This month, I address an issue that is most likely going to get worse next year. I’m talking about Capital Gains Tax. House Democrats proposed a top federal rate of 25% on long-term capital gains by the House Ways and Means Committee. The maximum rate would be 28.8% when combined with a 3.8% surtax on net investment income. In 2022, it would kick in for single filers with taxable income over $400,000 and for married couples at $450,000, according to a committee aide. Now, I understand that this will affect a relatively small number of our clients. But, that said, it will affect some of you a lot.

This article is aimed at helping those of you that have highly appreciated assets and would like to sell said asset but feel that the capital gains tax would be prohibitive and eat up your gains. However, there is a possible solution.

The solution: A Charitable Remainder Trust (CRT) or Unitrust (also called a CRUT) is a gift of cash or other property to an irrevocable trust. The donor receives an income stream from the trust for a term of years or for life, and the named charity receives the remaining trust assets at the end of the trust term. But wait, that’s not all. It’s got a bit complex, but I will simplify as best I can.

Let’s assume the asset is a building. You bought this building several years ago for 1 million. It’s now worth 5 million. You create a CRUT and gift your building to that CRUT. You get a monster tax credit that you can use for 1 plus an additional 5 years, depending on when you need it. The CRUT then sells the building. Guess who is exempt from capital gains tax? Yup, the Charitable Trust! You then get to take income from the trust for the rest of your and your spouses’ life.

When you die, the charities you named in the CRUT will receive the “remainder” of the assets in the trust. You can even create your own trust foundation and make your kids the trustees. They would then oversee dolling out the remainder to the charities of their choice. This can go on for decades after you pass. And the kids can take a fee for being the trustees.

Let’s talk about the kids. You scored -the IRS lost (using their own rules)but the kids also may have lost. So, to make the kids whole, you can take a fraction of the income from the trust over the first 7 years and buy a Last to Die Life Insurance Policy to replace the 5 million. We would create another trust called an Irrevocable Life Ins Trust to buy the life policy. We do that to keep the death benefit and cash value outside of your estate for estate tax purposes because, let’s face it, that probably will get worse too.

So, if this scenario fits you and your stock, real estate, precious metals, or any other highly appreciated asset, we are here to help. This is not something that most advisors out there know about or are experts at doing. We have worked with outside counsel uniquely versed in these strategies, and I have had experience creating these arrangements over the years. Before I joined American Retirement Advisors, companies like Wells Fargo Private Client Services and Morgan Stanley would call on me to build these plans for their clients. I was the resident expert for The Hartford and on loan to all of the major firms in Las Vegas. I am here to help.