Would you be more interested in selling your appreciated property if you could sell with no capital gains taxes, obtain a tax-free income stream that you cannot outlive, receive an income tax deduction, protect assets from creditors, and also reduce taxes after death?
We know what you are thinking: that sounds too good to be true! We have all heard the old saying, “If something sounds too good to be true, it probably is not true.
However, more than 50 years ago, Congress conducted a study on the good work that charities were doing versus the good work that governments were doing and discovered an interesting fact: it takes many dollars for government to do what charity can do with $1! That research became the driving force for Congress to pass a number of laws which actually create incentives for Americans to give money to charity just like the incentives (tax deductions) for owning a personal residence. One of those laws (Section 664 of the Internal Revenue Code) established a very powerful tool called the Charitable Remainder Trust.
A Charitable Remainder Trust (“CRT”) allows you to donate an appreciated asset into an irrevocable (can’ t be cancelled) trust which gives you income for life (or if you are older you may also elect a 20 year period) without any federal capital gains taxes on the sale. It gets better. You get a current charitable tax deduction for making this donation, the asset is no longer subject to estate tax, and the income payments are protected from any of the 41,000 lawsuits filed in this country every day.
The cumulative result from this strategy is that you can get 15% to 30% more income for your lifetime than if you had paid the capital gains taxes, and with proper planning you can get 50% more to your loved ones by avoiding estate taxes when you pass away.
You all know about the traditional strategies for eliminating capital gains taxes on the sale of real estate, such as the Starker exchange, which will keep you in the real estate business, or syndicated 1031 exchange funds, over which you have little control; but you may not have been told about the CRT strategy. With a CRT, you keep control of the investment of the sales proceeds and the income from them in a creditor-protected account. But, because it goes to a charity when you (and your spouse, if you are married) pass away, it still partially counts as giving the asset to charity while you are alive. Hence, a gift of an asset to the CRT results in a partial charitable deduction for you and a tax-free trading environment for the asset going forward.
The following example of how a CRT can more than triple the bottom line really shows the power of the CRT. Assume Izzy Smart is 70 years old and owns a property worth $10,200,000 for which he paid $4,000,000 about 18 years ago. His wife, Vera Smart, is also 70 years old. It does not matter whether he owns the property outright or in an LLC.
Because Izzy has grown weary of managing the property, he would like to sell it to get an increased income for his retirement years without the ever-increasing stresses of the day to day management. However, he just can’t stand the thought of writing a check to the government for federal and state capital gains taxes of $1,736,000 (which would result from the sale, assuming a state tax rate of 4.95%.) He also has significant other non-income producing assets, so he is looking at a big estate tax when he dies.
Should he sell the property? Should he transfer the property into a CRT and then sell it?
If he uses the CRT and reinvests all the cash proceeds, his loved ones get almost twice as much and his favorite charity gets more than $6 million at their death with the CRT, while nothing goes to his favorite charities without the CRT. Also note that his lifetime income is 67% higher with the CRT than without it.
If you would like more information about this strategy, please contact Rodney H. Piercey at (224) 848-4646.
Rodney H. Piercey is an attorney who limits his practice to asset protection, estate planning, estate tax elimination and income tax reduction planning. He has more than four decades of experience and has successfully completed the sales and intergeneration transfer of numerous real estate properties and businesses using Charitable Remainder Trusts to eliminate capital gains taxes. Mr. Piercey has completed plans which eliminate all estate taxes on more than $320 million of estates otherwise taxable and has completed plans which eliminate the creditor risks, costs and delays of probate on more than $1 billion of assets.
This article is published and distributed for educational and general informational purposes only and does not render legal, tax, regulatory or investment advice. Before attempting to implement any strategy discussed in this article, you should seek the advice of an attorney whose practice concentrates in the area of Charitable Remainder Trusts and require that such attorney coordinate the planning and implementation of all strategies with your real estate broker, your accountant and your financial advisor.
Company Name: Piercey & Associates, Ltd.
Contact Person: Piercey
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Address:1525 S. Grove Ave., Suite 204
Country: United States