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You create a charitable remainder trust, which is a pretty wild tax instrument that allows you to control the assets, “donate them” (~1% a year of the principal

You create a charitable remainder trust, which is a pretty wild tax instrument that allows you to control the assets, “donate them” (~1% a year of the principal) and collect tax benefits on the total amount at the start of the program. https://www.google.com/amp/s/www.wealthenhancement.com/blog/charitable-remainder-trusts%3Fhs_amp%3Dtrue https://www.google.com/amp/s/www.wealthenhancement.com/blog/... For carries of founder stock who have zero cost basis for their stock this can allow you to actually make more money depending on current interest rates.

skybrian 5y ago
From a brief skim, you’re irrevocably giving the money away and you still pay taxes on any money you get back from the trust, so I think more explanation is needed. How do you come out ahead, and compared to what? Is this a way of getting a different tax rate?
- toast0 5y ago
  One nice thing is you can sell without taxes becoming due immediately. Pretty handy if you want to move between a concentrated holding to a diversified holding. Getting the tax deduction upfront and making the donation later sounds nice too, although I'd guess with real investment choices, chances are good the donation is bigger than the deduction. But all of these things really only grant you more utility than just paying the taxes if you get (non-economic) utility out of the donation or (non-economic) utility out of the feeling of paying less taxes. Of course, you could get economic utility out of the donation, but that is likely to be less than legal. OTOH, I could see a possible way to make donating apprechiated assets work out to have economic utility. If the tax rates are high enough, and assuming zero cost basis and high ordinary income, you avoid X * Y% tax by donating, and you reduce tax on other income by X * Z%, where X is your donation, Y% is your total (marginal) capital gains tax rate, and Z% is your total ordinary income tax rate. If Y + Z is greater than 100%, that's a real savings. IIRC, top federal capital gains rate is 20 + 3.8 (net investment income tax), and if you live in california, 13.3 state tax = 37.1% Top federal ordinary income is 37%, if in california that ends up with 50.3% tax rate. Adding those up we get 87.4%, so a donation of apprechiated assets with zero basis doesn't quite create value, but it's close. Maybe some other state has a higher top tax rate.

skybrian 5y ago

From a brief skim, you’re irrevocably giving the money away and you still pay taxes on any money you get back from the trust, so I think more explanation is needed. How do you come out ahead, and compared to what? Is this a way of getting a different tax rate?

toast0 5y ago
One nice thing is you can sell without taxes becoming due immediately. Pretty handy if you want to move between a concentrated holding to a diversified holding. Getting the tax deduction upfront and making the donation later sounds nice too, although I'd guess with real investment choices, chances are good the donation is bigger than the deduction. But all of these things really only grant you more utility than just paying the taxes if you get (non-economic) utility out of the donation or (non-economic) utility out of the feeling of paying less taxes. Of course, you could get economic utility out of the donation, but that is likely to be less than legal. OTOH, I could see a possible way to make donating apprechiated assets work out to have economic utility. If the tax rates are high enough, and assuming zero cost basis and high ordinary income, you avoid X * Y% tax by donating, and you reduce tax on other income by X * Z%, where X is your donation, Y% is your total (marginal) capital gains tax rate, and Z% is your total ordinary income tax rate. If Y + Z is greater than 100%, that's a real savings. IIRC, top federal capital gains rate is 20 + 3.8 (net investment income tax), and if you live in california, 13.3 state tax = 37.1% Top federal ordinary income is 37%, if in california that ends up with 50.3% tax rate. Adding those up we get 87.4%, so a donation of apprechiated assets with zero basis doesn't quite create value, but it's close. Maybe some other state has a higher top tax rate.