On today’s episode of Tax Hacker Tuesday, Tim Berry and Matt Theriault expose internet lies about tax planning. Learn why the best tax advice won’t be found in a YouTube video, how to avoid getting tricked by false information, and what a charitable remainder trust is and how to use one.
What You Will Learn About Internet Lies About Tax Planning:
- The common piece of tax advice that makes Tim cringe
- Why the best tax advice won’t be found in a YouTube video
- What a charitable remainder trust is
- The big benefit of charitable remainder trusts
- What you can and can’t do with a charitable remainder trust
Whenever you’re ready, here are a few ways we can help:
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Speaker 1: This is Theriault Media.
Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, attorney at law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code, protect your assets, and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday.
Matt Theriault: Hello, and welcome to The Epic Real Estate Investing Show. It is Tax Hacker Tuesday with my attorney and friend, Tim Berry. Tim, how are you today?
Tim Berry: I am doing fantastic, Matt. How’re you doing, sir?
Matt: Doing well. It’s awesome over here. It’s summer and it’s just blazing hot.
Tim: Matt, don’t talk to me about blazing hot.
Matt: This is true. You’re in Arizona. I’m telling you, Glendale, California has been feeling a lot like Arizona lately. Yeah, on Mondays here at Epic, we show you new and creative ways as well as time-honored ways of making money in real estate. On Tuesdays, we show you how to keep it, and that’s what you’re tuning into right now. If you have a specific question for Tim and you’re too shy to go to the website and ask it, you can go to taxhacker.com/questions and post it there and then we’ll answer it right here on the show.
All righty, so Tim, I interview a lot of people on our Thought Leader Thursday episode. We do it on Thursdays and we bring in general business conversation because real estate investing is a business. We get a lot of good insights from other industries on how we can apply those principles and ideas and insights into our own business. One of the questions I always like to ask, particularly to our educators and our trainers that we have on those shows, is what’s one bit of advice that you hear frequently that just makes you cringe? I want to direct that question to you as well because we talked about it a little bit, and the stuff that you see on the internet, it makes you cringe. You were sharing that with me and some of that stuff can be downright lies or very misleading at the least. What piece of advice out there really makes you cringe, Tim?
Tim: The piece of advice is don’t trust what Abraham Lincoln tells you about tax planning. We kind of talked about that, Matt. In my family, we have a joke about, whenever one of my kids says something really silly, I say, “Oh, did you read that on Abraham Lincoln’s website?” Because they just find all sorts of weirdness out there on the internet about things.
Matt: Abraham Lincoln has a website?
Tim: Well, yeah, and the top of it says, “Don’t believe everything you read on the web.” That’s his slogan.
Matt: Got it. He was way ahead of his time.
Tim: He really was, wasn’t he? Very interesting. No, the biggest thing I cringe at, really, and whenever a client calls up and says, “Hey Tim, I just read on the web,” and I think, “Oh no, this is going to be a 30 minute conversation trying to untrain them about the BS they read on the web,” or I’ll talk about some complex idea and they’ll say, “Okay, cool. Where can I read about this on the web?” I’m saying, “Dude, you’re not going to be able to read about this on the web because this is 10 layers down as opposed to two layers down and the web is probably maybe one layer down.”
That’s the challenge. You talk to people about really interesting, fascinating things and bring a lot of the knowledge to the table, and then they want to dumb it down and then say, “Okay, where I can read about this on the web or where’s a YouTube video where I can watch about this on the web?” There’s just so many different variables that need to be placed inside here. We can’t do all the diving down. Does that make sense, Matt?
Matt: 100%. I can totally relate. People ask, “What’s the best real estate investing strategy?” It’s just like, “That’s a big fat it depends,” right? There’s no universal answer for something like that. It sounds like you experience the exact same thing. You probably have even more variables than I’ve got.
Tim: Well, I don’t know about more because real estate’s investing, but let me give you an example. There’s a really cool thing called a charitable remainder trust. As soon as I say charitable remainder trust, a lot of people get turned off, because the first word they think charity begins at home, they think, “Okay cool, but just stay tuned. Let’s talk about this a little bit.”
Matt: All right.
Tim: The big benefit of that charitable remainder trust is you could put assets inside of there and then the trust can sell them and you don’t have to pay any taxes on that sale. It all stays inside the trust.
I have a client right now with millions upon millions of dollars in gain on an asset, and for some strange reason, they don’t want to pay taxes immediately. I’m saying, “Okay, let’s do this CRT, charitable remainder trust,” and now he can slap the money inside there. Let’s just say it’s 40 million. He can slap the 40 million inside the trust. He’ll get a tax deduction equal to about 10%, so he’ll get an upfront tax deduction of four million. He can now sell those assets, no gain, and he’s got 40 million sitting inside the trust. That’s a cool thing, right?
