How To Eliminate Capital Gains Tax

Posted By Team iBizExpert On April 05, 2022 10:19 PM Hits: 95

First, I'll briefly explain what the Capital Gains Elimination Trust is (CGET). Then I'll explain how it works and end with a case study to show how someone might use this.

Summary:

A Charitable Remainder Trust is another name for a Capital Gains Elimination Trust. The way this works is that people put assets that have gone up in value into the CGET. When the assets are sold, the trust doesn't have to pay capital gains tax. You can then take money out of the trust every year. Earnings and principal can both be taken out.

Donors can be the trustees of the trust and decide how to invest its assets. They also get a tax break for the amount they put into the trust, which is based on the length of the trust, the size of the contribution, the rate of distribution, and the assumed earnings of the trust.

At this point, the assets are no longer part of their estate, they have a steady stream of income, and they haven't paid any taxes on the capital gains. The IRS says that you have to plan for at least 10% of the present value to go to a charity of your choice.

If someone wanted to leave the money to their family, they could buy a life insurance policy with some of the money they would have paid taxes on. Then, their children will get the same amount of inheritance money or more, without having to pay income or estate taxes.

A CGET can be used for real estate, stocks, or any other asset that has made capital gains and is free of debt.

Details:

There are a lot of rules and laws about CGETs. If a CGET doesn't meet all of the requirements, it might not be able to be a Charitable Remainder Trust, which could have bad effects on income, gift, and federal estate taxes. If a charity lost its tax-exempt status, it would also defeat the purpose of the donation.

Some of these requirements include math tests. Some of these tests have been part of the requirements for CRTs for a long time. The 1997 Taxpayer Relief Act (TRA 97).

Before TRA-97

 5 percent probability test (this applies only to charitable remainder annuity trusts)

 5 percent minimum payment test

1997's TRA act

 50 percent payout limitation test

10 percent of the benefit must go to charity

Provisions for Help

TRA 97 gave some relief to trusts that met all CRT requirements except for the requirement that they give at least 10% of their income to charity. The law says that a trust can be cancelled from the start (from the beginning). Under this option, the donor can't get a tax break for giving money to charity, and any income or capital gains made by property that was given to the CRT go to the donor.

The new law also lets a donor change a trust by changing either the annual payout or the length of a CRT (or both) so that the trust can give at least 10 percent of its income to charity. For this reformation, strict time limits have been put in place.

Get help from a professional

Laws and rules about Charitable Remainder Trusts can be complicated and hard to understand. People who need to make decisions about how a CGET will affect their taxes and estate planning should talk to an attorney.

Situation:

Beth and John have $100,000 worth of stock that is worth $1 million. They know that their portfolio needs to be more diverse and they want to make more money, but they don't want to pay the capital gains tax. They could put the stock in a trust that their lawyer would set up. The trust would not have to pay taxes, so it could sell the stock without doing so.

There is now $1 million in cash that can be used to invest. This could go into an annuity or a balanced portfolio. It makes no difference. And Beth and John can decide once how much money they'll get from the trust for the rest of their lives.

When Beth and John do this, they will be able to get a $417,180 tax break from the IRS as long as at least 10% of the money that goes into this trust is given to charity. And since they don't own the $1 million anymore, it isn't part of their estate. This saves their heirs $460,000.

Beth and John couldn't be happier. They'll have more money, less risk in the market, and a nice tax break. But the kids don't seem to be so happy. They thought they would get the million dollars. But that would be taken care of by a wealth replacement trust.

Beth and John use some of their new money to buy a second-to-die life insurance policy for $1 million on each of their lives. The policy is owned by a trust that can't be changed, so the money from it doesn't go into their estate. When the last person alive dies, the children will get $1 million tax-free, and whatever is left in the trust will go to charity.

If you ever have questions about how to plan for your short-term or long-term retirement goals, you can call the number on the coupon or send it in.