Real Estate WEALTH Magazine | Page 31

PHILANTHROPY Photo copyright: Alex Kalina Which Would You Prefer: LIFETIME INCOME of $1,237,947 or $718,300? C haritable remainder unitrusts are frequently used as a real estate exit strategy. This popular technique can provide incredible tax savings and help you maximize your lifetime income. Real Estate Exit Strategies MADE SIMPLE percentage of 5% for their unitrust. To be ultra conservative, we will assume that the trust only earns 5%. As you read in our example above, a charitable remainder trust or many individuals, real estate repfunded with real estate can resents a significant portion of their net be an excellent worth. Yet quite often it has dramatiexit strategy cally appreciated in value. Consider these for property potential benefits of using a charitable owners who remainder unitrust as your real estate exit are looking to strategy. cash in, want to bypass capital gains taxes, • Minimize or eliminate capital gains tax and desire to • Increase income maximize their • Lower income taxes lifetime income. • Re-position illiquid asset Compared • Create income stream for heirs to the most • Establish a meaningful legacy for charity common recommendation of just selling Here is a simple example in which the property and paying the taxes, this alternative can provide enormous the property owners increase their benefits! lifetime income from an estimated Here’s how it works. Once the char$718,300 to $1,237,947 (72%) using itable remainder trust is established, the leverage of a charitable remainit receives title to the appreciated real der unitrust: estate. Typically the trust then sells Malcolm and Margaret, age 72 the property and invests the sales and 68, own apartment units worth proceeds in a diversified portfolio that $1,000,000 that are fully depreciated will generate income for you and/or with a cost basis of $100,000. They other beneficiaries you select. Upon are in a 43% tax bracket (combined termination of the trust, any remaining federal and state) and a 33% capital assets must pass to a qualified charity gain tax bracket (combined federal or charities. Charitable trusts can be and state). Their joint life expectancy set up for a life, lives, and/or a term is 22 years. They establish a payout F Realty411Guide.com PAGE 31 • 2016 By Cynthia Steiger, CSPG San Diego Rescue Mission of years, not to exceed 20. Several generations of heirs may be included as beneficiaries. Once the trust sells the asset tax free, the entire proceeds (less costs of sale) are available to re-invest. If a charitable remainder trust is created during your lifetime (intervivos), you will also receive a charitable income tax deduction equal to the present value of the charity’s remainder interest in the trust - a major benefit to lower your federal and state income tax liabilities. This is usually a substantial amount and is tied to the value of the property, the estimated life expectancies of the beneficiaries, the payout rate of the trust and the federal mid-term rate when the trust is established. If the trust is created as part of your estate plan (testamentary), it will provide estate tax savings for taxable estates. You select a payout percentage when establishing the trust. A unitrust payout percentage must comply with three basic rules. The trust must pay a minimum of 5%, cannot exceed a maximum of 50%, and the payout percent must produce a charitable deduction of 10% or greater. Charitable remainder trusts are irrevocable. This means that once the trust is established and funded, the property cannot be returned to you. The trust must obtain a Tax ID number and file annual tax returns. The Continued on pg. 92 Private Money411