One day Jesus was teaching in the temple when a Pharisee, hoping to get Jesus in trouble with the Romans, asked him if it was lawful for Israelites to pay taxes. That put Jesus on the spot. If he said yes, the crowds surrounding him would have become angry because they felt Rome had no business running their lives and taxing them to enrich Caesar. On the other hand, if Jesus said no, the Roman soldiers would have cause to arrest him and throw him in jail.
We all know what Jesus did. He held up a coin for them to see and asked the crowd, “Whose image do you see?” The people knew all too well that visage, because Caesar’s profile was embossed on every coin. “Caesar,” they mumbled. Then Jesus replied, “Then render to Caesar the things that are Caesar’s, and to God the things that are God’s. “ (Matthew 22:21, NASB)
Today not much has changed. We still dislike paying taxes. Fortunately for us here in the United States, we have a bit more say in what our government can do. Our tax laws are agreed upon by our own representatives. The result is perhaps far from ideal, but we have managed to get a few tax rules in our favor. Believe it or not, some taxes are actually optional.
You may question the validity of that statement in the light of recent tax law changes. We maintain that there are still ways to minimize and often eliminate taxes.
For example, capital gains tax is optional. You have a choice. You can pay the tax (an expensive option), or you can postpone the tax (which only kicks the football down the field to be paid later), or you can take advantage of three direct ways capital gains tax can be avoided.
The first way to avoid capital gains tax is to give the appreciated property to heirs at your death. When the property owner dies, appreciated property receives a stepped-up basis to the value at the date of death.
The second is to give the property as an outright gift to charity. When the charity sells the property, it pay no tax on the sale.
The third way is through the use of a charitable trust. The appreciated asset is transferred to a trust now with the agreement naming that charity will receive the principal at the termination of the trust (at death or at the end of a designated period of years). During the trust term, income is paid to the donor or other designated individuals.
The asset donated to the trust can be sold by the trustee and the proceeds reinvested with no recognition of capital gains tax at the time of transfer or at the time of sale. The only time capital gains will ever be taxed is when they are distributed in the form of income, and that tax will be in lieu of ordinary income tax, usually at a lower rate.
What about Estate and Gift taxes?
While the tax credits have increased to a point that most will not be subject to gift and estate taxes, those who do owe the tax have the same options. You can pay the taxes, or the taxes can be postponed or avoided through various types of trusts.
A charitable trust can be used to eliminate estate tax on any estate, regardless of size. Property is placed into a trust with income payable to charity for a period of years. At termination of the trust, remaining property is distributed to personal beneficiaries. With proper design of the length of time and percentage of income payout, it is possible to avoid tax on an estate of any size.
Interested in learning how charitable strategies can help you reduce or eliminate capital gains, estate and gift taxes? Our Estate and Gift Designs are unique in the marketplace and can help show you positive solutions to your tax concerns. Contact us today for more information.