If you own a house in the Bay Area, you’ve likely got a high-value home. If you are downsizing to a smaller place, or moving to a retirement community, you may find that that upon sale you’ll be slapped with substantial capital gains taxes.
But there is an alternative. You can use a charitable gift plan that bypasses or offsets the gain and provides income for life.
“Unfortunately, most people have never heard of charitable remainder trusts and how they can reduce taxes and provide revenue for the costs of living, while supporting philanthropic goals,” said Jennifer Sachs, LightHouse’s Director of Development.
How does it work?
The $250,000 exclusion from capital gains tax ($500,000 for married couples) usually does not fully offset the gain of high-priced real estate in the Bay Area.
You can establish a charitable remainder unitrust by irrevocably transferring assets to a trustee, who then invests the trust’s assets and pays you and/or other beneficiaries an annual income. At the end of the trust term, the assets remaining in the trust are distributed to the LightHouse for the Blind.
Here’s a hypothetical example: Rick owns a San Francisco home that he inherited more than 30 years ago when it was valued at $500,000. It is now worth around $5,000,000. If it were sold, it would generate around $675,000 in capital gains taxes. Rick decides to create a 6% unitrust, naming himself as the primary beneﬁciary. He makes the gift establishing the unitrust in December, which allows him to claim a substantial income tax deduction for that year. LightHouse is named as the beneficiary upon Rick’s death. Beginning the following January 1, the trust will begin making regular 6% payments to Rick. Upon his death, the trust will end, and the remaining assets will be donated to LightHouse.
A unitrust is an excellent vehicle for gifts of appreciated property, because the trust is tax exempt and does not pay capital gains tax when it sells the assets. The full sales proceeds remain in the trust to provide a payout to you or the beneficiaries of your choice. These are complicated transactions but they can save thousands in taxes, and the savings can be used to produce increased income for the donor and a gift to benefit the blind community at the LightHouse.
- Variable income, based on a percentage of the fair market value of the trust assets, revalued each year
- Federal, and possible state, income tax charitable deduction
- Pay no immediate capital gains tax on the transfer of appreciated assets
- Reduce or eliminate estate taxes
- Diversify your investments
As an educational service, LightHouse produces estimates of the tax and payment benefits of charitable remainder trusts. Contact Jennifer Sachs at 415-694-7333 or firstname.lastname@example.org