Planning with Section 1245 property?

Planning with Section 1245 property?

Forum topic posted in Forum on 23 September 2009| 1 comments
audience: | last updated: 23 September 2009
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Joined: 07/30/2004
Points: 45
Can anyone help me with charitable planning ideas surrounding the use of Section 1245 property as the funding source? I have a new client who is about to sell fully depreciated equipment from his S-Corp. An outright sale of the assets will trigger recapture of the depreciation which will be taxed back to the S-Corp as Ordinary Income. I have thought of suggesting that he first set up a 20 year CRT with the S-Corp as the grantor and income beneficiary. Then fund the CRT with the depreciated equipment (Section 1245 property) which would subsequently be sold to an outside buyer in return for cash. There is some fear that this transaction would create UBTI inside the CRT, which would incur a 100% excise tax for the CRT. Bad result if that happens! Can find no cases where any rulings have been made suggesting that there truly would be UBTI. I believe these transactions occur occasionally, so I cannot be the first to think of it. Does anyone have any experience pro or con with funding a CRT with Section 1245 property? Please advise. Johnne Syverson, CFP, AEP, CAP West Des Moines, IA

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Joined: 11/18/1998
Points: 60
Planning with Section 1245 property?
Johnne - I spoke with your associate about this at the Mid-Iowa conference in October. Potential UBTI is an issue, and there wouldn't be any charitable deduction since a sale would generate 100% ordinary income. Maybe you knew that, and maybe you're ok with that. It is less clear whether a sale by the the CRT results in ordinary income recapture and hence ordinary income into the CRT's four-tier system. Logic would argue against that since the charitable deduction has already been reduced, but I'm not sure you get to a favorable conclusion just from the tax code. This was addressed in a bit more detail in a PGDC article I wrote back in Feb. 2002 at footnotes 18 and 19.
7520 Rates: December 26% November 2.4% October 2.2%

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