Question: My wife and I separated at the same time the markets tanked, and I was forced to retire at what I consider an early age (60). Our problem: without recurring income, we will have to split my retirement and IRA’s (which will be taxed to the hilt when withdrawn), and most of our assets (stocks and rental properties) have what our accountants call "low basis" (which means that if and when we sell them, we will pay capital gains taxes). We have one daughter, age 30, who is married and self-sufficient, no debt, and I have quite a bit of paid-up life insurance.

We don’t want to outlive our assets, but also realize that we need cash flow and will probably have to sell assets to get it. We have been looking for a solution, but taxes on income and capital gains keep getting in the way. Our accountants tell us there is no way to avoid the heavy income taxes that will cut into our ability to live. A friend in Jacksonville, Florida, reads your column, and he told me that he remembered an article you had written about solving these types of problems through charitable giving. Although giving to charity is not high on my list of priorities just now, I am interested in learning how this might work for us.

Answer: Your friend has a good memory! Several years ago we did write about charitable trusts as one of the most underutilized planning tools in the matrimonial arena, and we believe that, in appropriate situations, this is still the case. Whether yours fits the bill is a decision for you, your wife, and your advisors.

At the time of separation and divorce, many couples realize that while they need more cash flow, they have appreciated assets that, if sold, will result in the payment of capital gains taxes. Through the use of charitable remainder trusts, appreciated assets -- like low-basis stock, real estate, and rental property -- can be sold and used to generate cash flow without paying capital gains taxes, and provide a hefty income tax deduction to boot.

Let's say you have a $100,000 rental property that has been depreciated to $20,000. If you sell the property, you can invest the net proceeds – let’s say $80,000 after paying income taxes. Today, a conservative return may be 3%, or $2,400 annually. But if you contribute the same property to an irrevocable charitable trust, the trust could sell the asset without paying any income taxes and invest the total sales price -- $100,000 – on which the trust would pay you a fixed percentage each year that will not be less than five percent. You can choose either a charitable remainder unitrust (CRUT) or a charitable remainder annuity trust (CRAT).

If you choose a unitrust, your minimum payment rate would be 5% of the balance in the trust each year -- meaning that your payment would increase or decrease depending on the value of the investments made by the trust to which you can add other property. On the other hand, if you choose an annuity trust, you will receive a payment equal to at least 5% of the initial contribution into the trust, meaning that you will be paid the same amount regardless of the investment performance within the trust, but you cannot add to the annuity trust. In both trusts, principal may be invaded to satisfy the payout. In both trusts, the present value of the remainder that will pass to the charity at your death must be at least 10% of the value of the contribution on the date of the gift. In both trusts, you will receive an income tax deduction equal to the value of the remainder interest.

When it comes to developing cash flow from low-basis assets without incurring capital gains taxes, the charitable remainder trust certainly deserves a look. These trusts can also be used to avoid estate taxes; however, before you act, consult with qualified lawyers and tax professionals to see if they are right for you.