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![Giving the remainder interest to charity creates a
deduction of $65,553 worth $26,221. This will
purchase a paid‐up policy of about $50,000. [Using a 2%
§7520 rate; the deduction falls as rates rise, but so does the price of the policy]
John keeps lifetime use of farm.
Charity gets farm at death.
Heirs get $50,000 tax free.](https://image.slidesharecdn.com/ilitcrtadvanced-120317131719-phpapp02/85/Life-Insurance-Charitable-Remainder-Trusts-16-320.jpg)
Uploaded byRussell James
Life Insurance & Charitable Remainder Trusts
The document discusses the use of life insurance in charitable planning as a means to reduce taxes while providing for heirs. It explains how various charitable vehicles, such as charitable remainder trusts (CRTs) and irrevocable life insurance trusts (ILITs), can facilitate tax-free inheritances and enable philanthropic giving. Key concepts include the tax implications of ownership of life insurance policies and strategies for optimizing estate benefits for both heirs and charities.
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Life Insurance & Charitable Remainder Trusts
- 1. Life Insurance and Charitable Remainder Trusts Russell James, J.D., Ph.D., CFP®, Director of Graduate Studies in Charitable Planning, Texas Tech University
- 2. Life Insurance Can Be Used as Inheritance Replacement in Charitable Planning
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- 4. But, they also reduce heirs’ inheritance Charity Donor Heir
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- 6. Estate tax law made simple 1. Anything you own is taxable at death unless it goes to a spouse or charity 2. If your life insurance is owned by another person or an Irrevocable Life Insurance Trust (ILIT) it is not taxable at your death (unless given in prior 3 years)
- 7. Because the parent does Insurance Inc. not own the policy, it is not taxed in his estate Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Parent Child Child
- 8. Because the parent does Insurance Inc. not own the policy, it is not taxed in his estate Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
- 9. The parent can use the Insurance Inc. tax benefit or income from a CGA or CRT to pay for life Estate Tax insurance Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
- 10. Charitable Remainder Insurance Inc. Trust (CRT) Estate Tax Free Death Lifetime Benefit Income Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
- 11. The child gets a tax free Insurance Inc. inheritance instead of losing up to 55% in estate Estate Tax taxes Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
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- 13. Can it pay to be charitable? Priscilla wants to sell a $1,000,000 non‐income producing zero‐basis asset then spend the interest income of 5% while leaving principal for heirs. Her combined state and federal tax rates are: capital gains (20%) income (40%) estate (55%)
- 14. Sale CRUT $1,000,000 asset $1,000,000 asset ‐$200,000 capital gains tax $0 capital gains tax $1,000,000 in 5% unitrust pays $50,000 annually + a charitable tax deduction of $300,000 worth $120,000 + ILIT Client pays $120,000 initially and $10,000 annually for a $400,000 ILIT‐owned policy (including post‐crummey gift taxes) Client uses $40,000/year Client uses $40,000/year ($800,000 X 5% return) Charity receives $1,000,000 remainder Heirs receive $360,000 Heirs receive $400,000 ($800,000‐$440,000 est. tax) (tax free from ILIT)
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- 18. Wealth replacement through ILIT life insurance creates estate tax free inheritance for family members and allows for charitable giving
- 19. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity Payments after Donor’s Death, During Kids Lives Donor kids
- 20. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity Payments after Donor’s Death, During Kids Lives Donor kids
- 21. Initial Anything Left Transfer at Death Donor CRT Charity Payments During Life
- 22. Anything Left Initial after Death of Transfer Donor and Spouse Payments During Donor Donor Life CRT Charity Payments after Donor’s Death, During Spouse’s Life Donor’s spouse
- 23. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity Payments after Donor’s Death, During Kids Lives Donor kids
- 24. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity Payments after Donor’s Death, During Kids Lives Donor kids
- 25. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity Payments after Donor’s Death, During Kids Lives At donor death, ILIT pays annuity Donor kids
- 26. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity At donor death, ILIT pays annuity Donor kids
- 27. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity At donor death, ILIT pays annuity Donor kids
- 28. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity At donor death, ILIT pays annuity Donor kids
- 29. Anything Left Initial after Death of Transfer Donor and Kids Payments During Donor Donor Life CRT Charity At donor death, ILIT pays annuity Donor kids
- 30.
- 31. Donor cannot be ILIT trustee, Insurance Inc. otherwise in donor’s estate Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
- 32. Gifts to the ILIT are taxable, thus can Insurance Inc. reduce the available credit for estate tax purposes Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
- 33. Gifts to the ILIT are not “present Insurance Inc. interest” gifts, because recipients have to wait to receive benefit Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
- 34. We turn the gifts into “present Insurance Inc. interest” gifts by giving beneficiaries the temporary right to get the gift Estate Tax in cash Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Child
- 35. We turn the gifts into “present Insurance Inc. interest” gifts by giving beneficiaries the temporary right to get the gift Estate Tax in cash Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 36. This temporary right to get the gift Insurance Inc. in cash is called a “Crummey” power Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 37. Of course, we explain to the beneficiary it is best not to take the cash and destroy the planning I don’t feel like using my “crummey” power to take the cash immediately
- 38. Gifts for premiums can be gift tax free Insurance Inc. if ≤ $13,000 X beneficiaries X donors annually Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 39. 2 parents to 2 children, spouses, Insurance Inc. and 4 grandchildren 2 X 8 X $13,000 = $208,000 per year Estate Tax using “Crummey” Free Death Benefit powers Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 40. $208,000 per year can pay for a lot of estate tax free life insurance
- 41. The “Crummey” power creates Insurance Inc. another problem Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 42. When the beneficiary chooses Insurance Inc. not to take the cash, he makes a gift to the other trust beneficiaries Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 43. This gift is not a “present interest” Insurance Inc. gift, and will reduce the beneficiary’s available estate tax credit Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 44. But, beneficiary can release greater of Insurance Inc. $5,000 or 5% of trust amount tax free Estate Tax Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 45. One solution: beneficiary retains Insurance Inc. right to demand cash, except for $5,000/5% annual release (a.k.a. Estate Tax “hanging power” Free Death Benefit Premium Payments Policy on Parent’s Life Money to 30 day Pay right to Premiums take gift Irrevocable Life as cash Insurance Trust Parent (ILIT) Child
- 46. Death benefits are also generation Insurance Inc. skipping transfer tax free, therefore excellent planning for grandchildren Estate Tax beneficiaries Free Death Benefit Premium Payments Policy on Parent’s Life Money to Pay Premiums Irrevocable Life Insurance Trust Parent (ILIT) Granchildren
- 47. ILIT‐CRT planning creates flexibility CRT reduces Use part of CRT inheritance payments or tax deduction for ILIT Remove children CRT can pay CRT beneficiaries, to children increase CRT but creates payments to pay for estate taxes tax free ILIT owned life insurance for children
- 48. Life Insurance and Charitable Remainder Trusts More slides and lectures at www.EncourageGenerosity.com