How To Eliminate Capital Gains Tax
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
How to Eliminate Capital Gains Tax
Understanding the Capital Gains Elimination Trust
The Capital Gains Elimination Trust, commonly known as a Charitable Remainder Trust (CRT), provides an efficient way to manage appreciated assets while avoiding capital gains tax. In this article, we’ll explore how it works and provide a practical example to illustrate its benefits.
What is a Capital Gains Elimination Trust?
Essentially, a CRT allows you to donate highly appreciated assets to the trust. The trust then sells those assets without incurring capital gains tax. You receive a stream of income from the trust, which can include both earnings and principal. As a donor, you can also act as the trustee, making investment decisions for the trust’s assets. Additionally, you receive an income tax deduction based on factors like the trust term, contribution size, distribution rate, and expected earnings.
Key Benefits
- Tax Efficiency: Assets are removed from your estate, and you avoid capital gains tax.
- Income Stream: You benefit from consistent income withdrawals.
- Charitable Contribution: The IRS mandates that at least 10% of the trust's present value eventually goes to your chosen charity.
If you wish to leave money to your family, you can use the funds you would have spent on taxes to purchase a life insurance policy outside your estate, ensuring your heirs receive a tax-free inheritance.
Suitable Assets
The trust can include various assets like real estate and stocks, provided they are free of debt.
Important Considerations
CRT compliance is complex, involving detailed regulations. For instance, specific tests and requirements must be met for the trust to maintain its charitable status. The laws following the Taxpayer Relief Act of 1997 (TRA 97) introduced rules like:
- A 5% minimum payment for annuity trusts
- A 10% minimum charity benefit
Failure to comply can result in disqualification, leading to unintended tax implications. It’s crucial to consult with a legal professional for guidance.
Case Study: Beth and John
To see how a CRT can be beneficial, consider Beth and John, who own $1 million in stock with a cost basis of $100,000. They seek diversification and income without the burden of capital gains tax. By transferring the stock to a CRT, they enjoy tax-free asset sales and the opportunity to reinvest the $1 million.
Beth and John decide on their lifetime income from the trust. They also receive a $417,180 income tax deduction, provided 10% of the trust’s value benefits a charity. The $1 million is removed from their estate, saving $460,000 for their heirs.
To ensure their children receive the $1 million inheritance, they use a portion of their CRT income to purchase a life insurance policy through an irrevocable trust. This arrangement ensures tax-free proceeds to their children, while the charity receives the trust balance.
Seek Professional Guidance
Navigating CRTs can be daunting. Work with an attorney to tailor your estate and tax planning strategies effectively.
Conclusion
The Capital Gains Elimination Trust offers a strategic avenue to manage appreciated assets, secure income, and support charitable causes without incurring capital gains tax. If you have any questions about achieving your financial goals, feel free to reach out.
Mark K. Lund, CRFA
Wealth Manager, Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
[stonecreekwealthadvisors.com](http://www.stonecreekwealthadvisors.com)
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC
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