The Legacy Trust
The Legacy Trust is a creation from the Tax Reform Act of 1969 which allows you to receive income each year for the rest of your life and then your children’s lives from assets you give to a trust that YOU create. With a Legacy Trust, you can turn your high net worth asset into high income while avoiding the 33.1% tax.
Example: Mr. and Mrs. Jones own an apartment building worth $1million that currently pays a net income of only $35,000 per year. The apartment building is fully depreciated with a cost basis of $100,000 (land). They decide to give the property to the Legacy Trust, which then sells the building to an outside buyer for $1million. By using the Legacy Trust Sale, as shown in the chart below, Mr. and Mrs. Jones pay no taxes on the sale of their building and create additional income of over $350,000!
Legacy Trust Sale Compared with a Taxed Sale
|
Taxed Sale |
Legacy Trust Sale |
|
| Selling Price |
$1,000,000 |
$1,000,000 |
| Basis |
$100,000 |
$100,000 |
| Profit |
$900,000 |
$900,000 |
| Capital Gains Tax Due |
$180,000 |
$0 |
| CA State Tax Due |
$83,700 |
$0 |
| 3.8% Excess Tax Due |
$53,000 |
$0 |
| Net Investment |
$702,100 |
$1,000,000 |
| 5.5% Income |
$38,615 |
$55,000 |
| 25 Year Payout |
$965,387 |
$1,325,000 |
| ADVANTAGE |
$356,613 |
|
| Tax Deduction |
NO |
YES |
| Estate Tax |
YES |
NO |
Benefits of Legacy Trust
- Sell Real Estate Tax Free
- Retire with Lifetime Income Stream
- Avoid Capital Gains and Depreciation Taxes
- Defer 3.8% Excess Tax
- Receive a Tax Deduction
- End to End Control of Transaction
- Eliminate Inheritance Tax
- 1031 Alternative
- No Worries of Defaults or Foreclosure
- Opportunityto change estate planning by not having paid Capital Gains Taxes
Basic Rules
- There can not be a pre-existing Buy/Sell Agreement
- The seller cannot have entered into escrow in a pre-existing agreement
Assets Suitable for Legacy Trust
- Real Estate
- Stocks
- Bonds
- Mutual Funds
Conclusion
The Legacy Trust allows a property owner to exit real estate while avoiding capital gains, depreciation, state, excess, and inheritance taxes. The property owner receives an income tax deduction and is able to choose either variable or fixed income for life.
Jeff Reed is the National Sales Manager of American Estate and Trust (AET) and can be reached at (949) 444-8570 or email [email protected]. The accompanying information regarding the Legacy Trust is provided for informational and educational purposes only. No representations or guarantees are given or implied as to the legality or tax implications of a transaction such as this. The services of an attorney and/or appropriate tax professional must be sought and used before attempting this trust transaction.