Scott and Pat redirect an anxious caller who's received some terrible advice about selling a great asset.
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Pat: Let's talk to Jamie in San Diego. Jamie, thanks for joining Hanson McClain.
Jamie: Thank you so much for taking my call.
Pat: Sure. What can we do for you?
Jamie: Well, I live in San Diego and I'm looking to sell a rental property. It was recommended to possibly set up a CRT, the Charitable Remainder Trust, to put the capital into. I'm just looking for a second opinion if that's the best place to put the money.
Scott: So let's walk through this quickly, real quick. How old are you, Jamie?
Jamie: I am 51.
Scott: Okay. What's the approximate value of this property that you're going to sell
Pat: Or give away?
Scott: One of the two.
Jamie: No, I'm going to sell it and I think the range is probably $600,000.
Scott: What do you have into it?
Scott: Okay. What's your overall net worth?
Jamie: My overall net worth? That's a really good question.
Scott: If you sold everything you owned and put it in a suitcase, how big would that suitcase be?
Jamie: Probably . . . in dollars?
Jamie: Probably $1.3 million.
Pat: That excludes this rental, or it includes this rental?
Jamie: No, that includes that rental.
Pat: Oh, okay.
Jamie: So it'll be more than that, actually, because the house I live in and then I've got that house and then I have a condo.
Scott: Are you really involved with a charity and have a tremendous desire to fund this charity in your 50s?
Jamie: Well, that's a good question. That's still up for discussion of which charity it would go to but there's a couple.
Pat: Are you charitably inclined? And we don't know you, Jamie, and you might not even be using your real name. Do you give away a lot of your income now?
Jamie: I try not to.
Pat: Okay. So the main driver behind a Charitable Remainder Trust is you have to really have a charitable intent. In other words, these work great when you say, "Boy, I love giving to this organization. I'm trying to give to this organization. How can I do this more tax efficiently?" Or, even more common, "You know, I really have more assets than I need. I'm not going to spend all these assets during my lifetime. I've got this thing I was going to sell, but maybe if I can give it but still have some income today, but I want it all to go to this charity when I die."
That's usually when people, two things. One, when they have substantial assets. And not to say you don't, but they could certainly live without the asset. Two, typically when somebody's a little further down in life, a little older than 51.
Pat: So why are you selling this property or giving it away?
Jamie: That was one of my questions. Should we be doing that, really? We're putting some money into it. The tenants just moved out. We're going to clean it up. We're investing probably close to $20,000 to clean it up to sell it and then we're like, "Well, what if we don't want to sell it?"
Pat: What would it rent out for?
Jamie: It's in a very popular area in North Park. Probably $2,500, $2,700 a month.
Pat: All right. So you're running about $32,000, $33,000 in gross and you're probably netting . . .
Scott: So why do you want to put this in a Charitable Remainder Trust?
Pat: Because someone told her about it, Scott. I don't think she wants to. She was calling us for a second opinion. Is that fair, Jamie?
Jamie: Yeah, that's exactly right.
Scott: This is the last thing you should do.
Pat: Was it a financial advisor that was recommending the Charitable Remainder Trust, or was it your accountant?
Jamie: Financial advisor.
Pat: Okay. Did they talk about life insurance at all?
Pat: Okay. We're done. Listen, forget the CRT.
Scott: We're done.
Pat: We're done. This is just really strange. The idea being, for the rest of the listeners, is that you're going to take this house, for Jamie, you're going to put it in a Charitable Remainder Trust . . .
Scott: Which means you're going to get a tax deduction for the full $600,000. You give all of it away. You get a tax deduction for the fair market value, the current market value of the future gift. So you don't get the full tax deduction for $600,000. She probably doesn't even need a big tax deduction.
Pat: Correct. You give away the asset, you get some tax deduction, then income comes off of it. You take that income and from that income you pay taxes on it and then you buy this big life insurance policy to replace the asset. Was that how it was explained?
Jamie: No. It didn't couple like that.
Pat: All right. Well, in any case, right now, you own an asset that presumably will appreciate over time, that has income that will also appreciate over time, should keep pace with inflation. Right, that's what inflation is? So when you're 61, 71, 81, this should be providing higher and higher income. If you give this asset away today, you can receive some income, probably less than you're receiving today.
That income is not necessarily guaranteed in the future if things don't work out as far as investments, that could be reduced. Especially if you were buying a life insurance policy to replace the asset, it negates the whole thing almost completely because of the cost of the life insurance.
They can work great. We've done them before but not for a 51-year-old with a net worth of less than $2 million. We've done them . . . and they can work wonderfully. But you're not the right person, nor do you have the asset level to . . . and it doesn't sound like you're clamoring to give some charity some money.
No, I think it's a bad call for you. I think that I would look at keeping the property.
Jamie: Yeah, that's where I was leaning because we are kind of on the fence of should we rent it. It's just that it is an older home and we . . .
Scott: Well, you could always sell it and do a 1031 exchange into another rental, or you could go to another market. You could sell this and say, "I'm going to buy two rentals in the Portland region," or some other market where things aren't as expensive. You've got those options as well.
Jamie: Right, but if you go to do the 1031 in another market, is that still in effect with the other market?
Scott: Yeah, as long as you do like exchange. So you can get rid of this and say, "You know what? This house is old. Let's sell this house and exchange it. Let's buy a different piece of property and rent that out." I would certainly look at doing that before I gave this away.
Jamie: Yeah, that was one of the options. I really appreciate it. This is great information.