The Latest Installment

S.Crow Collateral Corp. has a new way for you to do well by doing good. It will help your favorite college, university or other charity, and it will help you at the same time.

If you have an appreciated asset which you’d like to sell but you don’t like the tax cost of doing so, you can defer the tax for as long as 30 years and have pre-tax cash to invest with your college or university.

Let’s suppose that you have a $5 million asset that you want to sell. Your tax basis, let’s assume, is zero. Let’s further assume that your combined federal and state tax rate on the sale would be 35%—so the tax cost of selling in the usual way would be $1,750,000. Therefore, if we ignore other closing and transaction costs, a cash sale would leave you with $3,250,000.

Let’s further suppose that you have a generous and grateful spirit and so you’d like to make a substantial gift to your college or university—but you anticipate that your future living costs and other expenses may require most or all of that $3,250,000. Therefore, if you were to sell the asset for cash, you wouldn’t feel at ease about giving your college or university any more than a very modest amount. Also, you’re not quite sure that you’re ready to commit to giving the whole asset to the college or university, even if you were to retain the income from it for life.

So, here’s a ready alternative that preserves more for you now and still will be a big benefit to the college or university: Sell the asset to S.Crow Collateral Corp. in a "collateralized installment sale" or "C453" transaction, to defer the entire tax on the sale for as long as 30 years. S.Crow Collateral Corp. will simultaneously re-sell the asset to the buyer who otherwise would purchase directly from you, for the amount of cash which that buyer would otherwise pay to you. S.Crow Collateral Corp. will pay you interest every month during the 30 years but will pay you no principal until the end, so that none of the capital gains tax will be due until the end. At closing, however, you may receive the proceeds of what the IRS calls a "monetization" loan from a third-party lender which we’ll introduce to you. (That loan may equal 95% of the amount that S.Crow Collateral Corp. receives on the resale of the asset.) So, you go away from the closing with non-taxable loan proceeds instead of taxable sale proceeds. S.Crow Collateral Corp.’s installment payments to you will fully fund your repayment of the loan, and to assure you of that the lender will limit its recourse accordingly.

So, instead of having only $3,250,000 left after the tax cost of a cash sale, you’ve got about $4,675,000 in cash (that’s 95% of $5 million less costs related to the loan). With that amount, let’s assume, you believe that you now have a comfortable margin above your future living costs, but you’re still not ready to give a lot of that $4,675,000 away.

What do you do with the $4,675,000? You invest it, to provide for your future living expenses (and to cover the capital-gains tax that you’ve deferred and will eventually have to pay). Along with the other investments which you choose, however, let’s say that you decide to invest the extra $1,425,000 (that is, $4,675,000 minus $3,250,000) with your college or university—not as a gift but as an interest-bearing loan. If at any time you see that you won’t need that money, or in your Will, you can forgive all or part of that debt of the college or university to you.

Until then, you enjoy the extra income and comfort, and the college or university has the use of $1,425,000 it would never see otherwise.—Stan Crow