Is it time to consider a CHARITABLE REMAINDER TRUST?

Income tax rates are trending upward.  Depending on your income level, the tax on long term capital gains can be as great as 23.8% and the President says he wants it to be 28% If you have appreciated assets, such as stock or real estate, and you want to sell, you face a stiff tax when you check out at the IRS cash register.  Congress wants part of your gain.

If you are trying to cash in on your gains and create income in retirement, you should consider using a Charitable Remainder Trust.  By transferring your appreciated stock or real estate into this special trust, you can sell the asset and pay no capital gains tax.  The entire sale proceeds can be put to work generating income to you, more income since you did not have to pay tax when you sold the asset.  Oh, and you receive a tax deduction up front for creating and funding the Charitable Remainder Trust.  How much of a deduction depends on several factors, such as your age, the percentage distribution you decide to take as annual income, and a rate published monthly by the IRS.

Let’s say you own appreciated stock worth $500,000.00 and your tax basis is $100,000.00 (essentially what you paid for the stock).  If you sell the stock, you will have a gain of $400,000.00 to pay tax on (the $500,000.00 less the tax basis of $100,000.00).  You will pay capital gains tax on the balance.  Let’s round the tax to $95,000.00 for our example.  That leaves you with roughly $405,000.00 to generate income in retirement.  If we use 5% as an example of the return we might be able to obtain on an annual basis (purely hypothetical), we would have about $20,250.00 in annual income.  If we did not have to pay any tax on the sale, we would have the full $500,000.00 to work with and using the same 5% yields $25,000.00 annually, about a 23% increase in our annual income from what we would get if we had to pay the tax on the sale.  Even if the capital gains tax rate is as low as 15%, you still save about $60,000.00 in tax you don’t have to pay, receive a nice charitable income tax deduction and have more money at work generating income to you.

Is there a catch?  Indeed there is.  When you and your spouse die, whatever is left in the account goes to your favorite charity.  So, this is clearly not a technique for everyone, but a strategy that should be explored before you decide to start selling appreciated assets.  Check with you favorite attorney and tax advisor to see if this might work for you.