Could a complex trust reduce your capital gains taxes?

If you’re planning to sell your business or some of your assets this year, you may want to set up a complex trust. Doing so could eliminate the capital gains you might otherwise be expected to pay.

There are a couple of traditional ways to reduce or defer capital gains taxes:

  • Offsetting gains with losses. You can take up to $3,000 in realized losses to offset capital gains of a similar type of investment.
  • 1031 “like kind” exchanges. If you sell a property and then roll the proceeds into a similar investment within 180 days, you can defer the capital gains taxes until a later date.

A complex trust works differently. It uses the principle that taxation follows ownership. With a trust, you can protect your assets from capital gains taxes, probate and inheritance taxes while maintaining control over the assets themselves.

Trusts also use trust accounting rather than traditional business accounting practices. That means that your distributable net income will be calculated in a slightly different manner.

A trust can allow you to transfer wealth or asset control from one person to another without creating a taxable event.

A complex trust can increase your overall tax efficiency.

A few caveats

A complex trust can be somewhat expensive to set up and maintain. There are often high liquidity requirements. This means that a complex trust may be a good option for a business owner who expects to pay over $200,000 a year in taxes or a high-net-worth individual searching for tax efficiencies. There are also significant rules and regulations to consider and comply with.

If you’re ready to get started, discuss your interest in a complex trust with an experienced business attorney who has handled these before.