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[H920]How To Calculate Capital Gains Tax

by Mark Lund, Mar

Summary:
The Capital Gains Elimination Trust is better known as a Charitable Remainder Trust. How this works is one would deposit highly appreciated assets into the CGET. The trust sells the assets and pays no capital gains tax. You then get to withdraw an income each year from the trust. The withdrawal can be earnings and principal.

Donors can be the trustees of the trust and decide how to invest the trust's assets. In addition, they get an income tax deduction for their contribution to the trust that is based on the term of the trust, the size of the contribution, the distribution rate, and the assumed earnings on the trust.

At this point, the assets are now removed from their estate, they have paid no tax on the capital gains, and they have a stream of income. The IRS requires at least 10% of the present value to be projected to go to a charity of your choice.

If someone wanted the money to be left to family, they could use part of the money they would have paid taxes on and buy a life insurance policy outside of their estate. Then, their children will still receive as much or more inheritance money, free of income and estate taxes.

A CGET can be used with real estate, stocks, or any other asset with capital gains, and must be unencumbered with debt.

Details:
CGETs are subject to a maze of law and regulation. The failure of a CGET to meet all requirements can result in a trust being disqualified as a Charitable Remainder Trust, with negative income, gift, and federal estate tax consequences. The loss of charitable status would also defeat a donor's charitable intent.

Some of these requirements involve numerical tests, several of which have long been a part of the qualifying conditions for CRTs. The Taxpayer Relief Act of 1997 (TRA 97).

Pre-TRA 97
 5% probability test (this applies only to charitable remainder annuity trusts)
 5% minimum payment test
TRA act of 1997
 50% payout limitation test
 10% minimum charitable benefit
Relief Provisions
TRA 97 provided several relief provisions for trusts which would meet all CRT requirements, except the 10% minimum charitable benefit requirement. The law provides that a trust may be declared void ab initio (from the beginning). Under this option, no charitable tax deduction is permitted to the donor for the transfer and any income or capital gains created by property transferred to the CRT becomes income and capital gain to the donor.

The new law also allows a donor to reform a trust, by modifying either the annual payout or the term of a CRT (or both), to allow the trust to meet the 10% minimum charitable benefit. Strict time limits have been imposed for this reformation.

Seek Professional Guidance
The laws and regulations surrounding Charitable Remainder Trusts can be complex and confusing. Individuals facing decisions concerning the tax and estate planning implications of a CGET are strongly advised to consult with an attorney.

Case Study:
Beth and John own $1 million of stock that cost $100,000. They realize that their portfolio needs better diversification and would like more income, but they do not want to pay the capital gains tax. They could place the stock in a trust set up by their attorney. The trust would be a tax-free entity and could sell the stock without paying the tax.

Now there is $1 million cash that can be invested. This could go into a balanced portfolio, or an annuity. It doesn't matter. And Beth and John can make a one-time decision on how much lifetime income they'll receive from the trust.

The IRS will let Beth and John take an income tax deduction of $417,180 when they do this, as long as at least 10% of the money that originally goes into this trust is left to charity. And since they technically no longer own the $1 million, it is out of their estate, thereby saving their heirs $460,000.

Beth and John are thrilled. They'll end up with more income, less market risk, and a nice tax deduction. But the kids aren't so happy. They thought that they were going to get the $1 million. However, a wealth replacement trust would take care of that.

Beth and John take part of their new income and buy a $1 million, second-to-die life insurance policy on their lives. The policy is owned by an irrevocable life insurance trust so the proceeds are removed from their estate. When the survivor dies, the children will receive $1 million tax-free, and the charity will get whatever remains in the trust.

If you ever have questions about planning for your immediate or long-term retirement goals, please feel free to call or send in the enclosed coupon.
Respectfully,
Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
www.stonecreekwealthadvisors.com
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC

Assets we own that have appreciated in value make us tremendously happy. The taxes we pay on these gains make us tremendously unhappy. If you own appreciated assets such as real estate, business, fine art, jewelry, planes, boats, or even a race horses, you face a large tax bill if you sell these assets and do not plan properly. However, there is finally a way to sell off almost every appreciated asset ranging from real estate to collectibles without paying hefty capital gains taxes using a powerful, tax-efficient selling resource called the Private Annuity Trust.

Not only is the Private Annuity Trust an ideal way to avoid capital gains taxes, it's also one of the most secure asset protection tactics offered today. The Trust cannot be sued for the value of your personal property or real estate. Securing your valuables in a trust is a critical piece of the financial puzzle for any type of investor, and the Private Annuity Trust has the added benefit of allowing you to avoid capital gains taxes when property is sold. The Private Annuity Trust will also allow you to pass all assets left in the trust when you pass away to your beneficiaries completely free of estate taxes and probate fees.

Who's using The Private Annuity Trust?
Private Annuity Trusts have traditionally been utilized by real estate investors, but even in this circle, the Private Annuity Trust is a new concept for many. The Wall Street Journal recently ran an article about various ways to defer capital gains tax and received an enormous number of inquiries asking for further information about the details of Private Annuity Trusts. This method of deferring capital gains on real estate is gaining momentum, but many people still don't realize that Private Annuity Trusts can also defer capital gains on property such as fine arts, jewelry, and other valuables.

How the Private Annuity Trust Defers Capital Gains Taxes Legally
Let's assume that Jim, a 45 year old man, owns a collection of fine art that will net him $5,000,000 once sold. If Jim were to sell his art collection tomorrow without a Private Annuity Trust, he could be responsible for paying a large amount of capital gains tax on his profit, potentially creating a $1,000,000 tax bill! Had he transferred ownership of the property into a Private Annuity Trust before selling, he could have paid $0 in capital gains taxes this year.

A Private Annuity Trust is designed to pay the owner of the trust a special annual payment, or annuity, over the course of his or her lifetime. Capital gains taxes on the earnings from the property sold are still due on the sale of the asset, but taxes aren't due until the money is taken out. The seller of the asset is able to "stretch or spread" his or her taxation over his or her entire lifetime without any interest or penalties from the IRS. This gives investors tremendous financial power, and flexibility - if they don't need the income from the Trust right now, they can defer payments, and not begin paying taxes until they decide to take the income.

The amount of the annuity payment is determined by a number of factors determined by the IRS. A very simple estimation of the program states that if Jim's life expectancy is another 40 years, he will receive annual payments of 1/40 of the value in the trust plus interest as calculated by the IRS. This means he will only be responsible for 1/40 of the capital gains tax from the sale of the property each year, which means that he will have more of his profits invested, and working for him, creating financial security for the future.

A Smart Way to Protect Your Assets and Grow your Wealth
The Private Annuity Trust isn't just beneficial when you sell your property, but also offers long term protection of your assets from lawsuits, liens, or any other threat to your investments. You can use the money gained from selling to reinvest and continue to grow your wealth. In the previous example, Jim can use the trust to buy new art-or any type of investment property, watch it appreciate, and then sell the property and defer the capital gains taxes again, by placing it in his Private Annuity Trust.

If you're a collector of fine art, jewelry, planes, boats, race horses, or anything of value, you owe it to yourself to look into the benefits of the Private Annuity Trust. There is no minimum or maximum value for property that can be transferred into a Private Annuity Trust. The Trust structure, as a planning tool, is a resource that can help you pass wealth to generations of your family, without worry about losing large chunks to taxes at each transfer. For many investors, it may be a key to safe, smart, investing.

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Both Mark Lund & Christine Harrell are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

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