Real Opportunities Real Opportunities with Real Estatewith Real Estate
K. Gene Christian, PrincipalK. Gene Christian, PrincipalCharitable Estate Planning NorthwestCharitable Estate Planning Northwest
What is a Charitable Remainder Trust?
What is a Charitable Remainder Trust?
“…the only planning tool in the tax code that allows people, who have ‘charitable receptivity’ four favorable tax outcomes by virtue of one financial transaction…”
Charitable ReceptivityCharitable Receptivity
20% 20%60%
No Charity
Charitable Receptivity
Pure Charitable
Intent
AmericansAmericans
Role of Advisors...Role of Advisors...
78% of people who create charitable life income
arrangements do so at the prompting of personal advisors.
Source: Planned Giving Today, May, 2002
ChallengeChallenge• Own Property
• Increased Value, Low Return
• Desire More Income
• Capital Gain Tax Problem
How to increase income without taxes?
SolutionSolution
Consider a Charitable Trust!
• Bypass Capital Gain Tax
• Increase Income
• Charitable Deduction
• Tax-free Growth Inside Trust
Roberts Case ProfileRoberts Case ProfileRoberts Case ProfileRoberts Case Profile
• Ages 76 and 75
• Own 8-plex valued at $530,000
• Depreciated Basis - $27,000
• Mortgage Balance - $230,000 (new debt)
• Primary Goal - Simplify Life
• Secondary Goal - Avoid Gain Tax
• Husband has Onset of Dementia
John and MarilynJohn and Marilyn
Outright Sale AnalysisOutright Sale AnalysisRoberts’ 8-plex
Sales Price $530,000
Capital Gain - Depreciation Recapture Tax <$135,000>
Net Proceeds After Tax $395,000
Pay Off Mortgage <$230,000>
Net Proceeds to Invest $165,000
Annual Income @ 7%Annual Income @ 7% $11,550 $11,550
Roberts’ 8-plex
$530,000
CRAT/Hospital sell 100% of 8-plex to
new buyer
Roberts put 57% ($300,000) in a CRAT
Step two
Step three
Step one
Hospital purchases 43% interest for
$230,000...
…and pays off mortgage
through escrow
Annuity TrustAnnuity TrustJohn Roberts - Age 76 Marilyn Roberts - Age 75
7% Annuity TrustProperty
$300,000Principal
$300,000Charity
$476,000Two Lives
Bypass of gainsaves $71,000.Deduct $106,000.
Annual incomefrom trust $21,000.
Trust yield 9%.After two lives, trust to charity
Sale & CRAT SummarySale & CRAT SummaryRoberts’ 8-plex
Income Tax Deduction $106,000
Tax Savings $37,000
Capital Gain Taxes on Sale of 43% Interest $62,000
Out of Pocket Cost <$25,000>
Annual Cash Flow from CRAT $21,000
Projected Lifetime Income (16.1 years) $338,000
Ultimate Gift to Charity $476,000
CRAT BenefitsCRAT BenefitsPrepared for John & Marilyn RobertsPrepared for John & Marilyn Roberts
CRAT BenefitsCRAT BenefitsPrepared for John & Marilyn RobertsPrepared for John & Marilyn Roberts
• Increased Annual Income
$9,500
• Reduction in Taxes
$110,000
• Gift to Charity $476,000
Questions or
Comments??
Chambers Case ProfileChambers Case ProfileChambers Case ProfileChambers Case Profile
• Ages 80 and 74
• Retired Nursery Farm Owners - 9 acres
• Three Adult Children - Doing Well
• Property Purchased 31 Years Ago for $100K
• Current Value - $2.2M
• Primary Goal - Simplify Life
• Secondary Goal - Avoid Gain Tax
George and BettyGeorge and Betty
George George andand
BettyBettyCharitableCharitable
TrustTrust
Charitable PlanCharitable Plan
Home &1 Acre 8 Acres
NurseryNursery
Option A: Part Sale/Part CRTOption A: Part Sale/Part CRT
Sell house and portion of land outright to maximize the exclusion
allowance with the balance to a CRT. The simplest way would be for the
Chambers to use their exclusion amount on a primary residence of
$500,000 and then place the remaining portion in a CRT for sale.
Option A: Part Sale/Part CRTOption A: Part Sale/Part CRT
CHAMBERS PROPERTYCHAMBERS PROPERTY
$2,200,000$2,200,000
$500,000$500,000
sell outrightsell outright
$1,700,000 CRT $1,700,000 CRT
(7% payout)(7% payout)
>No tax - exclusion allowance >All capital gain is avoided
>$707,000 in tax deduction may save $220,000 in taxes over 6 years
>1st year income - $119,000
Keep 23% by deed Sell 77% through a CRT
Sale & CRT BenefitsSale & CRT BenefitsPrepared For George and Betty Chambers
•Capital Gain Taxes If Sold $422,000
•Capital Gain Taxes - Sale/CRT $0
•Cash to Donors $500,000
•Income Tax Deduction $707,000
•CRT Annual Income $119,000
•CRT Lifetime Income $2.1 Million
Option B: ‘Wash Out’ Tax PlanOption B: ‘Wash Out’ Tax Plan
The slightly more complex approach would be to sell the house and a
portion of the land outright to maximize the
exclusion allowance - including another 27% of the property - place the
balance in a CRT.
Option B: ‘Wash Out’ Tax PlanOption B: ‘Wash Out’ Tax Plan
CHAMBERS PROPERTYCHAMBERS PROPERTY
$2,200,000$2,200,000
$500,000$500,000
sell outrightsell outright
$1,100,000 CRT $1,100,000 CRT
(7% payout)(7% payout)
>No tax - exclusion allowance
>All capital gain is avoided
>Generates a tax deduction of $458,000
>Potential tax savings of $155,000
>1st year income - $77,000
Keep 50% by deed
Sell 50% through a CRT
$600,000 more$600,000 more
sold outrightsold outright
>Generates $573,000 in capital gain to report
>Tax owing of approximately $149,000
Questions or
Comments??
Questions to Ask Yourselves...Questions to Ask Yourselves...
• Do you have a client who is interested is selling real estate, but is hesitant because of capital gains taxes?
•Do you know someone who would like to unlock the income potential of their real property?•Does a client have a taxable estate and has real estate holdings?
Questions to Ask Yourselves...Questions to Ask Yourselves...
•Are you acquainted with someone who is “land rich and cash poor?”
•Is there someone you know who owns a business, is considering a sale and the business holds real property?