Matt: It is, but let’s back up.
Matt: Okay. What is a charitable remainder trust, first of all?
Tim: What is it?
Tim: Matt, don’t ask me these questions. I don’t want to bore people. No, but what’s a charitable remainder trust?
Matt: Well, I know most of our audience has $40 million to play with, so I’m trying to make it a little bit relevant.
Tim: This is relevant for people that want to get out of real estate and don’t want to do 1030.
Matt: I got it. Let’s just start at ground one or ground zero.
Tim: Ground zero. What happens is a charitable remainder trust, tax-exempt entity. On a simplistic level of understanding, you put assets into the trust and then you’re entitled to take out a distribution of let’s say 10% of the value of the trust each and every year. If you put $500000 inside the trust, you’ll get upfront an initial income tax deduction of about 10%, so you’ll get a $50000 tax deduction on 500000. Then, each year, you’re able to take out about 10% of the value of the trust as well, so if the trust stays at $500000 throughout the whole time period, you’ll be able to take out 50000. If the trust increases 100000 each year, year one, you take out 50000, year two you take out 60000, year three you take out 70. Once again, it’s a 10% distribution each year.
Tim: It lasts for about 20 years and then at the end of that term, whatever’s left inside the trust goes to your favorite charity or charities.
Matt: Got it. Okay.
Tim: Now, that’s the simplistic thing. By the way, that right to take out the money each year, that’s something called income interest. Now, here’s where we start diving down and start taking things apart and making this all sorts of fun and interesting. The income interest, your right to receive that income from the trust, that’s a property interest. That’s something that can be bought and sold just like anything else.
Let’s say that three years you’re into this, you say, “You know what, Tim? This was a stupid idea. I never should have set up this trust. I want my money back.” In theory, you can’t get your money back under the rules of the tax code, but in reality, you could sell off that income interest. There’s all sorts of investors dying to buy these because they get some neat tax benefits, too, but you could sell off your income interest and get your money back that way. There’s all sorts of little different ways that you can shape and mold these things that start to get your head spinning pretty fast.
Matt: Okay, so let’s back up again. Now we know what it is. With this $500000, we’ll use that number, we put that in there. Do we pay taxes on that $500000 we made?
Matt: No, okay. We make $500000, we put it in there.
Tim: Let’s go back. Let’s say we have an asset that’s been depreciated down to zero or has a zero basis.
Matt: An asset, like a house?
Tim: Yeah, let’s say a house.
Tim: Or a condo, because that makes more sense about it being depreciated down to zero. We have a condo. We put inside of the charitable remainder trust. Let’s say the condo now is worth 500000, so if we just sorted ourselves and we didn’t do 1031, we’d have to pay taxes on that 500.
Tim: You with me?
Tim: Cool. We put it inside the trust, then the trust turns around and sells the condo, sells it for 500000. The trust is tax exempt. All 500000 goes inside the trust and it sits there.
Matt: Got it.
Tim: Now the trustee, by the way, who’s the trustee, Matt?
Matt: You, the attorney.
Tim: I like that answer, first off, because I can charge fees, but most of the time, no, it’s the client.
Matt: Okay, so who’s the beneficiary?
Tim: Most of the time it’s going to be the client.
Matt: Okay, so they can man both spots.
Tim: They can man both spots.
Matt: Okay. That’s why I did not say that initially. I thought it was a trick question but go ahead.
Tim: No, no, no, no, it’s a valid question, because normally you can’t with a trust. You put the property inside there. The trust sells it. The trust now has $500000 cash sitting inside there, and now you as a trustee can say, “Cool, I’m going to take that 500000 and I’m going to invest in pork belly contracts.” Cool, you can do that. “I’m going to take that 500000, I’m going to make hard money loans.” Cool, you can do that. “I’m going to take that 500000, I’m going to buy whatever, container homes.” Cool, you can do that. You’re in control of the investments of that trust at that point.
Tim: As it makes money, the value grows, hopefully, and then like I said in the beginning, you’re allowed to take out up to 10% of the value of that trust each and every year.
Matt: Okay, got it.
Tim: At the end of 20 years, whatever’s left goes to your favorite charity or charities.
Matt: Is it always 20 years?
Tim: It isn’t always 20 years. That’s the way how I structure it 90% of the time just because it gives people certainty. We can set it up based upon someone’s life expectancy, but I just like the certainty more than the life expectancy, so I just normally set it up for 20 years.
Matt: 10% over 20 years, you got all your money out.
Tim: More than likely, yes.
Tim: And some.
