Legally Pay $0 in Capital Gains Tax
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.
Interesting, good information. Would there be benifits to a LRT (living revocable) vice the CRT?
I thought georgie bush got the cap gains rate lowered to 15%?
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.
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
Great article! Thanks for your time writing it.
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.