What if you bought a piece of property years ago for about $25,000 and now it is worth more than $300,000? You don’t want it anymore but want to get rid of it in a way that maximizes your tax advantages. If you sold it outright, you might have to pay capital gains tax, and you don’t want that.
How about making a charitable remainder trust to your favorite cause? Knowing that both you and the charity will benefit makes it an especially attractive option.
How it works: You must be able to donate on a large scale. Make sure you really want to create the trust, because it is irrevocable. The charity has to be one approved by the IRS (have tax exempt status under the IRS). The charity becomes the trustee and invests or manages the property, which produces an income for you or your beneficiary. You determine the number of years the trust is operable. At the end of the trust period, the charity owns the property outright.
Benefits to you include a nice tax deduction spread over five years. The deduction is the value of the property minus the income received. The amount of income is established by such factors as interest rates, your life expectancy, and how the trust is set up. In addition, since the property is not in your estate anymore, you do not have to pay estate tax on it. And neither you nor the charity has to pay capital gains if your property has to be sold.
You can receive income from the property either through an annual fixed dollar amount, or as a percent of the trust assets every year.
Check with an estate planning attorney to see if this strategy could work for you.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.