Can You Really Put Your Money Where Your Heart Is?

What if I told you that paying capital gains taxes – estate taxes – and to some extent even income taxes … is voluntary? 

What if I told you that you could sell appreciated capital assets like real estate, stocks/bonds/mutual funds, even exotic animals (that’s another story – and a really interesting one!) and pay $0.00 in capital gains taxes, while also receiving:

  • A substantial income tax deduction?
  • Protection from creditors?
  • An increased, effortless income stream?
  • A reduction in estate taxes?
  • The ability to transfer assets estate-tax free to your heirs?
  • A vehicle to pass to your heirs assets that are protected from creditors or a divorce?
  • A significant contribution to your favorite charity or your own family foundation?
  • All the above benefits – (without going to jail)?

Does all of this sound “too good to be true”? If so, let me tell you the story of Simon and Paula Tyler.

When I was first referred to the Tylers, it struck me how very down to earth a family they are. Paula worked outside the home but wanted very much to be a more involved mom and wife. Simon was very clever with his hands, and over time had bought and fixed up eight rental properties. With Paula’s salary and the rental income, it allowed Simon to home-school the children in the mornings and early afternoons, and manage the eight rental properties with the rest of his time.

The Tylers were doing well financially, but life had become a non-stop race for both of them and was growing in complexity and demands. The net value of the rentals had grown to $3 million, but the net income was still not enough to allow Paula to step down from her job outside the home. Their quality of life was suffering, as was the closeness of their marriage. At our meeting, they shared with me what really mattered to them, and what they wanted to accomplish.  They hoped to:

  1. Provide sufficient income so that Paula could step down from her outside work position and be home full-time with the family;
  2. Reduce the demands on Simon’s time in maintaining the rental properties;
  3. Find additional tax savings if they were to dispose of some or all of the rental properties;
  4. Give more to various charities than they had been able to thus far.

After carefully listening to their concerns, we clarified exactly what it would take financially for Paula to stay at home. We also considered the financial objectives in meeting the educational needs of the children and the retirement needs of Paula and Simon. From this, we recommended the following steps:

  1. Create a living trust to eliminate the time consuming delays and costs of transferring property title at death as well as other important documents such as wills, health and financial powers, directives to physicians and more.
  2. Create a “Capital Gains Elimination Trust” (CGET) to hold rental properties prior to selling them.
  3. Transfer and sell the appreciated real estate through the CGET to create favorable outcomes:
    • Elimination of capital gains taxes on the appreciation in the properties … some of which had appreciated quite significantly from the time of purchase and after depreciation;
    • Over $300,000 of income tax deductions (which could be spread out over six tax years);
    • A creditor protected income stream of over $150,000/year coming from the net sales proceeds which were reinvested into an institutionally managed and diversified portfolio of stocks & bonds;
    • A reduction of $3 million in their assets subject to Federal estate taxes;
    • Creation of an estate tax-free and creditor protected/divorce-proof $3 million “family bank” for the heirs by using life insurance in an “Asset Replacement Trust” … paid for  with a portion of the income tax savings from the $300,000 income tax deductions;
    • A future benefit to their favorite charities of at least $3 million … which could ultimately be or include their own family foundation!

In practical outcomes, having the newly created  $150,000 a year  income stream allowed Paula to step down from her work position outside the home, and begin working side-by-side with Simon home-schooling their children. With the rental properties sold, Simon no longer had to wear the multiple hats of rent collector, property manager, bill payer and tenant selector, and so forth.

They could now just focus on their greatest priorities … each other, the children, the causes they love and all of their future needs. By “putting their money where their hearts are” and using a Capital Gains Elimination Trust and Asset Replacement Trust, they regained precious time with each other and their family, reduced their tax burden,  increased the size of their future estate for their heirs, and established a pot of money for future delivery to a number of worthy causes. Through flexibility in the document language, they receive irrevocable tax benefits now with the flexibility of revocable beneficiaries for the future. The beneficiary could even someday be their own family foundation. Should they find they have more money building in their tax-free accumulation trust (the Capital Gains Elimination Trust), they can actually direct distributions to support charities while they are still alive … and not wait until after their deaths.

Our approach of integrating various traditional and “non-traditional” planning tools allowed us to far exceed Simon and Paula’s  wildest dreams and meet  all of their desired outcomes … just as  they can for you!

Imagine That™”!

Written by R. J. Kelly –  December 2011