Matt: Got it. Okay, so now I’m getting it. Now it’s starting to make sense. And then some, exactly. All right. Can that charitable remainder trust buy another house and can you live in that house?
Tim: Oh, good question. No. You can’t use the trust assets for your personal benefit. It has to be for investment purposes. It’s kind of like the exact same rules of retirement plans. Just like with a retirement plan, you can’t loan money to yourself from the plan, you can’t use the plan’s assets for your personal enjoyment, the same thing with the charitable remainder trust rules.
Matt: Okay, got it. Now let’s go back to our original subject. Now we know about the charitable remainder trust as an example of things that people read on the internet and get misled. What would people normally read on the internet about this that would have them, “Ooh, no, I don’t want to do that”?
Tim: Well, they’d be reading that they can only take out 10% a year. They’d be reading that the money is stuck, they can’t get it out. They’d be reading that all the assets have to end up going to a charity, and they wouldn’t realize that gosh if you’re three years into it, you can sell off your rights. You can sell off that income interest. Oh, you want greater than 10%? Cool, we can sell the income interest, but we’ll make it over a five-year installment note, so now you’re getting 20% a year instead of 10% a year. Oh, you’re worried about too much money going to the charity? No big deal. Make a loan over to a non-related party at 5% interest and by definition, if you’re taking out 10%, it’s losing 5% a year. There’s just so many different things that you can do to really make the CRT work full boar for you.
Quick side note. Under no circumstances are we going to do any planning that’s going to make it where we’re going to rip off the charity. That’s not the case here, because you’re getting all sort of neat tax benefits already, but we’re just going to make sure that we maximize the benefit for you as well as the charity gets its 10% of the pie.
Matt: Okay, I got it. All right, starting to become clear. Yeah, you’re going to read on the internet that it sounds like you’re just giving your money away to charity is what it sounds like, right?
Tim: It sounds like it’s an irrevocable pledge to charity and you have no more control after that, and yet there are so many different ways that you can have so much control.
Matt: Got it, okay. One thing that you mentioned, give me a scenario. Say we got this $500000 in there and we have this annual income interest, and you said we can sell that. Let’s just say on year one, we’re expecting to pull out $50000 with no tax to that 50 grand, right? What would selling that to somebody else to get more money out for ourselves look like?
Tim: Clarification, too. Whenever you take a distribution from the trust, that distribution is probably going to be subject to taxes. It’s going to be taxed to you the same way it would’ve been taxed to the trust whenever you take it out, so this is a tax deferral mechanism for the most part.
Matt: Okay, got it.
Tim: Yeah. Now, how would that look? Gosh, it’s kind of like saying how would it look whenever I sell this piece of real estate because it’s just like a piece of real estate. We could go out to somebody and say, “Hey, look. I have rights to 10% of this trust for the next 20 years. Give me $520000.” If you can find somebody willing to pay cash, $520000, boom, it’s done, or you can go to somebody and say, “Hey, this is worth 520000 in my eyes, but you don’t have the cash. Why don’t you give me 10000 this year,” and I’m just making up numbers, “100000 this year and another 100000 for the next six years.” Boom, so they can buy it via installment note. There’s just so many ways you could structure it. You could structure it where someone gives you 50000 the first five years and 100000 for the next three years, just whatever.
Matt: Okay. The reason someone would want to do that, I would guess is that whatever you’ve invested in is performing.
Tim: Well, that’s one reason. This is where I’m probably going to lose people. There’s just so many cool things you can do. Let’s say somebody buys it for 520000. Let’s say it’s 500000, just to keep the number simple. Let’s say there’s 10 years left on the payout, and let’s say they take out distributions of 60000 a year whenever they buy that thing. Are you with me so far?
Matt: Okay, so they’re giving you 500000. What’s the actual money inside of the charitable remainder trust that they’re buying?
Tim: Let’s say 500000 still.
Matt: So it’s just a straight trade, 500 to 500?
Matt: Okay. My question, we’ll [inaudible 00:15:10] in just a sec, but what’s the benefit of the buyer to just make this trade?
Tim: Stay tuned. We’re getting there, Matt.
Matt: Okay, got it. All right, cool.
Tim: Don’t rush me. You’re really rushing me, Matt. I’m feeling threatened, okay?
Tim: Here’s the deal. Since this trust that the person purchased only has 10 years of life expectancy, they’re able to write off their acquisition price, the 500000 bucks, over that 10 year time period. Translation, they get a tax deduction of $50000 a year, and they take over that $500000 inside the trust. They now manage the investments, so now as they take a distribution, if they take a distribution of $55000, the first 50000 is tax-free because they have that write off.
