From the Desk of San Diego Estate Planning Attorney, Kristina R. Hess
Do you have Real Estate, Stock or other Assets that have appreciated significantly?
Do you want to sell the asset (maybe you no longer wish to be a landlord), but you’re concerned about the 35+% capital gains tax?
Here in California, the state tax rate can be up to 13% and you add in the federal rate of 20% plus the 3.8% Medicare Surtax and you are looking at a hefty tax bill.
Listen up. There is a way out.
Not only is there a legal and long-standing way to disinherit Uncle Sam – you can also create a legacy for your family.
Sound too good to be true?
Many people initially react this way.
However, once they see how powerful the tool of a Capital Gains Bypass Trust is, they see the wealth building tool for what it is.
Recently, one of my clients inherited three of these capital gains bypass trusts. In her situation they were called “Charitable Remainder Trusts” or “CRTs.” Her father had transferred highly appreciated assets to her, in one situation as an outright gift and she created the CRT, in the other two, he transferred the assets directly to the CRT.
These trusts are powerful.
What did he accomplish?
He avoided capital gains tax on the sale of the highly appreciated asset (over 35% right there).
He removed the asset from his estate (Estate Tax is currently set at 40% for assets you pass to loved ones over $5.45 million).
Right there over 75% of the assets would have been lost to taxes. He wiped out 75% in taxes!
In addition, the Capital Gains Bypass trusts allowed him to continue to receive an income stream from the trust (at a rate set by the Trust) for his entire lifetime. If you receive a 7% return on an asset of $1 million, your annual income would be $70,000. This is likely much higher than the rent you are getting on the real estate.
But perhaps of greater significance than the tax savings, and the income stream was the fact that in one CRT his daughter is receiving an income stream for her lifetime, and she gets to build a legacy of charitable contribution to causes that she cares about. That’s exciting.
Truly these trusts are a Win. Win. Win.
The donors are actually financially better off than they would have been without the donation. It is ironic but even clients who do not have charitable intent, do well by doing good.
With a Charitable Remainder Trust, you get the use of the asset (income and potentially principal) for your lifetime and even the lifetime of another (i.e. husband and wife, father and child). Then, when the lives of the beneficiaries end, the remainder of the trust assets go to charity or to charities of your choosing.
The present value of the remainder interest must equal 10% of the net fair market value of the property as of the contribution date.
When clients discover that really they are only giving at least 10% of the asset to charity and they get to live off of the income and potentially some principal (depending upon how the trust is set up) for their lifetimes they are thrilled. In addition, the benefits of this advanced planning provides you with:
- Forgiveness of capital gains tax on the sale of the asset;
- An immediate charitable deduction (for a number of years);
- Proceeds of sale are invested tax free (similar to an IRA); and
- Elimination of Estate Taxes on the asset.
Wow! Yes, it is very powerful.
Now, imagine that with the additional income you are receiving from the CRT (7% on the asset contributed) you purchase a life insurance policy and BOOM you put this life insurance policy into a special trust that will allow 100% of the life insurance proceeds to pass estate tax free (life insurance already passes income tax free)…. And you have now multiplied your legacy!
Your family is now going to have more wealth, you have increased your income during your life, reduced your income taxes (wiped out capital gains tax), and given to charity.
I don’t know of a more powerful tax saving, wealth generating, legacy building tool than this.
It fires me up what you can do when you have long held assets that have a lot of appreciation.
Let us know if you would like a complimentary analysis of your particular situation.
Build your legacy today!
Kristina R. Hess, San Diego Estate Planning Attorney