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?