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Advanced Estate Planning -- Life Insurance Trusts and Charitable Planning Presented By: Richard J. Shapiro, J.D.  and  Min...
<ul><li>The Objectives Of Using  Life Insurance: </li></ul><ul><li>Liquidity – funds available when needed </li></ul><ul><...
<ul><li>Compounding  the Problem </li></ul><ul><li>Should Not Be Part of the Plan </li></ul>Estate Tax Funding
<ul><li>$2.5 Million Estate </li></ul><ul><li>+ </li></ul><ul><li>$1,000,000 Life Ins. Policy </li></ul><ul><li>= </li></u...
<ul><li>The $1,000,000 Life Policy </li></ul><ul><li>Should be Held Outside of the Estate </li></ul>Estate Tax Funding
<ul><li>With or without a trust, we can get money out of the estate. </li></ul><ul><li>Annual Exclusion Gifts  </li></ul><...
<ul><li>The Objectives: </li></ul><ul><li>Exclusion From Taxable Estate </li></ul><ul><li>Control of Distributions </li></...
<ul><li>Established During Life </li></ul><ul><li>Three Parties  </li></ul><ul><ul><li>Trustmakers (Grantor) </li></ul></u...
Irrevocable Life Insurance Trust <ul><li>During Lifetime </li></ul><ul><li>Establishes Trust </li></ul><ul><li>Trustee Acq...
Irrevocable Life Insurance Trust <ul><li>During Lifetime </li></ul>Pays Premiums ILIT Insurance Policy Trustee <ul><li>Est...
<ul><li>Upon Death </li></ul>Irrevocable Life Insurance Trust Pays Death Benefit Property  Passes to Estate Makes Loans Se...
<ul><li>During Settlement </li></ul>Irrevocable Life Insurance Trust Property Subject to Estate Tax Income & Property   IL...
<ul><li>Power of Appointment </li></ul><ul><ul><li>Crummey vs. Commissioner </li></ul></ul><ul><ul><ul><li>Present Interes...
Cristofani vs. Commissioner <ul><li>Contingent Beneficiaries </li></ul><ul><ul><li>Children </li></ul></ul><ul><ul><ul><li...
<ul><ul><li>Estate Exclusion </li></ul></ul><ul><ul><li>Creditor Protection </li></ul></ul><ul><ul><li>Trust Protector </l...
Charitable Planning Basics  Charitable Deductions <ul><li>Amount you give to charity entitles you to an income tax deducti...
Charitable Planning Basics  Charitable Deductions <ul><li>Donate  appreciated  assets </li></ul><ul><li>Stock you bought f...
Charitable Planning Basics   Split Interest Gift Trusts <ul><li>Form a Trust - an agreement </li></ul><ul><li>One party ge...
Charitable Remainder Trusts <ul><li>Charitable Remainder Trusts  </li></ul><ul><ul><li>You keep the apples for life, and t...
Charitable Remainder Trust <ul><li>Donate an asset to the Trust </li></ul><ul><ul><li>highly appreciated asset works best ...
Charitable Remainder Trust John  &  Mary
Charitable Remainder Trust John  &  Mary Asset placed in Trust CRT Income Trust
Charitable Remainder Trust John  &  Mary CRT Income Trust Income for life
Charitable Remainder Trust John  &  Mary, Deceased CRT Income Trust 501(c)(3) Charity  Receives remainder
Charitable Remainder Trust John  &  Mary, Deceased CRT Income Trust The transaction  is a gift to the end Beneficiary, sub...
Charitable Remainder Trust <ul><li>  What good is a CRT? </li></ul><ul><li>Provide future benefit to charity of choice </l...
Charitable Remainder Trust   Bank Stock worth  $3,000,000 Basis     $100,000 <ul><li>Increase Income </li></ul><ul><li>Cur...
Charitable Remainder Trust   Bank Stock worth  $3,000,000 Basis     $100,000 <ul><li>Avoid Capital Gain Tax/Increase Incom...
