A Strategy To Sell Highly Appreciated Assets

I thought it was timely to discuss a strategy for selling your home for those families sitting on huge capital gains when they sell.  I have been working with a Financial Advisors, Advanced Trustee Strategies,  for many years that specializes in a unique strategy; it is not a 1031 exchange, or installment sale.  I have seen this strategy first hand and several years after the fact.  It is not a simple process, but I have helped many families navigate the details and successfully sell their homes utilizing this means with support from ATS.  This particular article is jointly written in order to bring this information to you.

The Dilemma

Steve Stewart is 62. His wife, Sandy, is 61. Almost 25 years ago, they bought their home for $350,000. They worked hard, made a decent living, and raised four children. However, now they’d like to sell their home, and downsize into a planned community.  Steve and Sandy have their home appraised. They are very excited to find that the property’s current value is over $1,800,000! The Stewarts are ecstatic until they visit with a tax advisor who tells them about capital gains tax.

The advisor explains that if they sell the property they will realize a gain of $1,342,000 ($1,800,000 sale proceeds, less the original price of $350,000 and selling expenses of $108,000.) Under current tax law, $500,000 of their gain is excludable from income for tax purposes. The balance of $842,000 is taxable at 23% (combined state and federal tax) in their situation. When they sell the property their tax bill will be $193,660.  Please remember this is a hypothetical example and is not representative of any specific investment. Your results may vary.

Before they sink into despair, the tax advisor explains, “There is an alternative route around the problem, one you need to know about. You can place the taxable portion of the property in your own tax-exempt charitable remainder trust, also known as the Capital Gains Bypass Trust (CGBT), thereby avoiding the tax due on that portion. By doing so, you will also get a charitable deduction that will help you keep more of the sale proceeds outside the trust. As named trustees and income beneficiaries of the trust you will maintain control of the proceeds from the sale of the property both inside and outside the trust, receive the income from the portion inside of the trust for the rest of your lives, and do whatever you want with that income and with the portion of the sale proceeds outside of the trust. Do this and you may be able to still leave your family more money. Let me explain how….”

The Advantage of Using a Tax-Exempt Trust Rather Than Selling Outright

The Stewarts’ tax advisor suggests that, instead of selling all the property outright, they sell outright only that portion that will be free of tax because of (1) the $500,000 exclusion, (2) the fraction of the basis and selling expenses allocated to this portion, and (3) the charitable deduction that they get from creating the tax-exempt Capital Gains Bypass Trust, also commonly known as the charitable remainder trust (CRT) with the balance of the property.  Computer software can readily calculate all these amounts. It’s called the “zero-tax” alternative. They will name themselves as the trustees and income beneficiaries of the CRT. The Stewarts will then control the investment of the proceeds inside the CRT as well as the proceeds kept outside the CRT. He lists many of the advantages the Stewarts may benefit from:

Depending on how they invest and consume the income from the CRT and the cash held outside the CRT, the Stewarts’ children may have the opportunity to receive more than they would have if the CRT had not been used.

The Disadvantages of the CRT

Of course, every strategy has some inherent disadvantages.  Some disadvantages of utilizing a CRT versus an outright sale of the property are as follows:

In certain cases the advantages may outweigh the disadvantages and potential risks.  Who Can Benefit?  Individuals or couples with an appreciated asset(s) that will be subject to capital gains tax if sold. Real estate, a business, stocks – almost any asset of value qualifies.  The CRT is one method to sell a capital gains taxable asset for cash with the potential to pay zero taxes. I have been working with clients utilizing this strategy for several years and have witnessed the benefits.  However, it isn’t a simple process.  When we prepare your home for sale we have to follow the steps exactly in order to recognize the benefits.  I have found the expert in this field to be Advanced Trustee Strategies (ATS).  I have worked alongside them with many family situations and think they have the knowledge, expertise andclient’s best interest at heart to be a part to your retirement strategy.

The Financial Consultants at ATS Advanced Trustee Strategies are Registered Representatives with and securities offered through LPL Financial, Member FINRA/SIPC.  Alden B. Tueller is a Chairman for Premier Administration, LLC., one of the preeminent trust administration companies in the countries and is not affiliated with LPL Financial.  Mr. Tueller is a Lawyer’s Lawyer in the area of tax-exempt trusts.  He has been working with tax-exempt trusts since 1966.  Professional lawyers, accountants and planned giving directors nationwide consult with Alden on their “toughest” cases.    He is a contributing author of Today’s Retirement and can be reached at alden.t@todaysretirement.com.

suzanne sarto