The Investment Scientist

How To Deal With A Concentrated Highly Appreciated Asset

Posted on: July 20, 2018

141223130506-charity-stocks-1024x576.pngAfter my last newsletter article “Top Ten Reasons to Avoid Exchange Funds” went out, I got an email asking how to deal with a concentrated highly appreciated stock position. To this, I replied, “It helps to have some charitable inclination.”

If you have no charitable inclination, no amount of gimmicks can get you off the hook of paying the huge capital gain taxes. At best, you can pay a hefty fee to have someone kick the can down the road by using exchange funds.

However if you are charitably inclined,  then a charitable remainder trust (CRT) is a great tool to save on taxes, reduce undiversified risk, create income and  benefit charities.

What is a CRT?

A CRT is a trust that lets you convert convert a highly appreciated asset like stock or real estate into lifetime income. It reduces your income taxes now and estate taxes when you die. You pay no capital gains tax when the asset is sold. And it lets you help one or more charities that you care about.

How does that work?

You transfer an appreciated asset (that is, all or a portion of your concentrated highly appreciated stock position) into an irrevocable trust. This removes the asset from your estate, so no estate taxes will be due on it when you die. You also receive an immediate charitable income tax deduction.

The trustee then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in income-producing assets or a well-diversified portfolio. For the rest of your life, the trust pays you a stream of income. When you die, the remaining trust assets go to the charity(ies) you have chosen. That’s why it’s called a charitable remainder trust.

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Who can benefit from using a CRT?

People who have concentrated highly appreciated stock position(s), business owners who have a closely-held business and  are ready to sell their business, and people who own highly appreciated real estate properties can all benefit from this tool.

What’s the catch?

The reminder of the trust will go to charities of your choice, not your heirs. If you want to leave something for your children, there needs to be another arrangement to complement the CRT.

Also, because  the CRT is a irrevocable trust, you can not name yourself, or your immediate family as trustees. In other words, you will lose a measure of control. (This could be the subject of my next newsletter.)

(Feel free to share if you find it insightful.)

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.


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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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