Insider Jeff Fleming

Start Up a Trust for Tax Savings

Are capital gains doing you in? This week, Jeff urges you to consider another option for your investments: a charitable trust. Both you and your favorite charity benefit! Plus--find out how to increase returns on an estate account.

Dear Jeff:
I've got assets in the forms of bonds and would like to cash them out but don't want to give it all away in taxes. I've actually got a few assets that I'd like to make liquid so they are more accessible if I need them, but I'd rather not pay a bunch in taxes if I don't need to. Got any ideas?

Jeff Says:
One of the cautions I always give to my clients is to be specific when talking about taxes. There are more types of taxes than we really want to think about. In my practice, however, the two types that I am asked about the most are income and estate taxes. From the context of your question, I will make the assumption that you are primarily concerned with income taxes.

If you want to completely avoid any income or capital gains taxes on assets, then you could give those assets away. The obvious problem with this approach, is that assets would no longer be available to provide you with the income you need. You could just sell the assets and pay the income taxes, but you lose approximately 20 percent in capital gains tax and you state that you "don't want to give it all away in taxes."

There is an exciting solution to your problem that seems to be ideal for your particular circumstance. It is called a charitable remainder trust. I've covered this topic in a previous column, but let me just highlight how this trust works:

First, an attorney should draft a trust document for you. Once the legal work is done, you could transfer any appreciated assets that you have into the trust. The trustee of the trust could sell the assets and because it is a charitable trust, no capital gains would have to be paid. You could take an income from this trust for the rest of your life and, at your death, the balance of the trust would be left to the charities of your choice. This technique not only reduces your estate taxes, but you get an income tax deduction at the time that you make the gift to the trust as well.

Charitable planning is receiving much more attention lately because of the number of celebrities such as Ted Turner taking advantage of the benefits of this technique. I have emphasized the tax benefits of charitable planning, but the true winners are those organizations to whom you leave your legacy.

Earn More Interest!