Charitable Remainder Trust   Bank Stock worth  $3,000,000 <ul><li>Also avoid Estate Tax </li></ul><ul><li>$3M >> $2,344,50...
Charitable Remainder Trust  PLUS John  &  Mary Income  for life Asset placed in Trust Charitable  Remainder Trust
Charitable Remainder Trust  PLUS John  &  Mary Income  for life Asset placed in Trust Charitable  Remainder Trust From ext...
Charitable Remainder Trust  PLUS No Death Taxes!! John  &  Mary Income  for life Asset placed in Trust Charitable  Remaind...
CRT Variations: NIMCRUT John  &  Mary, Deceased CRT Income Trust More flexibility on distributions vs. pushing growth insi...
Another twist   Charitable  Lead  Trust <ul><li>ZERO-OUT  your estate taxes </li></ul><ul><li>At death, from Living Trust,...
Another twist   Charitable Lead Trust John  &  Mary Asset placed in Trust Charitable  Lead Trust
Another twist   Charitable Lead Trust John  &  Mary Income Charitable  Lead Trust
Another twist   Charitable Lead Trust John  &  Mary Children Receive Remaining assets Charitable  Lead Trust
Basic Estate Tax Planning John’s Death Mary’s Death IRS  Supermarket John’s RLT Mary’s  Living Trust Children Family Trust...
Basic Estate Tax Planning  plus a Testamentary CLT Children Family Trust IRS  Supermarket Mary’s RLT Marital Trust Mary’s ...
Social Capital How to use our Social Capital <ul><li>Government: 1/4 gets to end user </li></ul><ul><li>Private charity: 9...
Who has paid enough? <ul><li>“ So you’ve made  $20 million  in your lifetime.  After you paid  income taxes , your net wor...
Advanced Estate Planning -- Life Insurance Trusts and Charitable Planning Presented By: Richard J. Shapiro, J.D.  and  Min...
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Life Insurance Trusts and Charitable Planning Techniques

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Learn techniques to provide protection for life insurance proceeds against estate tax exposure and creditors, and how to integrate charitable planning techniques that benefit the client and their family as well as selected charities.

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  • Transcript of "Life Insurance Trusts and Charitable Planning Techniques"

    1. 1. Advanced Estate Planning -- Life Insurance Trusts and Charitable Planning Presented By: Richard J. Shapiro, J.D. and Mindy Menke, J.D. Blustein, Shapiro, Rich & Barone, LLP www.mid-hudsonlaw.com
    2. 2. <ul><li>The Objectives Of Using Life Insurance: </li></ul><ul><li>Liquidity – funds available when needed </li></ul><ul><li>Leverage – the biggest bang for the buck </li></ul>Estate Tax Funding
    3. 3. <ul><li>Compounding the Problem </li></ul><ul><li>Should Not Be Part of the Plan </li></ul>Estate Tax Funding
    4. 4. <ul><li>$2.5 Million Estate </li></ul><ul><li>+ </li></ul><ul><li>$1,000,000 Life Ins. Policy </li></ul><ul><li>= </li></ul><ul><li>$3.5 Million Taxable Estate </li></ul><ul><li>With </li></ul><ul><li>$801,060 Estate Tax Due (in 2008) </li></ul><ul><li>vs </li></ul><ul><li>$301,340 ET due if Life Ins. Outside of Estate </li></ul>Estate Tax Funding
    5. 5. <ul><li>The $1,000,000 Life Policy </li></ul><ul><li>Should be Held Outside of the Estate </li></ul>Estate Tax Funding
    6. 6. <ul><li>With or without a trust, we can get money out of the estate. </li></ul><ul><li>Annual Exclusion Gifts </li></ul><ul><li>Taxable Gifts (Unified Credit) </li></ul><ul><li>Leveraging life insurance </li></ul><ul><ul><li>Cash Value vs. Death Benefit </li></ul></ul>Irrevocable Giving
