The good news is that 2013 was a record year for stocks as the market posted its best gains since the go-go 90’s, as the S&P benchmark index rose 29.6% in 2013. But now that tax season has ended, many taxpayers are feeling the pain of paying taxes on the capital gains they realized in 2013 as the result of the five-year bull market.
It was been a while since taxpayers had capital gains. Many had built up capital gain loss carry forwards due to the Great Recession of 2007. Also, many taxpayers didn’t realize there are now increased capital gain tax rates. The Affordable Care Act and American Taxpayer Relief Act (the “Acts”) added additional taxes on capital gains from 3.8% - 8.8% for many affluent taxpayers. Under the tax rates in the Acts, affluent taxpayers, when combined with Indiana State income taxes, can pay 28% or more in taxes on capital gains. This same tax rate was the Federal rate on capital gains back in the 1990’s.
The American Taxpayer Relief Act has also eliminated, at least for now, the thought that the Federal Estate Tax will be repealed. Affluent taxpayers and their families, specifically those with estates greater than the exemption amounts of $10,680,000 if married, or $5,340,000 if single, now also have to pay Federal Estate Taxes at the rate of 40% on the amount of their estate that is greater than these stated exemption amounts.
For affluent taxpayers, the tax landscape of today is similar to the 1990’s. During the 1990’s, many taxpayers utilized a Charitable Remainder Trust Strategy to both give back to the charitable organizations that are meaningful and important to them and to reduce the tax impact of realizing capital gains.
Stocks aren't the only investments reaching record highs -- farmland has reached similar heights. Many owners of farmland want to maximize the income produced by their investments, and are considering selling those holdings. However, those who own farmland are hesitating to sell because of the capital gains taxes that would be due upon sale.
Whether it is the affluent taxpayer with a portfolio of highly appreciated stock or a concentrated equity position who wants to diversify, or an owner of farmland looking to holdings to increase income, it may be appropriate to dust off the Charitable Remainder Trust (“CRT”) and pull it out of the “tool box” of income tax and estate planning strategies.
Why? A CRT is a sensible option when clients:
- Have highly appreciated assets that they would like to diversify without paying capital gains tax. Examples include: highly appreciated portfolios, concentrated equity positions, privately owned stock prior to a public or private sale to a third party or an Employee Stock Ownership Plan, collectibles such as coin collections and antique car collections, commercial real estate, and farm land;
- Want to increase their income to meet their wants or accomplish other advance estate planning strategies; and,
- Want to benefit charitable beneficiaries instead of paying taxes on that investment.
Six benefits for clients that implement the CRT strategy include:
- Receiving a current charitable income tax deduction for the present value of the remainder interest of the amount contributed to the CRT;
- Paying no capital gains tax on the sale of the asset;
- Potentially receiving more income after the transfer than the asset was earning before the transfer to the CRT;
- Having the opportunity to combine the CRT strategy with creating an endowment fund at a community foundation;
- Maintaining the ability to control most investments made by the CRT; and,
- Receiving recognition, if clients desire, for generous gifts made to charity.
Is 2014 the year of the rebirth of the Charitable Remainder Trust? With the tax and economic environment of today being similar to the 1990’s, it just may be. Time will tell if clients once again look favorably to the Charitable Remainder Trust to accomplish their income and estate planning goals and objectives.
Brian A. Eagle, J.D. is a nationally known attorney, educator, author, and wealth strategy consultant. He frequently provides wealth strategies consulting services to business owners, affluent clients, professional colleagues, and nonprofit organizations. He is the managing attorney of the law firm, Eagle & Fein, P.C. For more on Brian A. Eagle, J.D., and Eagle & Fein, visit www.eagleandfein.com.