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Almost everything you own and use for personal, or business, purposes in New Jersey is a capital asset. When pharmacy owners sell a capital asset, the difference between the amounts you sell it for and the amount you paid for it (the basis), is a capital gain, or a capital loss.
One strategy, but not the only one, that is currently available to assist the capital gains tax burden is the Charitable Remainder Trust (CRT). CRT’s are legally described as Split Interest Trusts. The term is used because of the blend of philanthropic motivations and personal financial aspects. CRT’s can decrease tax liabilities, increase a business owner financial wealth, and at the same time provide a vehicle for charitable giving.
CRT's are created when someone first donates an asset into this special type of Trust. These assets can be several things such as cash, stocks, real estate, etc. The lifetime of the CRT is predetermined, or it will expire on the event of the donor's (the pharmacy owner in New Jersey) death. The pharmacy owner or any family member can receive income from this Trust's assets. If the donor dies, the assets will go to a designated charity. Also, part of the Trust's income can be used to purchase life insurance for the donor, and the proceeds will go to a designated heir(s) who will receive the money without estate tax liability.
CRT's are a tool for tax-planning that professional financial planners are using to maximize their clients' financial position, while at the same time they increase charitable donations.
Third party appraisals, or pharmacy business valuations, must be completed to determine the asset or business value. For the charitable deduction, the donated value will be limited to the cost basis of the asset and not the current fair market value. CRT’s, as a concept, are very simple to understand. However, strict and complex tax rules govern how and when a CRT can be set up.
As a tool for the reduction of capital gain taxes, CRT's are often utilized when a highly appreciated asset or a New Jersey business is being sold. Following the IRS codes, assets are required to be transferred into the CRT before there are any obligations to sell the asset. Because CRT's are irrevocable trusts, these assets can't ever be taken back out of the CRT once they are donated. As the owner of an asset whose sole purpose is to reduce capital gain taxes on the sale of an asset, take heed that after the transfer of the asset into the CRT, if the sale of the asset does not happen for whatever reason, the asset can never be returned. Strict, complex, and specific procedures must be followed in order to take advantage of the CRT benefits. Only someone who has advanced knowledge in these matters should be retained to guide the donor through the process of setting up a CRT.
To qualify as a CRT in New Jersey the trust must meet all the requirements set forth in the Internal Revenue Code 664, and must, from its creation, in every respect meet the definition of, and function exclusively as a CRT. The requirements cannot be met unless each transfer to the trust qualifies in itself as a charitable deduction under the Internal Revenue Codes.
There are issues that may affect the status of the assets ability to be donated to a CRT. Non-qualifying assets may reverse the benefits of the CRT causing the CRT to lose its tax-exempt status.
When the CRT ends at its designated time period, or with the death of the donor, the remaining assets in the Trust will pass to the charitable organization. The designated charity can be any legally formed tax-exempt organization including a family foundation.
As tax rates increase more business owners will use tools such as the CRT to legally put more money in their pocket instead of the governments. Business owners selling a large asset, or their company in New Jersey, typically use the money to invest in other assets whether it is new equipment or real estate, business or personal.
Over the years there have been unscrupulous individuals who have tried using CRTs and similar financial tools in illegal scams. With the increase in capital gains taxes there are expectations more scams will be floating around out there. Be knowledgeable about the possibilities, but be confident you are working with experts in your industry. Use a company that has extensive experience in pharmacy and drug store acquisitions. Knowledgeable pharmacy consulting firms who have the knowledge and expertise to structure the transaction appropriately, for tax considerations, can save a New Jersey pharmacy owner large sums of money when a pharmacy is sold.
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