By Brad MacLiver
Authorship and profile at Google
Almost everything you own and use for personal, or business, purposes is a capital asset. When pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.
Authorship and profile at Google
Almost everything you own and use for personal, or business, purposes is a capital asset. When pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.
One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time 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.
Third party appraisals, or pharmacy business valuations, must be completed to determine the asset or business value. For the charitable deduction, the donated value will be limited to the cost basis of the asset and not the current fair market value. CRT’s, as a concept, are very simple to understand. However, strict and complex tax rules govern how and when a CRT 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. 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 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 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.
Washburn & Associates has extensive experience in pharmacy and drug store acquisitions. This pharmacy consulting firm and others 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.
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