    7. 7. <ul><li>The Objectives: </li></ul><ul><li>Exclusion From Taxable Estate </li></ul><ul><li>Control of Distributions </li></ul><ul><li>Protection From Creditors </li></ul>Irrevocable Life Insurance Trust
    8. 8. <ul><li>Established During Life </li></ul><ul><li>Three Parties </li></ul><ul><ul><li>Trustmakers (Grantor) </li></ul></ul><ul><ul><li>Beneficiaries </li></ul></ul><ul><ul><li>Trustee </li></ul></ul>Irrevocable Life Insurance Trust T r u s t
    9. 9. Irrevocable Life Insurance Trust <ul><li>During Lifetime </li></ul><ul><li>Establishes Trust </li></ul><ul><li>Trustee Acquires Policies </li></ul><ul><li>(or the Grantor makes Gifts of Policies ) </li></ul><ul><li>Makes Gifts for Premiums </li></ul>ILIT Crummey Rules for Present Interest Gifts Trustee
    10. 10. Irrevocable Life Insurance Trust <ul><li>During Lifetime </li></ul>Pays Premiums ILIT Insurance Policy Trustee <ul><li>Establishes Trust </li></ul><ul><li>Trustee Acquires Policies </li></ul><ul><li>(or the Grantor makes Gifts of Policies ) </li></ul><ul><li>Makes Gifts for Premiums </li></ul>
    11. 11. <ul><li>Upon Death </li></ul>Irrevocable Life Insurance Trust Pays Death Benefit Property Passes to Estate Makes Loans Sell Assets Insurance Policy ILIT Estate Deceased Trustee
    12. 12. <ul><li>During Settlement </li></ul>Irrevocable Life Insurance Trust Property Subject to Estate Tax Income & Property ILIT Estate Trustee Not Subject to Estate Tax
    13. 13. <ul><li>Power of Appointment </li></ul><ul><ul><li>Crummey vs. Commissioner </li></ul></ul><ul><ul><ul><li>Present Interest Gifts </li></ul></ul></ul><ul><ul><li>Cristofani vs. Commissioner </li></ul></ul><ul><ul><ul><li>Contingent Beneficiaries </li></ul></ul></ul>IRS
    14. 14. Cristofani vs. Commissioner <ul><li>Contingent Beneficiaries </li></ul><ul><ul><li>Children </li></ul></ul><ul><ul><ul><li>Robert - Sarah - Donald </li></ul></ul></ul><ul><ul><li>Children’s children </li></ul></ul><ul><ul><ul><li>Robert’s - Bobby, Sue & Doug </li></ul></ul></ul><ul><ul><ul><li>Sarah’s - Tom, Troy & Trent </li></ul></ul></ul><ul><ul><ul><li>Donald’s - Chris </li></ul></ul></ul>
    15. 15. <ul><ul><li>Estate Exclusion </li></ul></ul><ul><ul><li>Creditor Protection </li></ul></ul><ul><ul><li>Trust Protector </li></ul></ul><ul><ul><li>Income taxation – to whom? </li></ul></ul><ul><ul><li>“ Crummey” powers </li></ul></ul><ul><ul><li>Control of Distributions - standards </li></ul></ul>Trust Document Drafting Some Important Issues:
    16. 16. Charitable Planning Basics Charitable Deductions <ul><li>Amount you give to charity entitles you to an income tax deduction </li></ul><ul><li>Write off up to 50% of your AGI </li></ul><ul><li>Example: </li></ul><ul><ul><li>Made $80,000 this year </li></ul></ul><ul><ul><li>Contribute $20,000 to 501(c)(3) organization </li></ul></ul><ul><ul><li>Pay income tax on $60,000 </li></ul></ul>
    17. 17. Charitable Planning Basics Charitable Deductions <ul><li>Donate appreciated assets </li></ul><ul><li>Stock you bought for $5,000 but now is worth $20,000 </li></ul><ul><li>If you do anything else with that stock, it is only worth $16,723 ($3,277 less) </li></ul><ul><li>Capital gain taxes of 21.85% of $15,000 </li></ul><ul><li>Contribute: tax deduction for $20,000 </li></ul>
