A charitable remainder trust (CRT) in the form of an annuity is an effective means to provide a significant gift to a charitable cause that you support while at the same time providing an annuity income for life for yourself.
Potential Tax
A CRT potentially reduces taxes paid during your lifetime or eventually on your estate. This type of trust is especially useful for highly appreciated assets such as stocks, mutual funds or real estate holdings that have risen in value over a long holding period. The donation itself qualifies as charitable deduction in the current tax year, lowering your current tax burden. It also removes the asset from your taxable estate, thereby eliminating a possible estate tax on the assets.
Benefit to You
The annuity provision of the CRT pays a lifetime benefit, typically a monthly income, to the donor. An additional benefit accrues when the CRT disposes of the appreciated assets since the trust does not pay capital gains taxes. There is also the intangible benefit of knowing that your hard-earned assets will be funding your favored cause, perhaps in perpetuity if the CRT funds an endowment that never spends its principal.
Irrevocable Life Insurance Trust
An irrevocable life insurance trust (ILIT) is another legal instrument that can be used in conjunction with a CRT. If you create an ILIT that equals the value of the assets that were transferred to the CRT your heirs will receive those proceeds both income tax and estate tax free, making your estate potentially worth more to your heirs than if you sold the assets outright and paid capital gains taxes.
Life Insurance Considerations
An important point to remember is that you need to decide whether to transfer an existing life insurance policy to the ILIT or purchase a new policy. Transferring an existing life insurance policy to the ILIT means the death benefit is still in your taxable estate unless you live for another three years. Gift taxes may also apply if the existing policy has a value when it is transferred. Funding your ILIT with a new policy eliminates this problem and means the death benefit to your heirs will not be subject to either income tax or estate tax.
Both CRTs and ILITs are complicated estate planning tools that require the assistance of a qualified estate planning attorney.
Larry Parman
Attorney at Law
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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