How To Eliminate Capital Gains Tax

How to​ Eliminate Capital Gains Tax
First off I​ will give a​ short summary of​ the​ Capital Gains Elimination Trust (CGET) .​
Then,​ I​ will provide some details about how it​ works and conclude with a​ case study as​ an​ example of​ how someone might use this .​

The Capital Gains Elimination Trust is​ better known as​ a​ Charitable Remainder Trust .​
How this works is​ one would deposit highly appreciated assets into the​ CGET .​
the​ trust sells the​ assets and pays no capital gains tax .​
you​ then get to​ withdraw an​ income each year from the​ trust .​
the​ withdrawal can be earnings and principal.
Donors can be the​ trustees of​ the​ trust and decide how to​ invest the​ trust’s assets .​
in​ addition,​ they get an​ income tax deduction for their contribution to​ the​ trust that is​ based on​ the​ term of​ the​ trust,​ the​ size of​ the​ contribution,​ the​ distribution rate,​ and the​ assumed earnings on​ the​ trust.
At this point,​ the​ assets are now removed from their estate,​ they have paid no tax on​ the​ capital gains,​ and they have a​ stream of​ income .​
the​ IRS requires at​ least 10% of​ the​ present value to​ be projected to​ go to​ a​ charity of​ your choice.
If someone wanted the​ money to​ be left to​ family,​ they could use part of​ the​ money they would have paid taxes on​ and buy a​ life insurance policy outside of​ their estate .​
Then,​ their children will still receive as​ much or​ more inheritance money,​ free of​ income and estate taxes .​

A CGET can be used with real estate,​ stocks,​ or​ any other asset with capital gains,​ and must be unencumbered with debt .​

CGETs are subject to​ a​ maze of​ law and regulation .​
the​ failure of​ a​ CGET to​ meet all requirements can result in​ a​ trust being disqualified as​ a​ Charitable Remainder Trust,​ with negative income,​ gift,​ and federal estate tax consequences .​
the​ loss of​ charitable status would also defeat a​ donor’s charitable intent .​
Some of​ these requirements involve numerical tests,​ several of​ which have long been a​ part of​ the​ qualifying conditions for CRTs .​
the​ Taxpayer Relief Act of​ 1997 (TRA 97).
Pre-TRA 97
 5% probability test (this applies only to​ charitable remainder annuity trusts)
 5% minimum payment test
TRA act of​ 1997
 50% payout limitation test
 10% minimum charitable benefit
Relief Provisions
TRA 97 provided several relief provisions for trusts which would meet all CRT requirements,​ except the​ 10% minimum charitable benefit requirement .​
the​ law provides that a​ trust may be declared void ab initio (from the​ beginning) .​
Under this option,​ no charitable tax deduction is​ permitted to​ the​ donor for the​ transfer and any income or​ capital gains created by property transferred to​ the​ CRT becomes income and capital gain to​ the​ donor .​
The new law also allows a​ donor to​ reform a​ trust,​ by modifying either the​ annual payout or​ the​ term of​ a​ CRT (or both),​ to​ allow the​ trust to​ meet the​ 10% minimum charitable benefit .​
Strict time limits have been imposed for this reformation .​

Seek Professional Guidance
The laws and regulations surrounding Charitable Remainder Trusts can be complex and confusing .​
Individuals facing decisions concerning the​ tax and estate planning implications of​ a​ CGET are strongly advised to​ consult with an​ attorney .​

Case Study:
Beth and John own $1 million of​ stock that cost $100,​000 .​
They realize that their portfolio needs better diversification and would like more income,​ but they do not want to​ pay the​ capital gains tax .​
They could place the​ stock in​ a​ trust set up by their attorney .​
the​ trust would be a​ tax-free entity and could sell the​ stock without paying the​ tax.
Now there is​ $1 million cash that can be invested .​
This could go into a​ balanced portfolio,​ or​ an​ annuity .​
It doesn’t matter .​
And Beth and John can make a​ one-time decision on​ how much lifetime income they’ll receive from the​ trust .​

The IRS will let Beth and John take an​ income tax deduction of​ $417,​180 when they do this,​ as​ long as​ at​ least 10% of​ the​ money that originally goes into this trust is​ left to​ charity .​
And since they technically no longer own the​ $1 million,​ it​ is​ out of​ their estate,​ thereby saving their heirs $460,​000 .​

Beth and John are thrilled .​
They’ll end up with more income,​ less market risk,​ and a​ nice tax deduction .​
But the​ kids aren’t so happy .​
They thought that they were going to​ get the​ $1 million .​
However,​ a​ wealth replacement trust would take care of​ that.
Beth and John take part of​ their new income and buy a​ $1 million,​ second-to-die life insurance policy on​ their lives .​
the​ policy is​ owned by an​ irrevocable life insurance trust so the​ proceeds are removed from their estate .​
When the​ survivor dies,​ the​ children will receive $1 million tax-free,​ and the​ charity will get whatever remains in​ the​ trust .​

If you​ ever have questions about planning for your immediate or​ long-term retirement goals,​ please feel free to​ call or​ send in​ the​ enclosed coupon .​
Mark K .​
Lund,​ CRFA
Wealth Manager
Stonecreek Wealth Advisors,​ Inc.
10421 So .​
Jordan Gateway,​ Suite 600
So .​
Jordan,​ UT 84095
Securities offered through Sammons Securities Company,​ LLC
Member NASD and SIPC

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