    18. 18. Charitable Planning Basics Split Interest Gift Trusts <ul><li>Form a Trust - an agreement </li></ul><ul><li>One party gets the Income for a term - a defined period of time </li></ul><ul><li>The other party gets the assets later - the Remainder </li></ul><ul><li>Wealth is like an orchard you’ve built up over a lifetime. Taxes take the trees. When the trees are gone, no more apples! </li></ul>
    19. 19. Charitable Remainder Trusts <ul><li>Charitable Remainder Trusts </li></ul><ul><ul><li>You keep the apples for life, and the charity gets the trees when you die </li></ul></ul><ul><ul><li>Use some of the apples to replace the orchard for your kids </li></ul></ul>
    20. 20. Charitable Remainder Trust <ul><li>Donate an asset to the Trust </li></ul><ul><ul><li>highly appreciated asset works best </li></ul></ul><ul><li>Sell and reinvest proceeds (diversified for safety and at higher rate of return) </li></ul><ul><li>Keep income (some tax-free) for life </li></ul><ul><li>Use excess income to buy tax free insurance policy in “ILIT” </li></ul><ul><li>At death everything goes tax-free! </li></ul>
    21. 21. Charitable Remainder Trust John & Mary
    22. 22. Charitable Remainder Trust John & Mary Asset placed in Trust CRT Income Trust
    23. 23. Charitable Remainder Trust John & Mary CRT Income Trust Income for life
    24. 24. Charitable Remainder Trust John & Mary, Deceased CRT Income Trust 501(c)(3) Charity Receives remainder
    25. 25. Charitable Remainder Trust John & Mary, Deceased CRT Income Trust The transaction is a gift to the end Beneficiary, subject to the retained right to income for a number of years. 501(c)(3) Charity Receives remainder
    26. 26. Charitable Remainder Trust <ul><li> What good is a CRT? </li></ul><ul><li>Provide future benefit to charity of choice </li></ul><ul><li>Take profits: Liquidate appreciated asset without paying capital gain taxes </li></ul><ul><li>Diversify client’s investments </li></ul><ul><li>Current income tax deduction </li></ul><ul><li>Removes asset from taxable estate </li></ul>
    27. 27. Charitable Remainder Trust Bank Stock worth $3,000,000 Basis $100,000 <ul><li>Increase Income </li></ul><ul><li>Current income: </li></ul><ul><ul><li>dividend 2.5% $75,000 ---------------------------------------------------------------------------------------------------------------------------------------------------- </li></ul></ul><ul><ul><li>Transfer to CRT, sell stock, </li></ul></ul><ul><ul><li>reinvest, take 7% per year $210,000 </li></ul></ul><ul><li>Increase of $135,000 </li></ul><ul><li>Bonus! Up to $105,000 for 6 years is income tax free! </li></ul>
    28. 28. Charitable Remainder Trust Bank Stock worth $3,000,000 Basis $100,000 <ul><li>Avoid Capital Gain Tax/Increase Income </li></ul><ul><li>Sell as is, lose 21.85% of $2.9M gain </li></ul><ul><ul><li>lost $633,650; balance of $2,366,350 </li></ul></ul><ul><ul><li>invested at 7% return $165,644 ----------------------------------------------------------------------------------------------------------------------------------------------------- </li></ul></ul><ul><li>Using CRT, sell stock, no capital gain tax </li></ul><ul><ul><li>reinvest full $3M at 7% $210,000 </li></ul></ul><ul><li>Increase per year of $44,356 </li></ul>
