Charitable Giving Supports Our Communities

It is possible to "have your cake and eat it too," while doing good for others. When planning the sale of a capital asset like appreciated real estate. The Federal Tax Code rewards those willing to reinvest "social capital." As a result, many of our less fortunate, children, elderly, arts, and community resources that add to the quality of life, can be provided for in ways not consistent with our "for profit" world.

Take the case of a mythical couple, Ben and Mindy. They are working professionals; both 50 and have a grown, unmarried son. Their "ship" came in when Mindy's parents left her ten acres of prime, undeveloped property now worth $1,000,000, with a cost basis of $10,000. They would like to use this property to supplement their retirement.

They are active in a number of community organizations including Rotary, an arts league and the community symphony. They know they can exchange the property for a small commercial rental, but because of their activities, neither is interested in property management.

If they sell the property, they face a Federal and State tax bill of approximately $227,700, leaving $773,000 to invest, which if invested at 6% translates to an annual income of $46,380. Upon the death of the last to die, their son would inherit the principal, subject to potential estate taxation.

A "have your cake.." solution, better known as the Charitable Remainder Trust, or CRT, is possible if they have their lawyer create the CRT and then transfer ownership of the property into the trust. The trust sells the property and since the trust is a qualified charity, pays no taxes on the gain. They get a charitable tax deduction of $134,790 that can be used to offset up to 30% of their adjusted gross income, with the unused portion carried forward for up to five years. The $1,000,000 proceeds can be reinvested by the trustees of the CRT, in this case Ben and Mindy, and set up to pay out 6%, or $60,000 a year for the rest of their lives.

At the death of the last beneficiary, the remaining principal will go to the charities of their choosing.

If they wanted to leave an inheritance for their son, or if Mindy wanted to keep the property as her separate property but provide for Ben if she predeceased him, they could set up a Wealth Replacement Trust, funded with a life insurance policy on either or both their lives. The proceeds of the life insurance would go to the beneficiary(s) free of income and estate tax.

As a result of this planning, Mindy and Ben have turned non-income producing property into a lifetime income stream. They have avoided paying capital gains tax on the sale of the property. Instead they received a handsome charitable deduction to help offset current income. Their charities eventually benefit from their thoughtfulness. Finally, their heirs may have the property replaced, tax-free, by using a life insurance from a wealth replacement trust.

The above solutions represent just one use of many charitable planning options. Actual tax benefits will vary with current Federal interest rates, the amount withdrawn and the age of the grantor(s). Income will vary with plan design and investment results inside the trust.

Property suitable for gifting into a CRT include highly appreciated stocks, works of art, mortgage-free, non-personal-use real estate, and of course, cash.

As we enter the season of giving, keep in mind that a CRT, properly designed, can provide the long term funding that so many of our community organizations need to continue their good works.

Keith W. Springer, President of Capital Financial Advisory Services is a Registered Investment Advisor and a Mortgage Broker here in Natomas, located on the river at 1383 Garden Hwy. You can contact him at 916-925-8900 or keith@capfas.com