Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Friday, October 2, 2020

Eliminating Capital Gains Tax Using A Complex Trust

GainsFor high net worth individuals, the tax impacts of capital gains are a great concern. Fortunately, not only are there ways to reduce or defer capital gains, but there are also avenues to eliminate capital gains tax altogether.

Capital gains tax is paid on profits made from the sale of am asset. These assets are typically in the form of property, business, or stocks and bonds. 

Below are a few ways to reduce or defer capital gains tax: 

1. Offsetting capital gains with losses: With this tactic, you can use up to $3,000 in realized losses from your investments to offset capital gains of a similar type of investment.

2. Using a 1031 exchange: This is when you sell a property and then roll the proceeds into a “similar investment” within a 180-day window. This tactic defers your taxes until a later date.

3. Using retirement accounts, such as an individual retirement account or 401(k) plan: Many of these will actually create tax-free growth, but similar to 1031 exchanges, this method defers your taxes rather than eliminating capital gains.

4. Moving to a different state: Currently, nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming) do not have a state capital gains tax.

One way to eliminate capital gains is using a complex trust. "When trust documents are implemented properly, you can effectively transfer control of assets from one person to another without triggering a taxable event." Essentially, the trust system will allow you to maintain control without having ownership, which will eliminate taxation. 

Complex trusts will be the most effective way to eliminate capital gains tax, but they may not be for everybody. 

See Khurram Chohan, Eliminating Capital Gains Tax Using A Complex Trust, Forbes Finance Council, September 18, 2020. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

https://lawprofessors.typepad.com/trusts_estates_prof/2020/10/eliminating-capital-gains-tax-using-a-complex-trust.html

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Comments

Hard to figure out what he is talking about. The phrase "complex trust" implies nongrantor. The trust will have carryover basis. If you sell the appreciated asset, the trust will incur a gains tax. Not the settlor, true, but the rate brackets for a trust are compressed, so the gains tax will be higher. And if the suggestion is that gains can be passed through to another beneficiary by way of the distributions deduction, actually that is a lot harder than it looks, per section 643(b).

Posted by: Russ Willis | Oct 3, 2020 6:52:58 PM

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