You are 70 years of age. You own a small farm that you inherited from your parents in 1972. At that time, the farm was worth $10,000. Today, because of the growth of luxury homes in the area and demand for land, your farm is worth $1,000,000. You would love to sell the farm; but, if you do, you will pay capital gains taxes on $900,000. You do not want to pay those taxes; but, you need additional income. You also realize that if you leave this $1,000,000 asset in your estate that it may cause you to have an estate tax problem when you die.
An estate planning attorney can help you resolve this situation by transferring the farm to a Charitable Remainder Trust. The trust then sells the farm; however, it does not have to pay taxes because of its charitable designation. The trust is able to invest the proceeds from the sale and provide you with an income stream for a term of years or for designated lifetimes (notice that it can be for more than one person’s lifetime).
Of course, you may be the trustee for this trust; so, in fact, you are making the investment decisions that produce your income stream. After the term of the trust expires, the trust distributes the remaining assets to the charities you designated.
This type of trust enables you to escape the capital gains taxes and reduce your estate taxes because you are making a charitable gift of the asset. In the meantime, you are able to enjoy an income stream from the asset.
Of course, if you goal is also to pass on significant assets to your children, the estate planning attorney can guide you in using some of the income stream to establish a life insurance trust that will pass to your children; but, is not subject to estate taxes at your death. By using this combination of trust tools, you have been able to accomplish your goals while significantly reducing your tax exposure.
Editor’s Note: Melanie B. Bradford is an attorney located in Scottsboro, Alabama at 803 Garland Ferry Road at the intersection of Veterans Drive and Garland Ferry near The Daily Sentinel. Her phone number is 256-259-3301. The Alabama State Bar requires any communication that may be interpreted as an ad to state: “No representation is made about the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”