More on no cash but plenty of real estate
Q
You recently responded to a question where the trustee of a friend's trust was concerned that his friend's trust held plenty of real estate but no liquidity. The trustee was worried about having enough cash to continue to pay for his friend's end of life care and then the expenses once his friend passes away. I think you did a good job in covering the different options to raise cash without selling appreciated property and having to pay huge capital gains taxes. I didn't understand the part where you said you can work with the future beneficiary of the trust, a charity and possibly sell the property and create income without paying capital gains taxes. Can you clarify? A The reader wrote that the eventual beneficiaries of his friend's trust were a couple of friends but mostly charities. It was understood from the question that the trust had several rental properties that had significantly appreciated in value from the time his friend had bought the property, and they were hesitant to sell because of the capital gains taxes that would be due.
For clarity, let us call the maker of the trust in this scenario “Colin.” According to his friend, Colin is in his final months or weeks of life and his friend will step in as trustee should Colin become incapacitated or upon Colin's death. Let us further say that among Colin's assets is a single-family home that is currently rented. Colin collects the rent, pays insurance, property taxes and pays for maintenance on the home. Whatever net income is left, Colin uses for his own expenses. Colin has charitable intent as evidenced by his trust which provides that on his death most of his assets will be distributed to charities.
Colin can set up a charitable remainder trust and retitle or “gift” this rental property to his newly established CRT. Colin or his friend can be the trustee of the CRT and, once the property is in the CRT, it can be sold. No capital gains taxes would be due. The CRT can pay Colin an income stream for his lifetime and then, on his death, the balance of the CRT assets would be distributed to his named charities.
The amount of income that can be distributed to Colin depends on his age when the CRT is established as determined by IRS statues. Colin should work with his attorney and tax advisor to see if the income provided in this kind of plan would be greater than the net income Colin is currently receiving in rent. The CRT is irrevocable so, once Colin establishes the trust, he cannot change his mind. Undoing a CRT can be costly both in taxation and other legal hoops that need to be jumped through. That said, charitable planning can be very elegant and benefi
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cial to both the donor and the charities. Q My friend died and I am taking care of her estate. Apparently, she has a safe deposit box and I cannot find the keys. Also, I don't think she put my name on the box and the bank is telling me I must wait a period of time before I can get into it. What a hassle! How could this have been better handled? A First, it would have been great if your friend made you aware of the existence of the safe deposit box. Second, it would have been good if she added your name to the box or, if she had a trust, put the box in the trust's name. If she has the trust name on the box, anyone that steps in as trustee will have access to the box. At this point, the bank will probably make you wait 40days to access the box at which time you will need to have the box drilled (and pay the costs of drilling from your friend's estate funds).
Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust Management Company. This is not intended to be legal or tax advice. If you have a question call (831)6465262 or email liza@ montereytrust.com