By Brad MacLiver
Authorship and profile at Google
Virtually everything you own or use for personal of business purposes is a capital asset of some kind. When a pharmacy owner in California sells a capital asset, the difference in the amount they sell it for and the amount they initially paid for it (known as the basis) is a capital gain or loss.
Authorship and profile at Google
Virtually everything you own or use for personal of business purposes is a capital asset of some kind. When a pharmacy owner in California sells a capital asset, the difference in the amount they sell it for and the amount they initially paid for it (known as the basis) is a capital gain or loss.
To alleviate the capital gains tax burden in California, one possible strategy out of many is to use a Charitable Remainder Trust (CRT). CRT's are legally regarded as Split Interest Trusts, which is a term used to specify a blend of philanthropic motivations as well as personal financial aspects. CRT's can increase a business owner's financial wealth, decrease some tax liabilities, and also provide a vehicle for charitable giving.
CRT’s are formed when a person donates assets to this special type of Trust. Assets can be cash, stocks, real estate, etc. The CRT is set up for a set period of time, or until the donor’s (pharmacy owners) death. An individual (pharmacy owner or family member) can receive income from the Trust’s assets. Upon the donor’s death the assets go to a designated charity. Part of the income from the Trust can be used to purchase life insurance on the donor. The proceeds of the life insurance go to a designated heir(s) who receive the money without incurring any estate tax liability.
CRT’s are a tax-planning tool and professional financial planners are using CRT’s to maximize their clients’ financial position, and at the same time increasing charitable donations.
Either third party appraisals or pharmacy business valuations must be performed in order to determine the asset or California business' value. For charitable deductions, the donated value is limited to the asset's cost basis and not its current fair market value. As a concept, CRT's are very straight-forward, but strict, complex tax rules decide how and when CRT's can be set up.
As a tool for reducing capital gain taxes, CRT’s are often used when a business, or other highly appreciated asset, is going to be sold. In accordance to the IRS codes, assets must be transferred to the CRT before there is any obligation to sale the asset. Since CRT’s are irrevocable trusts, the assets cannot be taken back out of the CRT once donated. An owner of an asset, whose sole purpose it to attempt to reduce capital gain taxes on the sale of an asset, must be warned that if after the transfer of the asset to the CRT, and the sale of the asset does not happen for any reason, the asset cannot be returned. Strict, complex, and specific procedures must be followed in order to take advantage of the CRT benefits in California. Only someone who has advanced knowledge in these matters should be retained to guide the donor through the process of setting up a CRT.
To qualify as a CRT in California the trust must meet all the requirements set forth in the Internal Revenue Code 664, and must, from its creation, in every respect meet the definition of, and function exclusively as a CRT. The requirements cannot be met unless each transfer to the trust qualifies in itself as a charitable deduction under the Internal Revenue Codes.
There are issues that may affect the status of the assets ability to be donated to a CRT. Non-qualifying assets may reverse the benefits of the CRT causing the CRT to lose its tax-exempt status.
When the CRT ends at its designated time period, or with the death of the donor, the remaining assets in the Trust will pass to the charitable organization. The designated charity can be any legally formed tax-exempt organization including a family foundation.
As tax rates increase more California business owners will use tools such as the CRT to legally put more money in their pocket instead of the governments. Business owners selling a large asset, or their company, typically use the money to invest in other assets whether it is new equipment or real estate, business or personal.
Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry. Use a company that has extensive experience in California pharmacy and drug store acquisitions. Knowledgeable pharmacy consulting firms who have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a pharmacy owner large sums of money when a pharmacy is sold.
************************
