Sell smart!
by Seth PearsonFrequently, people sell highly appreciated real estate, pay taxes and then invest the rest to supplement their retirement income. But if you choose instead to avoid the tax at the point of sale, you can significantly increase the income available to you during your lifetime.
Take, for example, what Ginny and Bill Green (not their real names), both 66, can achieve with a charitable gift annuity trust (CGAT) that will guarantee an income of around 7 percent. (Today, certificates of deposit and Treasuries are paying about 5 percent).
When they place $500,000 of highly appreciated real estate into a CGAT before the sale, they can save as much as $100,000 in capital gains taxes. That tax savings would guarantee another $7,000 a year in income for life. Over 25 years, that easily can provide $175,000 more income. In addition, the Greens can have a current income-tax deduction of $50,000, which they can use to reduce taxes on other income over the next six years.
Here’s another example.
Joan and John Clark (not their real names), both 66, can avoid the capital-gains tax on the sale of a $1 million rental property, fully depreciated and at a very low cost basis. They also can replace the asset and allow their children and grandchildren to benefit as well. Here’s how:
The tax on the sale, without planning, will be $200,000. However, the Clarks can title the property in two ways – $800,000 of the value of the property to their charitable remainder annuity trust and a $200,000 gift to the children’s charitable remainder trust.
After the sale, the proceeds are divided accordingly. The parents will be the trustees of both trusts.
Just as in the Greens’ case, the Clarks can draw a guaranteed income of $56,000 a year from the $800,000 charitable remainder annuity trust to supplement their Social Security and other investments.
This income stream will continue throughout the parents’ lifetime or for 20 years – whichever is longer. Meanwhile, the $200,000 invested in the children’s trust is left to grow. If it earns 7 percent a year, it will grow to $1,086,000 in 25 years.
When the parents die, the children become the trustees and can draw income from this $1,086,000 trust throughout their lifetimes, supplementing their own retirement income.
Of course, some money in a charitable remainder trust must go to a charity or family controlled foundation. The Clarks will receive an $80,000 income-tax deduction and the children will receive a $20,000 tax deduction in the year the assets are gifted. These deductions could be leveraged by using them to convert $100,000 of IRA account assets to tax-free Roth IRA accounts with the grandchildren as the beneficiaries. At 7 percent, these Roth IRAs would grow to $543,000 in 25 years. When the parents die, the Roth IRAs could start paying a tax-free income to the grandchildren. If the grandchildren drew out the income and principal from the Roth IRAs over 31 years, they would receive more than $1,346,000 tax free.
These are meaningful legacies to create for your family, and you can powerfully leverage your tax savings to the benefit of nonprofit causes on Cape Cod that you support, rather than sending those tax dollars on a one-way trip to Washington, D.C. You do have a choice.
Seth Pearson, CFP, of Pearson Financial Services in Dennis, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way.” He can be reached at (800) 385-7925 or seth.pearson@verizon.net.
Originally published in the March/April 2007 issue of Cape Business
Seth Pearson Seth Pearson, CFP, is author of “The Million Dollar Gift” and has conducted numerous financial planning seminars. His firm, Pearson Financial Services, provides wealth management services and specializes in tax strategies for highly appreciated real estate. 
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