reynolds t. cafferata. you bought it for $40,000 in 1960’s and its worth $4 million in the early...
TRANSCRIPT
Reynolds T. Cafferata
Dusting Off the Old CRT
The Ideal Asset for A CRT?
Yes, if
You bought it for $40,000 in 1960’s and its worth $4 million in the early 1990’s.
Have you done a lot of CRTs in the past ten years?
Low Tax RatesFew appreciated assets
No because …
That’s all changing …
Federal Ordinary Income 39.6%Federal Capital Gains 20%Medicare Surcharge 3.8%California 13.3%
(9.3% base, 1% millionaire tax, 3% Prop. 30)
Rates Are Up
2009 Dow 6627, 2013 Dow 15300Residential House up 10%+ in some Markets
from 2012 to 2013
Assets Are Up
Robert F. Sharpe & Co Research finds peak age for creating a CRT is 68
Next year the first baby boomer turns 68
Demographics Will Favor CRTs
Main benefit of a CRT is not the deductionTax Exempt Status of CRT allows pre-tax
reinvestment of sale proceedsThe greater the appreciation and the greater
the tax rate, the greater the benefit of the CRT
Someone looking to turn an appreciated asset into an income stream will benefit from a CRT
Ideal Circumstances for CRTs
$4,000,000
Sale CRT
$2.8 Million
$4 Million
Sale vs. CRT
Unitrust or Annuity TrustLives in Being or Term of years up to 20Assets remaining pass to charity
CRT Review--Structure
10% Remainder Value Payout Term AFR
5% to 50% Payout RateAnnuity Trust must pass Exhaustion Test
CRT Basics--Minimum Requirements
Fixed Dollar AmountNo Additional Contributions AllowedNo Benefit to Beneficiary From Growth of
CRT
CRT Basics—Annuity Trust
Fixed PercentageTrust Revalued AnnuallyFlavors
Standard Net Income (Make-up) Flip (Make Up)
Beneficiary benefits from growth in value
CRT Basics--Unitrust
Payments to Beneficiary Taxed under Four Tier Rule
UBTI Taxed at 100%Cannot Be a Grantor TrustDebt can cause UBTI or Grantor Trust StatusCannot Hold S-Corporation Stock
CRT Basics—Other Rules
Taxes reduce proceeds of sale of highly appreciated asset by 30% to 40%
CRT can reinvest 100% of proceeds of sale of highly appreciated asset
Beneficiary receives unitrust amount from 100% of proceeds of sale of highly appreciated asset
Power of the CRT
Long-term real estate, particularly after 1031 exchanges
Founders stockLong-term stockTangible property like art
Types of Appreciated Assets
Unitrusts that pay net income are limited to cash flow
LLCs, Partnerships and annuities can control cash flow
Flip trusts can have triggers based on a variety of events
Managing Income Flow
Managing CRT Income
0 25 50$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
SaleCRT
Basis Percentage
Pre
sen
t V
alu
eSale vs. CRT PV
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
SaleCRT
Year
Pri
ncip
al
Fixed After Tax Payment