Paying Of Your Debt With The Pyramid

With discipline and consistency, over time you can pay off your debt and be on the road to an improved and more manageable financial situation. You probably didn???t get into debt overnight, and short of winning the lottery or receiving a large inheritance, chances are you aren???t going to get out of debt overnight, either!

Assess the Situation

While you may have gone blindly down the path to excessive debt, you don???t want to attempt to get out of debt in the same manner. Developing a plan of attack will prove more productive and successful than simply saying you want to pay off your debt. It???s important to be extremely self disciplined and determined in your quest for a debt free existence.

Start by gathering your most recent statements from each of your creditors. Make a list of each account on a piece of paper, starting with your lowest balance and ending with the account you owe the most on (like a pyramid, you start with the smallest and build to the largest).

Your list should include the creditor???s name, the total amount owed, and the minimum monthly payment. On another sheet of paper, make a list of monthly living expenses that must be paid- rent or mortgage, insurance, gasoline for your car or commuting expenses, utilities, etc.

Make another list of all your monthly income, so that you know how much money you have to work with and make your payments.

Develop Your Plan of Attack

Once you have your list of creditors, your ???pyramid??? basically tells you how you will begin making payments. First, add up all of the minimum payment amounts of your accounts, except for the first one on the list. Add it to the total amount of monthly expenses you pay to get a total of minimum expenses going out each month. Once you have this number, subtract it from your total monthly income to see how much money you have left each month. This is the amount you???ll send to the first creditor on your pyramid list monthly until that account is paid off.

When the first account has been paid off, you???ll then apply the money you had been paying to that creditor to the next account on your list- and include the minimum amount you???ve already been sending to that account, also. Each time you pay off an account on your list, the next one will be paid off much faster.

Example list of creditors:

AccountBalanceMonthly Minimum Payment
Credit card 1:$475$21
Credit card 2:$895$56
Credit card 3:$1970$75
Personal loan$3000$150
Car Loan$13,500$375

Example of total monthly living expenses: $1200
Example of total monthly income: $2100

In this example, the total amount of minimum monthly payments (excluding the first account on the list) is $656. When combined with the monthly living expenses, $1856 of the $2100 monthly income is spoken for, leaving $244.

The first month, you would send credit card 1 the full $244 and send each of your other accounts only the monthly minimum payments. Month two you would call credit card 1 for a pay off balance, and send the $231 remaining, (plus whatever finance charges remain) to completely pay off the account. During month 3, you suddenly have an additional $244 to send with your $56 payment to credit card 2, making your payments to credit card 2 about $300 each month- so it would only take 2 or 3 months to pay that one off!

Once your second account is paid off, you take the $300 you have freed up from card 1 and 2 being paid off, add it to the payment for credit card 3, and send $375 to card 3 until that account has also been paid off.

You continue paying more and more on each of your accounts until each have been paid off- and this pyramid method of paying off your debt is probably the fastest self debt reduction method for getting your accounts paid off.

Important Considerations

And, once you???ve got your debt under control- don???t run out and charge purchases all over again! You don???t want to add additional monthly debt while you???re striving to pay off the existing debt. In order for this self debt reduction method to work, you must have self discipline and stop charging on your credit cards while you are working to pay them off.

How To Eliminate Capital Gains Tax

Then, I will provide some details about how it works and conclude with a case study as an example of how someone might use this. First off I will give a short summary of the Capital Gains Elimination Trust (CGET).

Summary:
The Capital Gains Elimination Trust is better known as a Charitable Remainder Trust. How this works is one would deposit highly appreciated assets into the CGET. The trust sells the assets and pays no capital gains tax. You then get to withdraw an income each year from the trust. The withdrawal can be earnings and principal.

Donors can be the trustees of the trust and decide how to invest the trust???s assets. In addition, they get an income tax deduction for their contribution to the trust that is based on the term of the trust, the size of the contribution, the distribution rate, and the assumed earnings on the trust.

At this point, the assets are now removed from their estate, they have paid no tax on the capital gains, and they have a stream of income. The IRS requires at least 10% of the present value to be projected to go to a charity of your choice.

If someone wanted the money to be left to family, they could use part of the money they would have paid taxes on and buy a life insurance policy outside of their estate. Then, their children will still receive as much or more inheritance money, free of income and estate taxes.

A CGET can be used with real estate, stocks, or any other asset with capital gains, and must be unencumbered with debt.

Details:
CGETs are subject to a maze of law and regulation. The failure of a CGET to meet all requirements can result in a trust being disqualified as a Charitable Remainder Trust, with negative income, gift, and federal estate tax consequences. The loss of charitable status would also defeat a donor???s charitable intent.

Some of these requirements involve numerical tests, several of which have long been a part of the qualifying conditions for CRTs. The Taxpayer Relief Act of 1997 (TRA 97).

Pre-TRA 97
 5% probability test (this applies only to charitable remainder annuity trusts)
 5% minimum payment test
TRA act of 1997
 50% payout limitation test
 10% minimum charitable benefit
Relief Provisions
TRA 97 provided several relief provisions for trusts which would meet all CRT requirements, except the 10% minimum charitable benefit requirement. The law provides that a trust may be declared void ab initio (from the beginning). Under this option, no charitable tax deduction is permitted to the donor for the transfer and any income or capital gains created by property transferred to the CRT becomes income and capital gain to the donor.

The new law also allows a donor to reform a trust, by modifying either the annual payout or the term of a CRT (or both), to allow the trust to meet the 10% minimum charitable benefit. Strict time limits have been imposed for this reformation.

Seek Professional Guidance
The laws and regulations surrounding Charitable Remainder Trusts can be complex and confusing. Individuals facing decisions concerning the tax and estate planning implications of a CGET are strongly advised to consult with an attorney.

Case Study:
Beth and John own $1 million of stock that cost $100,000. They realize that their portfolio needs better diversification and would like more income, but they do not want to pay the capital gains tax. They could place the stock in a trust set up by their attorney. The trust would be a tax-free entity and could sell the stock without paying the tax.

Now there is $1 million cash that can be invested. This could go into a balanced portfolio, or an annuity. It doesn???t matter. And Beth and John can make a one-time decision on how much lifetime income they???ll receive from the trust.

The IRS will let Beth and John take an income tax deduction of $417,180 when they do this, as long as at least 10% of the money that originally goes into this trust is left to charity. And since they technically no longer own the $1 million, it is out of their estate, thereby saving their heirs $460,000.

Beth and John are thrilled. They???ll end up with more income, less market risk, and a nice tax deduction. But the kids aren???t so happy. They thought that they were going to get the $1 million. However, a wealth replacement trust would take care of that.

Beth and John take part of their new income and buy a $1 million, second-to-die life insurance policy on their lives. The policy is owned by an irrevocable life insurance trust so the proceeds are removed from their estate. When the survivor dies, the children will receive $1 million tax-free, and the charity will get whatever remains in the trust.

If you ever have questions about planning for your immediate or long-term retirement goals, please feel free to call or send in the enclosed coupon.
Respectfully,
Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
www.stonecreekwealthadvisors.com
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC