Eliminate Capital Gains Tax with a Trust – The USB Trust™
Yes, you read that right: You can eliminate capital gains tax with a Trust. The good news: it is completely legal. We have no interest in assisting any client with tax fraud and would never advocate a scheme that is even remotely fraudulent. The bad news: It is not as simple as putting your assets into any ol’ Revocable Living Trust.
The Capital Gains Tax Problem
Many of our clients are faced with unrealized gains in either their real estate, their investment account or their business. Ideally, they would like to liquidate and diversify those assets, but assume they are forced to hold onto them so that they do not pay capital gains tax. They would like to eliminate capital gains tax with a trust, or any other vehicle. Other vehicles, such as a 1031 exchange, do not eliminate the issue of a lack of diversification or liquidity. Another often oversold approach to eliminating capital gains tax is through a charitable trust. It is true that a charitable trust does minimize capital gains tax, but you must also be willing to give the remaining assets to a charity. Most of the time, when looking at it from the perspective of “money in your pocket,” the charitable trust does not increase the amount you receive.
So what’s the solution? Drum roll please . . . the USB Trust™
The USB Trust™
The USB Trust™ or the Upstream Basis Trust is a unique trust that very few people utilize and even fewer estate planning attorneys understand. The individual legal concepts of the USB Trust™ have been respected by the IRS and the Courts, but very few understand how to maximize these concepts. The USB Trust™ uses a combination of respected estate planning concepts including: upstream lifetime gifts, powers of appointment, dynasty trusts, asset protection, estate tax inclusion and basis adjustments to eliminate capital gains tax. Unlike many other trusts, which require expensive out of state trustees, the USB Trust™ can be controlled by you. Besides eliminating capital gains tax, the USB Trust™ has additional benefits as well, including minimizing estate taxes and asset protection. At its core, the USB Trust™ uses the benefit of a step up in basis upon death pursuant to IRC § 1014 and § 2041.
Who Should Use the USB Trust™ to Eliminate Capital Gains Tax?
The USB Trust™ is not for everyone. The USB Trust™ is ideal for someone that has two or more of the following circumstances:
- Assets with a low-cost basis. In other words, assets with built-in or unrealized gains. Specifically, these are the assets that you want to eliminate capital gains tax on.
- Someone older than that you trust implicitly. Ideally, these will be elderly parents or grandparents that you currently take care of now and are not likely to have any significant debts now or in the future.
- The trusted person should have a net worth that is less than the estate tax exemption ($11.2 million as of 2018).
- The assets either create minimal income, or the income it does create you can afford to pay taxes on without the need of the income itself. In other words, you have other assets available to pay the income tax.
Like most types of trusts, there are pros and cons. However, the benefit of eliminating capital gains tax has a huge upside at the small cost of some minimal administration complexity.
John Wong advises on all aspects of estate planning, probate, asset protection and trust administration. He believes that estate planning is about planning for life; while having protections in place should the unexpected occur.
