How To Eliminating Capital Gains Tax Using A Spendthrift Trust


The tax impacts of capital gains are a common concern for high net worth individuals. There are many paths for reducing or deferring capital gains, but not as well known are ways to eliminate capital gains tax. So how can you eliminate such taxes?

First, let's start by explaining what capital gains tax is. Capital gains is a tax paid on the profits made from the sale of an asset — usually a property, business, stock or bond. For example, if you were to start a company from
scratch and then sell it for $10 million, depending on which state you lived in, you may have a 20% to 37% capital gains tax to pay, or $2 million to $3.7 million.

Some ways to reduce/defer capital gains tax include:
1. Offsetting capital gains with losses: With this tactic, you can use up to $3,000 in realized losses from your investments to offset capital gains of a similar type of investment.
2. Using a 1031 exchange: This is when you sell a property and then roll the proceeds into a “similar investment” within a 180-day window. This tactic defers your taxes until a later date.
3. Using retirement accounts, such as an individual retirement account or 401(k) plan: Many of these will actually create tax-free growth, but similar to 1031 exchanges, this method defers your taxes rather than eliminating capital gains.
4. Moving to a different state: Currently, nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming) do not have a state capital gains tax.
5. Monetized Installment Sales when done properly are an effective alternative to a 1031 exchange with more flexibility of investment options and deferral for 30 years.

Eliminating Capital Gains Using A Spendthrift Trust
One way to eliminate capital gains is through the use of a Non-Grantor Irrevocable Spendthrift Discretionary Complex Trust. This type of trust is a contract trust and not Stauarory in nature meaning it is not governed by the courts. Contract-law trusts are based on private contracts, which are linked to Article 1 Section 10 of the Constitution and upheld by US Supreme court ruling. ( see my other blog about this topic) Trust accounting is different than the more commonly used generally accepted accounting principles, and the distributable net income is calculated in a different manner when using a complex trust. When trust documents are implemented properly, you can effectively transfer control of assets from one person to another without triggering a taxable event.
Taxation follows ownership, and a trust system can provide you control without ownership. This will allow you to eliminate capital gains in an efficient way without looking for the latest loophole or deferring the taxes. A properly set up spendthrift trust allows you to avoid capital gains tax and also eliminates probate and inheritance taxes at the same time, while also increasing your tax efficiency overall.
Spendthrift trusts are an option for anyone concerned about asset protection, that is selling appreciated assets and will have significant capital gains tax, and business owners that have significant passive or active income. People with only W2 income are not a fit for this tax solution. The trust has many rules and regulations so you must choose a qualified team to implement and maintain and file your returns to keep you fully compliant.
There are many tools for minimizing or deferring your capital gains, but properly established spendthrift trusts can allow you to have a more efficient tax structure, not only for capital gains and ordinary income tax but also for wealth protection and transfer.

To learn more contact Adam Ausloos at adam@defernow.com or call 414-269-2600. We have the best implementation team and trust documents available ready to implement in a very cost-efficient way.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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