If you are thinking of retiring your investment real estate and you would like hassle free cash flow that you can’t outlive, you need to consider a charitable remainder trust. This special creature of the Internal Revenue Code may allow you to sell that rental property or other highly appreciated asset and avoid all capital gains tax and any applicable recapture of depreciation. With this method of sale, you also are entitled to a healthy charitable income tax deduction to shelter your income that can stretch out for five more years if you can’t use it all in the year of sale. If you think this sounds too good to be true, you’d be wrong. Don’t think you get this all for free, however, since you must commit irrevocably to this program, agree to accept a percentage return that you can’t change later, and dedicate what remains when you die to charity. If you want a family member to benefit after you die, there is a way to stretch out an income stream and even to use life insurance to create a tax free distribution. Why would the government allow such a scheme? Put simply, the charitable benefit in the end outweighs the loss to the U.S. Treasury. Charities tend to be more efficient than the government, so putting more money into schools, food banks and other charitable ventures means less pressure on the government. A charitable remainder trust really can be a win-win estate planning technique when appropriate.
An heirloom primary residence or second home may be just the asset to put in a so-called “house trust.” That’s qualified personal residence trust to you technical folks. If you plan to keep your house for the long term and you want it to go to the kids when you die, you should explore this special trust. Under this technique, a first or second residence is moved irrevocably into a trust for a set period of years. At the expiration of the term, the kids own the property. You reside in the property during the term and you can even rent it from the kids when the trust term ends. Through the magic of present value analysis, the gift you make to the kids today is valued at a fraction of the actual market value for gift tax purposes, leaving you more room to give away other assets during life and at death. Remember that even though we have a fairly high federal estate tax exemption for 2011 and 2012, many states like Washington have their own estate tax. Washington has an exemption level of $2,000,000.00, meaning that estates which are valued in excess of this amount will be taxed at rates that run from 10 to 19 percent. This special house trust can relieve the pressure in an estate, especially when you factor in a long life and future appreciation. The downside to this technique is the requirement that you outlive the term of years you pick. In other words, if you pick too long of a term and you die before the end of the term, you pop the balloon and go back to square one. Get out your crystal ball and find out your life expectancy. Or, at least consult with a good CPA and attorney on this one.
Putting your house and your other assets into a revocable living trust can be a good move for many people. This type of trust can provide for management of your assets if you ever become incapacitated, avoiding the need for a guardianship over your assets and eliminating the risk that your power of attorney is rejected because of age or improper wording. A revocable living trust will avoid the probate process for all assets that have been titled in the name of the trust. You die but the trust does not. A new trustee steps in upon your death and follows your instructions on who gets what. Such a trust also maintains maximum privacy. It is especially helpful when you own real estate in more than one state, since multiple probates may be avoided. When a revocable living trust is coupled with a power of attorney, living will and proper funding, you have the makings of a thorough estate plan. Don’t forget to handle all of your IRA and retirement assets as well as annuities very carefully. Generally, these special assets require special treatment and may not be the best ones for a trust.
Do your homework and engage the services of good professionals to help you decide on whether to use these and other trust and estate planning vehicles.