Many of us are facing a much larger tax obligation this year, owing to strong markets. There may not be a more financially rewarding use of your time into year end for wealth management than brushing up on your options for managing this liability.
Every situation is different, but jhh partners with CPAs who are experienced in dealing with a variety of circumstances. Below is a sampling of steps clients have taken over the years to help keep more wealth under their own control.
- Transfer of shares into a partnership to defer your gain (section 721 exchange):
It’s puzzling that this opportunity gets no more attention than it does. Suppose you own shares of a highly appreciated stock, real estate asset, or portfolio of securities that you want to sell. You prefer not to realize the gain, and seek a strategy akin to a 1031 exchange. You have the option to contribute these shares into a partnership and defer realizing the gain under certain circumstances. Be sure to follow the rules not to diversify into an “investment company”.
- Gift of securities: This is well known and often forgotten. One should almost never donate cash to a charity, except in the event a portfolio is substantially underwater (not common today). These gifts should be determined ideally at least two weeks prior to year-end.
- Accelerated / Bonus depreciation: More common at the business level,clients in the medical and transportation fields, among other capital-intensive businesses, have benefitted from this deduction, which applies to certain equipment purchases used for income-producing property or business.
- Charitable Remainder Trust (CRT): This irrevocable trust is intended to generate income in addition to supporting a charitable cause or causes. They are typically established with a gift of cash, stock, or another appreciated asset such as property. Whoever wants or needs income receives distributions from the gift for a period of time (often the remainder of their lives), and at the end of the designated period the remaining amount in the trust transfers to a charity.
Why set one up? These trusts are often used a) when a donor has appreciated stock and wants an annuity, but at better economics. There is also potential for the calculation of present value of the gift to be substantial.
- Charitable Lead Trusts (CLT) A favorite tool of cable billionaire John Malone, the lead trust is, like the remainder trust, irrevocable. Just as with the CRT, assets are donated, but an annuity is paid to a charity rather than a preferred family member or other beneficiary. After a specified, period, if the donated property appreciates above a government discount rate, that property returns back to the donor or other trust beneficiary.
Why set one up? If an asset appreciates more than the government discount rate (often 1-2%), the remainder coming back to the donor in future years can be substantial.
- Donor Advised Fund: The DAF is a simple means to take an upfront deduction before a donor has found a suitable use for his or her funds. You have the option of choosing your preferred manager to help you maximize the long-term value of these funds.
- Foundation: While requiring time and expense to monitor and execute effectively, foundations are favored by those with substantial resources and the ability or interest in supporting specific causes. In some cases, donors appreciate also providing a means of support for family or other close associates in order to help vet or solve societal challenges important to the donor.
- Easement (controlled): An easement typically results in a deduction based on the potential use of a piece of property. For example, someone donating property that might have been used for tract housing could deduct the opportunity cost of that use. This gift typically requires a trust to coordinate with, in additional to appraisal and legal fees.
- Easement (syndicated): The process of outsourcing an effort similar to the above. Due to the often extreme deductions generated by these structures, owing to sometimes aggressive assumptions, IRS will typically audit investors in syndicated easements. These should be used with eyes open, and while known to be a favorite of some politicians, may not be allowed indefinitely.
The information presented here is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This information may change at any time without notice.