Real Estate and the CRT
Controlling 100% of Your Family’s Social Capital
Real Estate Income Property Converted for Retirement
Sarah Sullivan, a widow age 72, has a modest estate with some cash savings and an apartment complex that has become increasingly burdensome to manage. As a former high school biology teacher, she is comfortable with her pension, but she would like to travel with her grandchildren while her health remains good. The rental property generates a decent source of income, but the responsibilities of day to day management keep her tied closely to the units. As the property ages, recurring repairs and dealing with renters has taken most of the enjoyment out of the property since her husband passed away some 5 years earlier. She would like to move to Florida to spend more time with her adult daughter and grandchildren. However, she is unwilling to sell the apartments and pay 30% of her proceeds as a capital gains tax. Besides the income tax issue, she was especially incensed to learn that she would also have the remaining balance taxed again at death when she passes that value on to her family. With a tentative offer of $680,000 for her property, she views this as an opportunity to sell and retire more comfortably. Her attorney suggested a charitable remainder uni-trust (CRUT) as a possible planning tool to minimize tax liabilities and retain some control over 100% of the family capital. The attorney requested that our firm to run a sample scenario*, and compare what would happen if (a) she kept the apartment complex and continued to operate it, or (b) sold it and paid the tax, reinvesting the balance, or (c) gifted it to an IRC § 664 Trust. The following presentation was reviewed and accepted by Mrs. Sullivan, her family and advisors. The major attraction was that the CRT would revert to a family type foundation after Mrs. Sullivan passed away. In this way, the family keeps a presence in the community and commits annual funds to the school district’s high school science program.
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Income Property CRT Strategy (seehttp://members.aol.com/CRTrust/CRT.htmlfor other tools) | Keep Asset and Pass to Heirs (A) | Sell Asset and Reinvest the Balance (B) | Gift Asset to CRT and Reinvest (C) |
| Fair Market Value of Apartment Complex |
$680,000 |
$680,000 |
$680,000 |
| Less: Cost of Sale (legal fees, commissions, appraiser) |
27,200 |
$27,200 | |
| Adjusted Sales Price |
$652,800 |
$652,800 | |
| Less: Tax Basis |
$40,000 | ||
| Equals: Gain on Sale |
$612,800 | ||
| Less: Capital Gains Tax (federal and state combined) |
$183,840 | ||
| Net Amount at Work |
$680,000 |
$468,960 |
$652,800 |
| Annual Net Return From Asset Valued at $680,000 @ 5% |
$34,000 | ||
| Annual Return From Asset Reinvested in Balanced Acct @ 9% |
$42,206 | ||
| Avg. Annual Return From Asset in 7% CRUT Reinvested @ 9% |
$51,808 | ||
| After-Tax (31%) Avg. Spendable Income |
$23,460 |
$29,122 |
$35,748 |
| Statistical Number of Years of Cash Flow for Income Beneficiary |
15 |
15 |
15 |
| Taxes Saved from $330,664 Deduction at 31% Marginal Rate |
$102,506 | ||
| Tax Savings and Cash Flow over One Life Expectancy |
$351,900 |
$436,836 |
$638,724 |
| Total Increase in Net Cash Flow Compared to Original Asset |
$84,936 |
$286,824 |
* Hypothetical evaluations are provided as a professional courtesy to members of the estate planning community. Call for suggestions.
Normally, a wealth replacement trust would be established to offset the loss of value in the charitable gift. As once the asset is irrevocably transferred to the CRT it is unavailable to the heirs, and many families opt for insurance protection to replace the value of the gift. However, she and her husband had already purchased a $500,000 “second to die” insurance policy to provide liquidity for estate taxes, so this policy was simply converted to a different use and shifted out of her estate via gifts to her family while the early policy value was low. Now, since there won’t be estate taxes to pay; the existing policy will be used instead to offset much of the value lost in the gift.
© Vaughn W. Henry, 1997