McKenzie Bezos: 4 Wealth Strategy Concerns
By Chris Chen, CFP®, From Kiplinger's Personal Finance, April 2019
On April 4, it was announced that McKenzie Bezos would be receiving $36 billion worth of assets from her divorce from Jeff Bezos, founder of Amazon and the world’s wealthiest person.
First of all, congratulations to Jeff and McKenzie for keeping this divorce process short, out of the media as much as possible, and out of the courts. We are not going to know the details of the Bezos’ agreement. However, some information has been disclosed in the press.
As reported by CNN, McKenzie is keeping 4% of their Amazon stock, worth approximately $36 billion. Jeff retains voting power for her shares, as well as ownership of The Washington Post and Blue Origin, their space exploration venture. According to The Economist, this makes the Bezos divorce the most expensive in history by a long shot.
As a post-divorce financial planner, I feel a little silly thinking of what I would tell McKenzie to do with her money now. The magnitude of her portfolio is well beyond run-of-the-mill, high-net-worth divorces with assets “only” in the millions or tens of millions of dollars. McKenzie can buy $100-million or $200-million houses and condos wherever she wants. She can have her own jets and her own yachts. She could buy an island or two.
McKenzie’s wealth, though, is concentrated in Amazon (AMZN) stock. That has worked out well for the Bezos’ for the past several years. It is likely to continue to be a great source of wealth for both of them in the future. As it stands, McKenzie is now the third-richest woman in the world. Who knows, if she holds onto AMZN stock, she could become the richest woman in the world one day! McKenzie’s concerns with budgeting, taxes, and wealth strategy will soon be in a class of their own.
There are, however, some lingering considerations for McKenzie, particularly when it comes to capital gains taxes, portfolio management, philanthropy, and wealth transfer.
Capital Gains Taxes
McKenzie probably has an enormous tax liability built into her AMZN holdings. While I am not privy to her cost basis, it is not unreasonable to assume that it is close to zero since the Bezos’ have owned Amazon stock since the company’s inception. Should McKenzie sell her AMZN stock, the entire amount would likely be subject to capital gains taxes. Because McKenzie is likely to be in the top tax bracket, she would pay 23.8% in federal capital-gains tax (the top 20% bracket plus the 3.8% ACA surcharge), plus state liability that would depend on where she lives at the time. As such, McKenzie may not be worth quite $36 billion after taxes are accounted for.
A benefit of keeping the stock until her death is that her estate will benefit from a step up in cost basis. This would mean that the IRS would consider the cost of the stock to be equal to its value at her death. This favorable tax treatment would wipe out her heirs’ capital gains tax liability.
Nevertheless, the standard advice that wealth strategists give clients with ordinary wealth applies to Ms. Bezos as well: It would be in McKenzie’s financial interest to diversify her holdings. Diversifying would help her reduce the risk of having her wealth concentrated into a single stock. It is a problem that McKenzie (and Jeff) share with many employees of technology and biotech startups.
McKenzie might not want to sell all of her AMZN stock or even most of it. Although we have not read their separation agreement, she has probably agreed with Jeff that she will retain the bulk of her holding. She may also believe enough in AMZN and Jeff’s leadership to sincerely want to keep it. Regardless, McKenzie should still diversify her portfolio to protect herself against AMZN-specific risks.
An advantage of having more money than you need is that you have the option to use the excess to make a measurable impact on the world through philanthropy. In 2018, Jeff and McKenzie created a $2 billion fund, the Bezos Day One Fund, to help fight homelessness. Given that the home page of the fund now only features Jeff’s signature, this may mean that Jeff is keeping this also. McKenzie will likely organize her own charity. What will her cause be?
Philanthropy can be an effective tax and estate management tool, primarily because the IRS allows taxpayers who itemize to deduct your donations against your income. For McKenzie, it is about deciding what to do with the money, instead of letting Congress decide.
McKenzie’s net worth is far in excess of the current protections from federal and state estate taxes. Unless she previously planned for it during her marriage, she will have to revise her estate plan. Even though her heirs would benefit from a step up in basis on her AMZN stock if she chooses not to diversify, the inheritance would still be subject to estate taxes, potentially in the billions of dollars.
Of course, no matter how much estate tax is due, it is likely that she will have plenty to leave to her heirs.
Financially, McKenzie Bezos has what wealth strategists would consider “good financial problems.” She has the financial freedom to focus on the important aspects of life: family, relationships and making a difference.
All Contents © 2015 The Kiplinger Washington Editors
Initially published in Kiplinger Magazine on April 12, 2019