Charitable giving can help individuals accomplish many objectives, not the least of which is the satisfaction that can come from helping others. Though it may seem difficult for many donors to maintain both a suitable income stream to fund their lifestyles and build an adequate estate to leave to their heirs, while at the same time continuing to give to charitable organizations, it doesn’t have to be financially painful. There is a way to accomplish all three goals: combining a charitable remainder trust (CRT) with life insurance.
The larger the gift, the more attractive a CRT becomes, particularly given the high tax rates associated with large estates. The CRT is simply a device through which a person may donate assets — cash, property, stocks, collectibles or anything of value — to a charity or foundation.
Assets donated during an individual’s lifetime are held and managed by the trust, with the donor receiving a specified lifetime or retirement income from the trust. Upon the death of the donor, the charity or foundation then receives the principal. Because a CRT is irrevocable, once it is established it cannot be changed, except in terms of which charity will receive the proceeds. The estate-planning and tax-savings advantages inherent in the trust are enormous. In particular, donating highly appreciated assets such as stock or property offers donors unique advantages. Consider the difference in tax treatment of two people who donate a $100,000 highly appreciated asset.
- Donor 1 sells the asset, bypasses any kind of trust and donates the proceeds directly to the charity. No provisions are made for replenishing that person’s estate, nor for providing lifetime income, and additional costs are incurred due to capital gains tax, which can all but offset the tax benefits of the charitable deduction.
- Donor 2 has the same asset. It is put in a CRT with the donor retaining an interest in an annuity from the gift for lifetime income. Most of the tax liability from capital gains is passed on to the charity. With the tax-savings, Donor 2 purchases a life insurance policy on his or her life equal to the amount donated to charity and places it in a trust, thus increasing the size of his or her estate for the benefit of heirs.
An even more efficient use of life insurance in this regard is the purchase of a survivorship, or second-to-die, policy. This coverage can provide a tax-free inheritance for heirs, and is less expensive since it pays on the death of the second spouse to die.
One thing is certain: you’ll need qualified help from an attorney and an accountant if you’re interested in a charitable remainder trust. Most charities and foundations also have people to whom you can turn for advice. There are many variations of a CRT and only the basic variety has been described here.
The rules and requirements governing what constitutes a qualified charity or foundation vary from state to state. Federal tax treatment of contributions to charities and foundations also differ. Qualified professionals can assist you through this maze.
But by using a charitable remainder trust as a holding vehicle for your gifts, and buying life insurance with the tax savings, you’ll be able to benefit your charity, your heirs and yourself.
Cyrus L. Hancock is president of Hancock Wealth Management, an associate of National Financial Services Group. He specializes in wealth management, business, retirement and estate-planning strategies. Hancock is a registered representative of, and securities are offered solely by, Equity Services Inc., Member NASD/SIPC, 1050 Crown Pointe Parkway, Ste 1000, Atlanta, GA 30338 (770-512-5100). Hancock Wealth Management and National Financial Services Group are independent of Equity Services Inc. Reach Hancock at (770) 690-4229.
