Using Trusts to Reduce, Defer, and Eliminate Capital Gains Taxes

A trust is a legal method for reducing, deferring, and eliminating capital gains taxes.

What is a "trust"?

A trust is an arrangement where property is held for the benefit of another.

Our discussion here is about using trusts for minimizing or eliminating taxes, but there are also trusts for protecting assets, estate planning, and privacy.

Who should consider a trust?

Consider a trust if you:

want to sell or transfer assets that have appreciated significantly, such as real estate, stocks, bonds, and art.
have an estate worth more than the IRS limits (the limits change)
have property that produces little income

Also consider a trust if you:

want to sell an asset that would incur $15,000 or more in capital gains taxes
have a taxable income of $100,00 or more

How much can I save by using a trust?

Say that you have a piece of property you want to sell. It has appreciated in value and you want to avoid the capital gains tax that would be due.

Assume that:

the property was purchased for $70,000 several years ago
the current sale price is $800,000
the current capital gains tax rates are 15% federal and 9% state

		w/o Trust	w/Trust
+ Sale price:	$800,000	$800,000
- Purchase price:	$70,000	$70,000
- Costs of sale:	$70,000	$70,000
= Capital gain:	$660,000	$660,000
x Tax rate:	24%	n/a
- Tax due now:	$158,400	$0	(deferred)
= Cash to invest:	$501,600	$660,000

The seller using a trust clearly has more money available after the sale!

Are trusts legal?

Yes. The IRS recognizes 26 different types of trusts.

What types of trust are there?

Many types of trust exist. Examples include: Bypass, A-B, Private Annuity, Life Insurance, Privacy, Fixed, Discretionary, Asset Protection, etc. For our purpose here, the Charitable Remainder Trust and Private Foundation Trust are of interest.

How does a trust work?

For our purpose here, a typical trust structure to minimize capital gains taxes could look like this:

Create the trust

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Place asset into the trust (prior to sale or transfer)

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Sell the asset

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Place funds from the sale into a bank account. The account is in the name of the trust. The funds can then be invested or retained.

Benefits of using a trust

Consider these features of a "Charitable Remainder Trust" or "Private Foundation Trust":

You remain in complete control of assets as Trustee.
You receive income from the trust
You can pass your income on to your heirs
You may borrow from your trust
Your trust is tax exempt from income tax
Capital gains tax is deferred on assets sold by the trust
You may use the trust for retirement planning
Assets in the trust are protected from creditors
Receive an income tax deduction for assets placed into the trust

A word about "Private Annuity Trusts"...

In October, 2006, a ruling was made that Private Annuity Trusts cannot be used to avoid capital gains tax. Discuss with your tax professional whether a Charitable Remainder Trust may be a better alternative.

How much does it cost to create a trust?

The cost will depend on the attorney and the details of your situation. For our clients only, we can provide referrals.

Will you help me with my trust?

We use sophisticated techniques to help you growth wealth through real estate. To create a trust, you must consult a qualified attorney. We will work closely with your attorney to handle your transaction in the method that best serves you. For our clients only, we can provide referrals.

Important disclaimer: This is general information, not tax advice. Federal and state tax laws change frequently. We are not tax or legal advisors. Please consult a qualified tax or legal professional before acting on anything described here.