    29. 29. Charitable Remainder Trust Bank Stock worth $3,000,000 <ul><li>Also avoid Estate Tax </li></ul><ul><li>$3M >> $2,344,500 after Cap Gain tax $655,500 </li></ul><ul><li>Death: Federal and State estate taxes $284,050 </li></ul><ul><li>To IRS from original $3M: $939,550 </li></ul><ul><li>To Heirs from original $3M: $2,060,450 ----------------------------------------------------------------------------------------------------------------------------------------------------- </li></ul><ul><li>Using CRT & investing some of the extra $37,450 into a guaranteed $3,000,000 2 nd to Die Life Insurance Policy held in an ILIT </li></ul><ul><li>To Charity at Death $3,000,000 </li></ul><ul><li>To Heirs at Death $3,000,000 </li></ul><ul><li>TO IRS: $0 </li></ul>
    30. 30. Charitable Remainder Trust PLUS John & Mary Income for life Asset placed in Trust Charitable Remainder Trust
    31. 31. Charitable Remainder Trust PLUS John & Mary Income for life Asset placed in Trust Charitable Remainder Trust From extra income, invest Gifts into Trust Life Insurance Trust
    32. 32. Charitable Remainder Trust PLUS No Death Taxes!! John & Mary Income for life Asset placed in Trust Charitable Remainder Trust From extra income, invest small Gifts into Trust Family Receives $3,000,000 Charity Receives $3,000,000 Life Insurance Trust
    33. 33. CRT Variations: NIMCRUT John & Mary, Deceased CRT Income Trust More flexibility on distributions vs. pushing growth inside the CRT John & Mary 501(c)(3) Charity Receives remainder
    34. 34. Another twist Charitable Lead Trust <ul><li>ZERO-OUT your estate taxes </li></ul><ul><li>At death, from Living Trust, place part of estate in the CLT </li></ul><ul><li>Income for a few years goes to Charity </li></ul><ul><li>After those years, property to kids </li></ul><ul><li>Let charity “pick the apples” for a few years, then the kids get the trees </li></ul>
    35. 35. Another twist Charitable Lead Trust John & Mary Asset placed in Trust Charitable Lead Trust
    36. 36. Another twist Charitable Lead Trust John & Mary Income Charitable Lead Trust
    37. 37. Another twist Charitable Lead Trust John & Mary Children Receive Remaining assets Charitable Lead Trust
    38. 38. Basic Estate Tax Planning John’s Death Mary’s Death IRS Supermarket John’s RLT Mary’s Living Trust Children Family Trust plus Mary’s coupon, tax free; Estate Taxes on all over that Family Trust (coupon) Mary’s Living Trust Marital Trust
    39. 39. Basic Estate Tax Planning plus a Testamentary CLT Children Family Trust IRS Supermarket Mary’s RLT Marital Trust Mary’s RLT John’s RLT Charitable Lead Trust
    40. 40. Social Capital How to use our Social Capital <ul><li>Government: 1/4 gets to end user </li></ul><ul><li>Private charity: 90% + to end user </li></ul><ul><li>Which makes more sense? </li></ul>
    41. 41. Who has paid enough? <ul><li>“ So you’ve made $20 million in your lifetime. After you paid income taxes , your net worth is $13.2 million . </li></ul><ul><li>“ After your children pay estate taxes upon your death, it will be worth $6.33 million . </li></ul><ul><li>“ After your grandchildren pay estate taxes on the death of your children, it will be worth $3,401,400 . </li></ul><ul><li>“ Your estate will be worth only 17% of its original value after only two generations of taxation.” </li></ul><ul><li>Barry Kaye, Save a Fortune on Your Estate Taxes </li></ul>
    42. 42. Advanced Estate Planning -- Life Insurance Trusts and Charitable Planning Presented By: Richard J. Shapiro, J.D. and Mindy Menke, J.D. Blustein, Shapiro, Rich & Barone, LLP www.mid-hudsonlaw.com
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