Legally Pay $0 in Capital Gains Tax

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So what is the magic formula so when the Tax Man Cometh you don't have to pay out a boatload in Capital Gains? A Charitable Remainder Trust (CRT). This lovely piece of work allows the rich to keep it all, so why not try one on for size.



The secret of this Trust is putting assets into it before you sell them. That way the proceeds belong to the Trust and Uncle Sam can't touch it. How then can you use the funds? The sweet thing is that as Trustee of the Trust, you are in control. You can pay yourself a salary, expenses, even pay for a car that's needed for Trust purposes. The only catch is that at the very end of it all (after you have died) at least 10% needs to go to some charity.



Here is an example. A property you own is about to go to sale. Alternative 1 - sell the property and make $100,000. Depending on your tax bracket, 25% goes to that wonderful family member Uncle Sam. That leaves you with $75,000 to reinvest. 10% a year is $7,500. Alternative 2 - Place the property into a CRT. Sell the property and get $100,000 to invest at the 10% now gives you $10,000 a year. You are now getting returns 33% more a year because your property was in a CRT.


Comments(8)

  • 3qu1ty18th October, 2003

    Interesting, good information. Would there be benifits to a LRT (living revocable) vice the CRT?

  • dgtop16th October, 2003

    I thought georgie bush got the cap gains rate lowered to 15%?

  • DaveT16th October, 2003

    Let's clarify Alternative 2. You place the property into a CRT. The CRT sells the property and the CRT gets $100,000 to invest. You can use the income from the trust, but I don't think you can withdraw principal. If the trust is able to attain a 10% yield, you have $10,000 in annual trust income to play with.

    • jbccapital13th March, 2004 Reply

      If you are utilizing a CRUT or charitable remainder unitrust, you can absolutely pay out both interest and principal. As long as you met the 5% IRS rule when you formed the trust you are ok. You need to make sure that you do a propper analysys on the front end to determine whether or not the income/life of the trust will be able to help you meet your goals. At the same time provide you with the flexibility to change things, even though this is an irrevocable trust. This can be accomplished. We do it all of the time

  • hibby7617th October, 2003

    Great article! Thanks for your time writing it.

  • FGump18th October, 2003

    I am familiar with Trusts of all kinds, as well as Tax Law. There are so many holes in this idea as stated that I am leery of even looking at it in detail.



    Some of the problems:

    (1) Capital gains is only 15% not 25%. It is the CHEAPEST form of tax right now.

    (2) There are legit ways to avoid Cap gains entirely if you want to go to the trouble, using 1031 exchanges, plus step-up-in-basis at death.

    (3) The money you pay yourself as salary as the trustee will be taxed as Ordinary Income, at (most likely) 28, 33, or 39%. Much MORE than 15% Cap Gains tax.

    (4) You can deduct expenses without having a Trust.



    This looks like much complexity for no benefit. It may even cost you money.



    My reaction: I hope the people who follow this guys advice are competing with me for property. They will be bogged down in detail and have less net cash to use, IMO.

    • davidallen10th January, 2004 Reply

      Your response answered most of my questions. Thank you land-for-sale/land/forest">Forest!

      • jbccapital13th March, 2004 Reply

        The key to making this strategy work is to make sure you are working with someone who thoroughly understands the IRS rulings and Private Letter rulings pertaining to this particular strategy.



        If you don't, then find someone who does. There are a couple of key issues to be aware of:

        1. You can not but debt encumbered property into a CRT . It generates unrelated business income and can cause the trust to be disqualified as tax exempt. There are ways to get around this issue, but I will have to go over that info another time



        2. The income that you will receieve will be taxed depending on how it was generated. For instance, if you put a highly appreciated asset in the CRT and then sold that asset...Future distributions would go through the four tiers of trust accounting.

        1 - Ordinary income

        2 - Capital Gains

        3 - Tax Free

        4 - Return of principal



        All of the top tiers must be emptied before the lower ones can be distributed.



        This is contrary to the advise given by some not so educated "advisors" out there who think they can sell an appreciated asset in the trust and just invest in tax free muni bonds and the distribution would be tax free. Wrong!!! You must empty the tier 2 bucket of capital gains first.



        The bottom line is that the trust is a very useful tool if properly designed versus the majority which are out there as what i call them the "plain vanilla CRT"

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