In 1995, Bill and Sandy met with me to discuss what to do with a real estate investment that had appreciated significantly. The investment represented a meaningful portion of their net worth, and they felt the time was right to sell. However, they didn’t necessarily need a large infusion of cash and they didn’t want to pay the tax (in 1995, the capital gain rate was 29%).High-Level Strategies to Protect Your Wealth from the Wolf at the Door
What Bill and Sandy really needed at that time was income. They had two active teenagers and were paying for private school, travel soccer, spring break trips, and summer excursions abroad. They also had a large home to keep up with and needed to keep everyone entertained.A CRT Was a Good Choice at the Time
It seemed that at this time a charitable remainder trust (CRT) would be their best option. While there are many versions of the CRT, simply stated, the taxpayer establishes a trust in which the taxpayer is the income beneficiary and at death, the remainder of the assets in the trust pass to one or more named charities. The CRT is established before the asset is sold, the asset is contributed to the trust, and on sale, no federal or state tax is due on the gain. The taxpayer will receive a charitable income tax deduction on the present value of the future income stream, which can be used to offset some or all of the income tax liability. Thus the CRT would enable Bill and Sandy to put their real estate in the CRT, then sell it, and defer the related capital gain, garner an immediate charitable deduction, and collect income from the trust moving forward.
The CRT worked masterfully for years. They enjoyed the income stream while their children were still in the house and active. Afterward, they used it to help pay college tuition and were able to continue to use it during a period of world travel during early retirement.Then Things Changed
But then Bill and Sandy decided to slow down a bit. They sold their house and moved into a condo near their golf and tennis club.
Today, they continue to enjoy their condo and frequently visit their children and grandchildren for months at a time. Their income need is minimal, and Bill recently had their CPA go on a “quest,” as Bill likes to say, to reduce their taxab