Let’s say, and this is getting in the weeds a little bit, let’s say they structure the trust so that they don’t take a distribution in year one. They want to save it to have it come out in year two and then it’s going to be 100000. No big deal. Year one, they still get a 50000 tax deduction. They’re able to write off their acquisition price, their purchase price, of that trust asset each and every year, so this in the right hands is a fantastic vehicle to A, generate some giant-sized tax deductions, and B, give you tax deferral at the same time.
Matt: Got it. Okay.
Tim: That’s the benefit for the buyer.
Matt: Right. I see, but the original person that put it in the charitable remainder trust still has that 10% tax deduction annually, right?
Tim: They got an upfront 10% tax deduction and that was it. It stopped right there.
Matt: Oh, that’s it. Got it. Yeah, the buyer’s going to get that 10% every year.
Tim: The buyer’s going to get that 10% every year if it’s a 10-year life expectancy. We’re getting way deep in the weeds, so let’s just simplify from here because otherwise, it’s going to have everyone’s minds spinning. Does that make sense?
Matt: Yeah. This is why we’re talking about it because the internet doesn’t get deep in the weeds. They just tell you what it can and can’t do on the surface.
Tim: You’re saying a culprit of my own thing, huh? I’m trying to stay on a simple level.
Matt: Yeah. You don’t want to go deep now. You just want to contribute to all the lies that are going around the internet. No, I get it now. Here’s another thing. Could you get with a partner, you both create a charitable remainder trust, and sell each other the trust, so now you get the 10% deductions each year?
Tim: That’s kind of a gray area. The IRS wants to see a change in economic circumstances. The simple answer is no, to what you’re talking about.
Tim: Because if I set up a trust with 100000, you set up a trust for 100000, and then we sell each other each other’s income interest, the IRS is not going to like it. They’re not going to like it one bit. They’re going to say, “Oh, your economic situations haven’t changed. Tim, you had a trust worth $100000 with a 10% annual payout. Matt, you had a trust with 100000 with a 10% annual payout, and you guys just cross-sold those. We’re not going to say there’s any substance to that.”
That’s probably not going to work, but if you guys are going out there and if you’re buying other people’s income interests and there’s different dollar amounts, that will be given credibility or that will be recognized, I can’t think right now, accepted by the IRS, more than likely.
Matt: Got it. Okay, so here’s another scenario, Tim.
Tim: Okay, let’s hear it.
Matt: What if there are three people and you created this triangle and you didn’t actually swap, but each person bought the other person’s?
Tim: Even if we had 85 people, and this is a little bit far-fetched because the IRS isn’t going to expend the resources, but even we had 3923 people and they were able to track that everybody just did the triangle or whatever that would be, whatever it might be, they would still say, “No economic substance.” There has to be a change in someone’s economic situation for the IRS to recognize it.
Matt: Got it, okay.
Tim: There’s tons of these things out there. These charitable remainder trusts, there’s a database of them on the web and you could literally, if you wanted to make a profession of it, you could probably make bank just sending people letters saying, “Hey, I’d like to buy your income interests,” and that’s a whole another show because that’s all a function of what price do you pay based upon interest rates. You buy it from them for 7%, you get all these massive tax savings, and you buy it so that you’re guaranteed a 10% rate, and you sell it to someone else at 7% rate, you pocket the difference. There’s all sorts of neat things you could do there.
Matt: Oh, that’s exciting.
Tim: It is. It’s all public record. It’s just amazing out there.
Matt: This is a whole new world. Well, this is why you need a professional to help you.
Matt: Super. All right. Thanks, Tim. I think that was enough for today. That was out there. That was deep in the weeds, right?
Matt: Cool. Whenever you’re ready to have Tim customize his Tax Hacker Blueprint for you or if you want to have a conversation to the level that we just had because this sounds like it might fit your situation, that’s probably a better conversation for off the air. You can go to taxhacker.com. Answer a few questions about your situation. Tell Tim what you’d like to have happened and his team will take it from there, and then in the meantime while you wait to talk to Tim, he’ll give you a copy of his free American novel, The Loopholes of Tax. There we go again. That’s a tongue twister, of Trump’s Tax Plan. I’m going to stop trying to be creative and funny and cute and we’ll just wrap it up, how about that, Tim? Any last bit of advice?
Tim: No real last bits of advice other than if you want to dive down in the weeds, make sure you talk to a professional who knows what they’re doing. Don’t get advice from the web.
Matt: Perfect. That sums it up. We brought it all full circle. Great. All righty. That’s it for Tim and myself. We’ll see you next week for another episode of Tax Hacker Tuesday on The Epic Real Estate Investing Show.
Speaker 1: That’s it for today as we dream of a tax system that works just for you, but until then, you have Tim Berry. You see you next Tuesday for another episode of Tax Hacker Tuesday.