06/06/2024
Dealing with the tax burden of selling a highly appreciated asset can be challenging. Without the tax implications, you would likely sell and diversify, but that doesn’t seem like an option. Or is it?
What if I told you there are ways to diversify your assets while deferring taxes? Intrigued?
Let’s dive in.
I will cover two strategies that allow you to diversify your assets and defer taxes. (And perhaps sleep a little better at night)
The first strategy is using an exchange fund. Exchange funds are private investment funds for long-term investors with concentrated stock positions. Exchange funds gather concentrated positions from multiple investors with different holdings to create a diversified basket of investments. The tax benefits of exchange funds allows investors to defer taxable gains when they contribute stocks to the fund. So think about what we are doing here, we are diversifying our assets for wealth protection and deferring taxes which can help with wealth creation. Certain conditions need to be met for the fund to qualify and for you qualify for the tax deferral for example you are required to hold the fund for 7 years.
The second strategy for diversification and tax deferral is a Charitable Remainder Trust (CRT). While this approach is more complex, it is particularly beneficial if you have charitable inclinations. Here’s a straightforward explanation of how it works.
First, you contribute a highly appreciated asset to the trust, which allows you to receive a tax deduction based on the value of the transferred assets, your specific circumstances and charity/beneficiary. The trust then sells the asset and reinvests the proceeds into a diversified portfolio without incurring capital gains tax. This enables you to diversify your assets while deferring taxes.
Additionally, a CRT provides you with an income stream. If you do not need the income, there are ways to set up the CRT so you can defer it and receive it later. The remaining money, or 'remainder,' after a specific term length or your lifetime, is left to the charity of your choice.
Which one makes sense for you? It depends on your financial situation.
Be sure to talk with a Financial advisor, CPA, and estate planning attorney before implementing any strategy.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. You should consult a financial advisor before making any investment decisions.
