Financial problem solved! "I'll have huge capital gains taxes!"

April 25, 2003

"I'll have huge capital gains taxes!"

 

FINANCIAL PROBLEM SOLVED!

"I'll have huge capital gains taxes"

Problem

I bought a piece of raw land for $50,000 about eight years ago. It's in a high-growth area and is now worth $750,000. Since I'll retire in a few years, I'd like to cut back my practice hours, sell the land, and put the money into something that will give me steady income. Is there any way I can cut the tax I'll have to pay on the gain?

Solution

Not if you simply sell the land. Then you'll owe $140,000 in capital gains tax and will have only $610,000 left to invest. Still, if the land's value is your only nest egg, you'd best bite the bullet and pay the tax.

Assuming you have substantial savings in addition, however, consider donating the property through a Charitable Remainder Trust (CRT). The gift would be structured so that you receive a lifelong income based on the land's full $750,000 sale price. You'll also get an immediate tax deduction, make a significant gift to the charity of your choice, and avoid estate tax on the property. And if you're ever sued, the property will be protected, because technically it won't belong to you anymore.

Although there's no minimum age to set up a CRT, it only makes sense for people over 50, because of rules that calculate the charity's chances of receiving the money. When your attorney sets up the CRT, he'll name you as income beneficiary and the charity as the charitable beneficiary. Then, you'll contribute the land to the trust. This transfer is irrevocable; once you hand over the property, you'll no longer have access to its value.

For contributing your appreciated land, you'll receive a one-time tax deduction—in your case, about $125,000. You'll need to appoint an independent trustee to sell the land and put the money into the trust. The trust won't owe tax on the profit, so it can reinvest all the proceeds from the sale. That means the entire amount can work to provide an income stream for you.

One of the most common ways to structure the income stream is to set up an annuity trust that kicks out a set percentage of the $750,000 annually. (By law, that percentage must be at least 5 percent.) Say you get a 6 percent income stream. You'd receive $45,000 a year for the rest of your life and your spouse's. Another option is a unitrust, which would pay you a percentage of the account's beginning value annually. Most people start receiving payments immediately, although you can defer them.

After you and your spouse die, the assets remaining in the CRT will pass to the charity, unless you've made other arrangements. But be sure to discuss these possibilities and their potential ramifications with your financial adviser.

You will have some continuing paperwork and costs with a CRT. You must prepare a tax return each year, and you'll need to pay an administrator to make sure everything complies with IRS regulations. But you may decide these are small sacrifices for an arrangement that can help you, your heirs, and your favorite charity win.

This month's problem solver is Randy R. Thurman (moneymngr@aol.com), a financial adviser with Retirement Investment Advisors in Oklahoma City. Financial Problem Solved! is edited by Senior Editor Leslie Kane.

 

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Leslie Kane. Financial problem solved! "I'll have huge capital gains taxes!". Medical Economics Apr. 25, 2003;80:70.