          
          
          
          Goodbye Capital Gains Tax:
          
          
               It has become commonplace in America's quadrennial
          presidential election platforms for Republicans to call
          for reductions or repeal of the capital gains tax
          ("CGT") to stimulate investment and economic growth -
          while Democrats demand the tax be increased as a means
          of redistributing unjust gains from those who have
          much, to those who do not.
               Lost in all the political rhetoric is the long-
          established availability of the charitable remainder
          trust, an effective bypass of the capital gains tax for
          a grantor who donates his or her appreciated property
          to the trust.  The law is well-established that a
          transfer of appreciated property to a CRT is not a sale
          or exchange on which a capital gains tax is imposed.
               Hopefully, investments in real estate or other
          forms of property eventually mature, appreciating in
          value but too often declining in earnings or yield. 
          Before this process proceeds too far, the prudent
          investor looks for new areas of investment with greater
          yields.  But one very real roadblock gives pause before 
          selling low-yield property and reinvesting elsewhere;
          the federal capital gains tax, which at this writing is
          set at the confiscatory maximum level of 28 percent.
               Various states get into the act with their own
          CGT, for example, California, where it is now set at 11
          percent.  This produces a combined federal-state CGT of
          a whopping 36 percent - plus it pushes the taxpayer
          into a higher income tax bracket and raises his income
          taxes courtesy of that old devil "bracket creep."
               To illustrate more vividly, suppose you are lucky
          enough to own a building worth $1 million currently,
          with a fully-depreciated acquisition basis of $40,000 -
          a prescient value judgment you made years ago - but now
          with a horrific taxable capital gain of $960,000.  This
          means a combined federal and state CGT liability (if
          you live in California) of $344,832!  That leaves
          $655,168 to reinvest, and if the first year pays a 10
          percent return (again, lucky you), you get $65,517 in
          income - fully taxable at current federal and state
          income tax levels.
               And don't forget estate taxes.  If you are in the
          50 percent estate tax bracket, and are unfortunate
          enough to die soon after your sale, your heirs will
          only get $327,584 after paying an estate tax of
          $327,584.  Not much left of that $1 million building. 
          How discouraging for those who remain alive.
               But if you create a charitable remainder trust,
          then donate the building to the tax-exempt CRT, you pay
          no capital gains tax at all - zero, nor does the CRT
          trustee who sells the building later.  The entire
          proceeds from the sale go into the trust for
          reinvestment - $1 million, tax free.  (The CRT
          assumes the donor's cost basis and the subsequent sale
          of the property by the trust results in a capital gain,
          but no tax is imposed - but see the related discussion
          of taxation of a beneficiary's CRT payout, below). 
               Remember that you will need a qualified appraisal
          of the value of real estate or any other property at
          the time of transfer to a CRT, and the trustee is
          required to report the transaction to the IRS.  The
          transfer itself can be accomplished by a simple or
          quitclaim deed from the donor.
               Of course low cost basis appreciated real property
          (either developed or undeveloped) is not the only
          candidate for donation to your CRT; it may be your
          closely-held family business that has skyrocketed in
          value over the years; it might be your personal
          residence that has done the same; or growth stocks or
          aggressive mutual funds that now would better be
          replaced with conservative, safe, high income
          investments.  
               A word about mortgaged property you might consider
          for donation to a CRT.  Under IRS rules, if the
          property has been encumbered within five years prior to
          the proposed date of transfer to the trust, acceptance
          by the CRT, or any trust payment on the mortgage, would
          cause it to lose its tax-exempt status - and defeat the
          purpose of its creation.  Or the transfer could receive
          tax treatment as a "bargain sale," making at least part
          of the appreciation immediately taxable to the donor as
          a capital gain.  If the donor cannot pay off the
          mortgage before the transfer, there are possible ways
          to get around these obstacles, including a trust
          declaration provision forbidding the payment of
          mortgages, or the donor formally agreeing to assume all
          mortgage obligations personally.
               There are some other qualifying factors you should
          consider concerning transfers of property to a CRT.
               In the case of a successful closely held business
          of long duration, the original stock usually has a very
          low cost basis and selling it through the medium of the
          CRT will produce huge tax savings.  The fact that the
          business is sold through a tax-free CRT allows you as
          seller (technically the CRT is the seller) to structure
          a more attractive purchase agreement for the buyer,
          perhaps conceding some business tax benefits that would
          essentially be wasted if retained by the CRT.  These
          tax concessions can boost the business sales price
          and/or clinch the deal.
               A CRT donation works with personal property also. 
          Suppose you own a significant art collection.  Naming
          the art museum as the remainderman of the CRT provides
          you with leverage on keeping the collection together
          and its display.
               You can also sell your home through a CRT.  The
          law says people over 55 years of age are entitled to a
          one-time $125,000 capital gains exclusion on the sale
          of their home, if they re-invest the proceeds in a new
          home.  If your home exceeds this exclusion in value,
          you can sell it through a CRT and shelter all the
          income from the sale.  This maneuver is known as a
          "charitable buy-down" in sophisticated real estate
          circles.
               The possibilities of legal tax avoidance and
          significant guaranteed income are as limitless as the
          assets available for transfer to a CRT.
          
          
          
