George and Martha were tired of repairing the buildings they owned. At 68 George wanted to spend his time on the beaches of Hawaii or the Caribbean rather than in the basements of his apartment properties fiddling with the hot water boiler systems. They had built their real estate empire over a period of 40 years, but were tired of the hassles and just wanted a monthly flow of income.

If they were to sell their property, they could:

1. Pay the capital gains taxes.
2. Trade their properties in a 1031 exchange and buy a bigger property with triple net tenants.
3. Become a partner in a Tenancy-In-Common investment (see www.1031ex.com).
4. Create an LLC and gift shares of their property to their children in $10,000 increments annually.
5. Create a corporation of their real estate assets and operate the assets as a business that is not inherited; rather the corporation employs the children.
6. Give their property to a charitable remainder trust.

They decided to figure what their federal capital gains impact would be. They logged on to www.southwestexchange.com and used the Capital Gains Calculator found on that website. The immense amount of information they found there overwhelmed them. Instead, they then consulted with a tax attorney and discovered that their estate, worth over $1,000,000, would be taxed at a 50 % rate. Demoralized by the loss of value of their assets, they decided to look into Charitable Remainder Trusts (CRT). They found that over 16,000 not-for-profit institutions were happy to receive their gift of real estate. Should they choose to give, they would receive in turn a) an income tax deduction equal to the fair market value of the real estate (this can be spread out over six years and works for non-income generating assets too, such as land), and b) elimination of all or part of the capital gains tax. Also, they would be charged no estate taxes on the assets they gave to charity.

In 1969 the U.S. Congress created the Charitable Remainder Trusts (CRT) to help charities and not for profit organizations. By using a CRT, George and Martha would get to choose where the money would go and could change the beneficiaries, but they could not have the assets or the money back. Because the assets are destined for charity, there would be no capital gains tax as the value of the assets grows.

Typically, when an owner gives a charity real estate, the charity sells it and invests the cash because most charities don’t have much or any property management expertise. The amount of income generated by a CRT could be distributed to George and Marthathrough an annuity that is funded by the assets, also called Charitable Remainder Annuity Trust. The IRS requires that the trust pay the owners at least 5% annually. When George and Martha pass away, all of the assets would go to the charity.

On the other hand, if they were to use a Charitable Lead Trust, the charity would receive the income from the assets while George and Martha are alive, and the residual would pass on to their children, grand children, or other named beneficiaries.

George and Martha’s children were very well off and did not need any financial help from their parents. But they wanted to make sure there was money in place to help the grandchildren jump-start their lives. George and Martha decided to sell their assets and create an annuity CRT so they would have some income. Then they gave a share of the return to the charity and made sure there was some money left over for when the grandchildren would begin college.

Of course they made sure they had CPAs and attorneys involved to make sure they did it right. Unfortunately it took some time to set up, so they missed the best vacation season in Hawaii. So George and Martha purchased an RV and started touring across America.

Note to Reader: The same laws can be used for vacation housing, time-shares, or homes. In the case of a home, it would be gifted to the charity, but the donor could maintain a life estate. In that way the donors can receive a charitable write-off while they are alive and live in the house until they die.

Published: August 5, 2002

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Clifford A. Hockley is the President of Bluestone & Hockley Real Estate Services, one of the larger brokerage and property management companies in Portland, Oregon. Mr. Hockley holds an MBA Willamette University and a B.S. in Political Science from Claremont McKenna College. He is a Certified Property Manager and Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Mr.Hockley serves as member at large on the Portland IREM board. He has twice been named Certified Property Manager of the Year (2001 and 2003) by the Institute of Real Estate Management and is a frequent contributor to industry newsletters.