Articles Posted in Irrevocable trusts

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42198970 - picture of beautiful village house with gardenMany of my clients come to me with a very Californian problem: they bought their home many years ago for a fraction of what that home is worth today. For example, their mid-century house near downtown cost them $125,000 in 1973 and could be sold for $3.2 million next weekend. While that’s an excellent problem to have in some ways, what it means for a person who needs to sell that home is that they are going to have to pay a lot of capital gains on that sale.

Capital gains taxes are levied upon the difference between what someone buys an asset for (called ‘basis’) and what they sell that asset for–the lower the basis, the higher the gain, and the higher the tax.  In 2016, the maximum for long-term federal capital gains taxes (for assets held longer than one year) is 23.8% for high income families. In California, you need to add another 10%-13.3% for capital gains , so roughly a 33% total tax is what you’d expect to pay for capital gains at both the state and federal level.

Each person is entitled to a $250,000 exclusion on capital gains taxes for the sale of their primary residence, so if a married couple sells, they’ll have $500,000 excluded from tax.  In many parts of the country, that means people can indeed sell their residence and pay no capital gains taxes. But not around here.

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gift2Recently, a client of mine asked me how to set up a trust to hold gifts to their children that those children wouldn’t be able to use for about twenty more years. This can be done by use of what’s called a “Crummey” Trust (named after the attorney who invented the technique).

This kind of trust is usually funded with annual gifts. Currently, you are allowed to give $14,000 per year to any one person without having to report the gift on a gift tax return or use any of your lifetime exclusion from the gift and estate tax (currently $5.43 million per person). A Crummey Trust allows you to make such annual gifts, but keep those gifts in trust for years. The gift counts as being made in the year of the gift, even though the beneficiary has no control over the money until the trust ends. Other people, like grandparents, can also make contributions to this kind of trust.

Why would you want to do this? The first reason is control: if your children are currently minors (let’s say, middle schoolers), you probably don’t want to just put $14,000 into their bank accounts each year, unless you are extremely relaxed about the choices they’d likely make with that kind of annual bonanza (or want to support GameStop). You’d much rather put that money into a trust that’s managed for your children until they grow up to an age where they’re likely to use the money more wisely. Since you are setting up the trust, you can have control over what the trust’s assets can be used for, too — maybe it’s just for the purchase of a house, or maybe just to pay for graduate school, or a wedding.

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sad kitty.jpgIf you are considering making a gift to charity in your estate plan, own assets that have appreciated significantly, and would like to get a current income tax deduction, please talk to us about establishing a Charitable Remainder Trust (CRT).

A CRT doesn’t have to be complicated to offer compelling benefits. If you’d like to benefit a charity or multiple charities, you can establish the trust and transfer appreciated assets into the trust. As long as the trust conforms to IRS rules, the trust can then sell the appreciated assets and diversify the trust’s holdings. The CRT is tax exempt, so when the asset is sold, the trust pays no capital gains taxes. The entire amount can be reinvested.

You (or a named beneficiary) must receive a certain amount or percentage of the trust’s assets each year, and you will be taxed on the portion of each such distribution that is capital gain income. The trust can last for your lifetime, or a certain number of years, and the charity will receive the remaining assets when the trust terminates. You get an income tax charitable deduction based on the value going to the charity and the type of charity you’re benefitting.