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Common Questions Regarding Charitable Remainder Trusts

Do I have to take the income now?

You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates.

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized.

Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts.

 

Sounds great for me. But if I give away the asset, what about my children?

If you are concerned about replacing the value of the assets that you place into the charitable remainder trust for your children you can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust (ILIT) or what is referred to as a Wealth Replacement Trust. The trustee of the insurance trust could then purchase enough life insurance to replace the full value of the asset, or more, for your children or other beneficiaries from the income generated.

 

What are my income choices?

You can receive a fixed percentage of the trust assets which is referred to as a unitrust. The amount of your annual income will fluctuate depending on investment performance and the annual value of the trust.

The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income could increase assuming the value of the trust grows.

Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily marketable, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust’s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year.

You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.

 

Who can receive income from the trust?

Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives.

 

The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you receives it. Instead of lasting for someone’s lifetime, the trust can also exist for a set number of years (up to 20).

 

Do I have to take the income now?

No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

 

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates. (Our example is based on a 3.0% Section 7520 rate.) Generally, the higher the payout rate, the lower the deduction.

 

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

 

What kinds of assets are suitable?

The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won’t qualify, either, but you might consider paying off the loan.) Cash can also be used.

 

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

 

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

 

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.

 

For more information on charitable remainder trusts, or questions about getting CPA tax help in Charlotte, give us a call today.

 

 

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Cost Segregation: Accelerated Cash Flows and Opportunities For Growth

Cost Segregation studies allow tax payers to capture accelerated depreciation deductions by reclassifying components of a building into accelerated recovery periods Most commercial properties are depreciated over 39 or 27.5 years. Cost segregation studies are an approved method from the IRS that requires engineers and CPAs to reclassify portions of commercial properties to shorter depreciation lives, as short as 5 years. These accelerated deductions apply to both federal and state income taxes, allowing for significant cash flow increases.

Any commercial property is eligible for a cost segregation study. For every dollar, a cost segregation reclassifies from 39-year property to 5-year property results in an estimated 22 cent benefit. Cost segregation studies can provide a substantial return on investment.  A top-quality CPA firm with high-quality cost segregation services will be able to provide a fee proposal and estimated tax savings to determine the cost/benefit of the analysis and compliance. Contact Camuso CPA PLLC (CamusoCPA.com) today for a free initial consultation regarding a comprehensive cost segregation study, if eligible you will receive a free quote.

Case Study:

An apartment building with a tax basis of $1.5 million, with one year of standard 27.5 year accumulated depreciation can accelerate $263,424 in tax deductions in just 4 years with $143,314 in year 1.

Take a look at the chart below for an illustration, the red represents the accelerated cash return from the cost segregation study while the yellow represents a conservative estimated rate of return you can get from the accelerated cash flows.

Technology Disruption Offers Opportunity to Small Investors and Small Businesses

Traditionally, many CPAs do not have the expertise and depth within their professional network to deliver cost segregation studies.

Our team (CamusoCPA.com) and systematic process takes a comprehensive approach to cost segregation, by leveraging our network of licensed professional civil engineers, cutting edge technology and top-tier knowledge our team can efficiently do properties of any size.

Cost Segregation is now cost effective for smaller properties by using cutting edge technology and online software designed for CPAs who are strategically aligned with engineers that are experts in cost segregation.

Traditionally, cost segregation studies would only be recommended for larger properties with a tax basis over $1,000,000. The cost segregation industry is being disrupted, offering a great opportunity to smaller investors and business owners who can recognize this opportunity and capitalize on it to accelerate cash flows to improve their business or secure an additional strategic investment on properties with a tax basis as lows as $100,000 to $200,000.

Here is an additional article regarding technology disruption in the cost segregation industry: https://www.linkedin.com/pulse/technology-disruption-offers-tax-maximazation-small-camuso-cpa

The Process

The cost segregation process utilizes an engineering approach to identify assets that can be reclassified for accelerated depreciation, evaluating all available information and presenting the conclusions in a professionally documented format.

  • Review of all cost detail for the property
  • Inspection of facilities
  • Review of all blue prints
  • Reconciliation of all construction costs and estimates to the actual amounts incurred by tax life
  • Pro-rata allocation of soft costs

Timing

Tax regulations allow for taxpayers to retrospectively capture missed deductions provided by a cost segregation study.

Cost segregation studies can be performed at any time but in order to maximize tax deductions one should be performed as soon as possible.

Estate Planning Opportunities

Cost segregation studies can be a powerful estate planning tool.  Cost segregation studies offer an additional opportunity to reduce the decedent’s original tax basis for real estate assets that are recorded on their tax depreciation schedule before death. A cost segregation study can be done after a death occurs, but must be completed before filing the decedent’s final income tax return.

This can generate accelerated depreciation that can eliminate tax owed on the final federal income tax return, while reducing the building’s pre-stepped up tax basis. Since the federal income tax basis of the building is reset to fair market value on the date of death, neither the decedent nor the heirs realize any offset to future deductions typically associated with cost segregation studies.

Additionally, the recapture tax that is paid upon sale of the property on the accelerated depreciation deductions does not occur in estate planning situations.

Additional Strategies

Cost segregation studies can be combined with 1031 exchanges as a powerful tax planning toolset, allowing investors to accelerate the growth of their portfolios by capturing large tax deductions and deferring gains on the sale of properties.

Additionally, cost segregations can be combined with other studies, incentives and tax planning strategies including bonus depreciation, 179D Deductions, 45L Energy Credits, Insurance Replacement Appraisals, Tangible Property, Repairs & Maintenance Studies and much more.

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