Your wealthy clients who sell such property as a home, stocks, bonds and other high-value property soon learn the danger of capital gains taxes, which are levied on the difference between the original cost mbasis and the sale price.If the asset has been for decades or if the market has been rising quickly,  the difference can be dramatic. Capital gains usually depend on the taxpayer’s income. The maximum rate is usually 20 percent; many taxpayers face a zero or 15 percent rate. A 25 or 28 percent tax rate can also apply, however, to certain types of net capital gain.

Clearly the bite can warrant some clients finding ways to protect the money. One common tactic: a 1031 exchange (named after the pertinent section of the Internal Revenue Code) that allows a taxpayer to postpone paying tax on a gain if the taxpayer reinvests the gain in similar property in a qualifying “like-kind exchange.” But some Congressmen want to eliminate the 1031 exchange to finance a tax rate cut.

CPA David Barrett, director in the tax practice of Freed Maxick in western New York, adds there may be different reasons not to use a 1031. Perhaps your client is uncomfortable with the economic environment surrounding a category of replacement property for a 1031, or no longer wishes to actively manage real estate. Maybe your client has heard that tax reform may eliminate or severely curtail Sec. 1031.

Some charitable trusts can help defer capital gains. Charitable remainder trusts can allow your client “to sell a highly appreciated asset and avoid taxation, as well as receive income while making a future gift to a preferred charity,” says Walid Petiri, chief strategist at Financial Management Strategies in Baltimore.

A CRT, charitable gift annuity (CGA) or a donor advised fund (DAF) might work, says J. Kevin Stophel, principal at Kumquat Wealth in Chattanooga, Tenn. “The CRT and CGA could provide a current partial charitable gift deduction and an income stream,” he adds. “The DAF could provide a larger deduction but without the income stream.”

Says Bryan Clontz, president of Charitable Solutions LLC in Jacksonville, Fla., “Using a CRT or a CGA can eliminate or defer capital gains taxes while providing life-time income. The remainder is then paid to the charities the donor chooses.” A charitable remainder unitrust with flip provisions is good for real estate, he adds. (The “flip” occurs when the property sells and the income starts.)

Generally healthy clients who wish to leave an inheritance, Barrett points out, can use a CRT combined with a wealth replacement trust such as an irrevocable life insurance trust that allows investing of tax savings in life insurance for the ILIT. The ILIT is not included in the value of your client’s estate; the death benefit passes to heirs free of estate taxes.

There are other options for certain assets. Exchange funds are “commonly used for [large] concentrated stock positions that an owner wants to convert to a diversified portfolio over time without paying capital gains,” Stophel says, adding that for investors with very large positions, a private exchange fund with a few participants could be advisable, “customizable to a degree related to the diversified portfolio one wants to have when the end portfolio is distributed.”

Those looking to transfer appreciating assets to heirs with an estate exceeding the lifetime gift exemption can explore a grantor retained annuity trust (GRAT), one kind of trust that allows an owner to place an asset in a trust and receive income; remaining assets in the trust are transferred to beneficiaries at the end of the term. Says Stophel, “No capital gains taxes are incurred … although the heirs do not receive a stepped-up basis as an offset.”

A family limited partnership (FLiP) could also be utilized, with a transfer of an asset occurring over time through incremental gifting of ownership interests using amounts equal to annual exclusion gifts.

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