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Using life insurance and charitable trusts to minimize your estate tax burden

Combining life insurance benefits with a charitable remainder trust can provide for your family while benefitting a good cause.

A charitable remainder trust can be used both as a tool to help out charitable causes and as a tax-saving measure that still allows you to provide for your family. Through a charitable remainder trust, you create an irrevocable trust that pays you or a family member an annuity for a set period of years or for a lifetime. Once the annuity ends, the remainder of the trust assets are given to a tax-exempt charity.

Why a charitable remainder trust?

A charitable remainder trust comes in two forms: a charitable remainder unitrust (CRUT) and charitable remainder annuity trust (CRAT). A CRUT pays an annuity amount to you based on a percentage of the fair market value of the trust, which is valued annually. A CRAT pays you a fixed percentage of donated assets regardless of the performance of the trust assets.

Either type of charitable remainder trust is useful to reduce the taxes you pay. If you’re like most people, you want to see your hard-earned money go where it is most needed. A CRUT or CRAT allows you to maintain financial security for yourself and your spouse while still providing the greatest benefit to a cause you believe in.

What are the tax benefits of a charitable remainder trust?

You can use a charitable remainder trust to receive tax benefits both now and in the future. You can deduct the fair market value of the donated assets in a CRT over five years on your income taxes. In addition, as an irrevocable trust, donated assets are not counted against you for estate tax purposes. Finally, donated assets are not taxed on capital gains. This can be a significant benefit.

For example, if you have stock that has appreciated considerably, you can donate the stock to a CRUT or CRAT, which will not have to pay any capital gains tax as a tax exempt organization. You can then still receive income generated from the appreciated stock. When added up over years, a charitable remainder trust can save significant amounts by avoiding the capital gains tax.

How does life insurance play a role?

A trustee can also purchase a life insurance policy inside of a CRUT, with the benefits payable to a surviving spouse. In some cases, that policy may be owned by a life insurance trust. So, for example, if you have a trustee take out an insurance policy that swells the trust assets, your surviving spouse can receive an increased annuity from the CRUT for the remainder of his or her lifetime.

You could also use the annuity received from the CRUT to pay for a separate life insurance trust. Through this method, you could create liquid assets to pay for estate taxes, if necessary, leaving your beneficiaries able to keep illiquid assets or to sell when financially appropriate.

How do I set up a CRUT or CRAT?

While the concepts are straightforward, actually setting up a charitable remainder trust can be complex. At Brady, McFarland & Lord, LLC, our attorneys can maximize the benefit of your estate for heirs and charitable causes while minimizing estate taxes based on a plan tailored to your needs. Contact our office to discuss what options work best for you.

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