Tuesday, October 09, 2007

Bottom Line - The Charitable Remainder Trust (or any Irrevocable Trust) Part III

The Charitable Remainder Trust has been around for quite a while as well. It comes in many different forms that have acronyms like CRT, CRUT, CRAT, NIMCRUT, CGA. There are a couple of capital gains tax strategies that also involve non-charitable irrevocable trusts.

The differences are too complex to go into detail in this article, but the gist is that you pledge all or part of an asset to a charity either immediately or at your death for benefits like a tax deduction, tax forgiveness and an income stream while living. For the non-charitable trusts, you basically give up control of your asset for a series of installment payments and pay taxes as you receive principle.

The IRS allows you favorable tax treatment if you pledge to a charity and exchange control of your asset for a series of interest payments. Here are some considerations when contemplating an irrevocable trust.

Who will own the trust? The Charity or (if a non-charitable trust) Related and/or Unrelated parties? What happens if something happens to one of the owners? Who does ownership pass to then? Will the new owner have your best interests at heart?

What happens if the trust defaults on making payments?

One might be perfectly comfortable with a chosen representative, but what if they pass away or are no longer able to handle their responsibility?

What are the costs involved in setting up and maintaining a trust? Once you find out what it costs to establish one, administer one, file annual tax returns and audit one on an ongoing basis you may be taken aback at how fees diminish anticipated returns.

Who is the trustee? This is supposed to be a knowledgeable person and fiduciary who invests the funds prudently with the main goal of meeting the payment obligation for the length of the agreement.

You might be lured into believing the assets will generate high returns on an ongoing basis and are not limited to principle protecting vehicles. What you may not realize is:
If the trust does make more money than it is obligated to pay out to you each year it must file its own tax return and pay income tax. Trust income tax rates are higher than personal income tax rates and can quickly reduce a gain.
Most of the money you will receive in annual payments will be taxed at ordinary income rates. Depending on the amount and your tax bracket, this might also take a huge chunk of your payment stream.
If the funds are not in a guaranteed environment, this means the funds can also lose money. If your payments are fixed, the trust can run out of money prior to your full payout. If you are getting variable income, it can decrease in future years, just when you may need more to offset inflation. Do you have other sources of income if this should happen?
The more actively managed the funds are, the higher the trading costs and management fees. This also requires more careful auditing and oversight.

A charitable trust will leave the remainder to the charity at your death. If you have heirs to consider, you may have to use insurance to replace the amount passed to charity. Are you insurable? Can you afford the insurance premiums?

Again, the considerations above are not comprehensive but should give much food for thought. There are ways to protect your funds and still give you a good return. For many, slow and steady should outweigh shooting for the brass ring at a stage in life where protection is more important than accumulation and the associated risk.

Paula Straub
http://www.savegainstax.com/
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php

Monday, October 08, 2007

A Good Problem to Have

It is true, the more money you have, the more options you have. That’s all good, and evidenced by a recent situation I encountered.

A man and his wife in their mid-fifties were receiving their portion of family real estate holdings in an upcoming sale. Their portion of the gain was 4.5 million dollars. They live in California, and there was depreciation recapture involved, so their tax obligation was over 1.3 million dollars if they sold outright and paid their tax bill.

We discussed many options and there was no bad plan. Most of us would be thrilled to have the choices they did. This was not their only asset or source of income. Even if they paid their taxes it would not have affected their current or future life style.

What they decided to do was a bit surprising, but given their situation, it worked for them.

They chose to do a 1031 exchange, but their choice of exchange property was a 4.5 Million dollar single family home that they eventually want to make their primary residence.

They plan to rent it out for a couple of years (who actually rents a 4.5M house?) to satisfy the exchange rules and then move in.

Even in California, 4.5M buys a pretty darn nice property. I can’t even fathom paying property taxes, insurance costs and upkeep on an annual basis- even if there is no mortgage. But then again, this is a problem I would love to have!

As you can tell, this couple can afford to take a loss if they have to. They have other assets and income which are unrelated to this property, and have options most of us will never have to worry about deciding between.

Their biggest concern going forward will be estate planning for passing wealth tax efficiently to future generations. (lucky kids)

I wonder if they have any interest in “adopting”. I am going to throw my hat in the ring.

Paula Straub
www.savegainstax.com
savegainstax@gmail.com
760-917-0858
Fill out a Qualification Questionnaire and see if you qualify to save capital gains tax. Go to
http://www.savegainstax.com/qq.html

Find the “Definitive Beginner’s Guide to Potentially Saving Hundreds of Thousands of Dollars in Capital Gains Tax” at
http://www.savegainstax.com/sales.php