Many people are nearing retirement age or are already retired and want to downsize their home after the kids have left the nest. Or they just want to use the equity in their home to help increase their income, but don’t want to take out a mortgage.
Given the tremendous growth in the value of homes, especially in Southern California, the capital gains taxes on the sale of your current home could be significant. Even the $250,000 capital gain exclusion for an individual or $500,000 for a married couple will not eliminate all the tax in many cases and the sale could result in a devastating tax liability.
What Is the Possible Solution to This Dilemma?
You may avoid capital gains taxes on the sale of a residence by using what is known as a “Capital Gains Bypass Trust”. It’s not a Living Trust. This tool allows you to sell an appreciated asset, pay zero tax, then manage the sale proceeds in the trust to provide income for you and your spouse for your lifetimes. It may seem too good to be true, but this trust has been in the Internal Revenue Code since 1969!
How Does This Work?
The first step usually involves meeting with a financial advisor experienced with this strategy to run some numbers for you. (We may refer you to one.) The next step (before you list your property for sale) would be to have the trust document drafted by a competent attorney. Then, you transfer your home into the trust, sell it as trustee of your trust tax-free, invest the proceeds and start collecting checks from the income for the rest of your and your spouse’s lives (this income may also continue for other family members for a limited period of years). After you pass away, the trust provides a legacy in your name, helping charities once all the income beneficiaries are deceased (or after a period of years).
Don’t believe it and think this sounds too good to be true? Well, the fact is that many of the universities and hospitals in the country have a large portion of their endowment assets in these types of trusts.
Here’s an Example
Let’s assume your residence is worth $2.5 million. Your cost basis for capital gains purposes is $300,000. Part of the residence - - 60% - - is put into the trust. This portion of the sale proceeds ($1.5 million) may then produce a lifetime stream of retirement income for you and your spouse, of about $7,500 per month. The sale proceeds from the other 40% ($1 million) can be used by you to buy a smaller home or for whatever else you may want to do. Depending upon your age, the net tax paid on the sale could be close to zero. That’s due to a significant charitable deduction that is allowed on the date the 60% of the home is put into the trust, because charities you name will receive the balance in the trust after you and your spouse are gone. If you want additional money to pass to your kids or other family members, the tax savings from the charitable deduction may help purchase a life insurance policy or investments for them.
A Quick Summary of the Benefits
Here is a summary of the benefits to you of this Capital Gains Bypass Trust strategy:
- No tax on the sale of your current residence
- You can downsize to a new home (paid for in cash from the sale)
- You’ll receive additional retirement income for the rest of your and your spouse’s lifetimes
- You may provide financially for your loved ones after you pass away
- Plus, a significant donation is made to your favorite charity after you’re gone
How does that sound to you? Not too bad, right?
If You’re Ready to Sell Your Home, ACT NOW
In order for this special trust strategy to work for you, you need to take steps before you sell your home, preferably before you even list it! Once an offer is accepted, it’s too late to use this strategy.
This article offers only a brief overview and there are many more important details to discuss and consider before implementing this strategy. If you’re serious about selling your home, give us a call at 1-800-756-5596 and ask to see if this Capital Gains Bypass Trust is the right fit for you!
Do You Need to Speak With an Estate Planning Attorney?
If you need to speak with an experienced estate planning lawyer, please contact us online or call us directly at 800.756.5596 to first register for one of our free, informative seminars. Your attendance will qualify you for a special discount for our estate planning services should you decide to make an appointment at the conclusion of the seminar. We proudly serve clients throughout California with offices in Torrance, Newport Beach, Orange, Woodland Hills, and Pasadena.