in an after-tax world. Keeping that in mind will change your approach to almost every investment you consider.

As I write this in the spring of 2017, President Donald Trump is indicating he will eliminate estate taxes. No doubt, this will render estate plans that were established at material cost unnecessary, and many parents will lament the costs already incurred to establish estate plans that will become irrelevant, or unnecessarily costly. I am not sure it is any different than the cost of car insurance that is “wasted” when one doesn’t have an accident. If present trends in the United States continue, federal budget deficits are unlikely to go away anytime soon. It remains likely that future administrations will rely once again on the estate tax, not just to raise revenue but because of matters of tax equity. Better to use the current period, if estate taxes are eliminated, to shift assets to your kids, so if the tax is reinstituted, the transfers will have already been made.