life insurance & charitable remainder trusts

Life Insurance and

Russell James, J.D., Ph.D., CFP®, Director of Graduate Studies in Charitable Planning, Texas Tech University

Charitable Remainder Trusts

Life Insurance Can Be Used as Inheritance

Replacement in Charitable Planning

Charitable planning devices such as Charitable Gift Annuities, Gifts of Remainder Interests in Homes and Farms, and Charitable Remainder Trusts produce amazing tax advantages, reducing income taxes, capital gain taxes, and estate taxes

But, they also reduce heirs’ inheritance

Heir Charity Donor

Life insurance can diminish this concern

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)

Estate tax law made simple

ChildParent Child

Money to Pay Premiums

Premium Payments

Estate Tax Free Death Benefit

Policy on Parent’s Life

Because the parent does not own the policy, it is not taxed in his estate

Insurance Inc.

Irrevocable Life Insurance Trust

(ILIT)Parent Child


Premium Payments



Because the parent does not own the policy, it is not taxed in his estate

Insurance Inc.


(ILIT)Parent Child


Premium Payments



The parent can use the tax benefit or income from a CGA or CRT to pay for life insurance

Insurance Inc.


(ILIT)Parent Child

Insurance Inc.


Premium Payments



Charitable Remainder Trust (CRT)

Lifetime Income


(ILIT)Parent Child


Premium Payments



The child gets a tax free inheritance instead of losing up to 55% in estate taxes

Insurance Inc.

We give the taxable inheritance to charity, and create income to purchase the non‐taxable inheritance to give to children

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%)

Sale$1,000,000 asset ‐$200,000 capital gains tax

Client uses $40,000/year ($800,000 X 5% return)

Heirs receive $360,000 ($800,000‐$440,000 est. tax)

CRUT$1,000,000 asset

$0 capital gains tax$1,000,000 in 5% unitrust pays $50,000 annually + a charitable tax deduction of $300,000 worth $120,000

+ ILITClient 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

Charity receives $1,000,000remainder

Heirs receive $400,000 (tax free from ILIT)

John, age 59, owns $100,000 of farmland which he would like to use for the rest of his life then leave to charity, but he also wants to benefit his heirs. His combined state and federal tax rates are income (40%) and estate (55%).

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.

Donor can use money from CRT tax deduction to buy tax free life insurance (ILIT) for children’s inheritance

Wealth replacement through ILIT life insurance creates estate tax free

inheritance for family members and allows for charitable giving

Donor CRT Charity

Initial Transfer

Anything Left after Death of Donor and Kids

Payments During

Donor Life

Donor kids

Payments after Donor’s Death, During Kids Lives

Donor CRT Charity

Initial Transfer

Anything Left at Death

Payments During Life

Donor CRT Charity

Initial Transfer

Anything Left after Death of

Donor and Spouse

Payments During

Donor Life

Donor’s spouse

Payments after Donor’s Death, During Spouse’s Life

Donor CRT Charity

Initial Transfer


Payments During

Donor LifePayments

after Donor’s Death, During Kids Lives

Donor kids

Donor CRT Charity

Initial Transfer


Payments During

Donor Life

Donor kids



Donor CRT Charity

Initial Transfer


Payments During

Donor Life

Donor kidsILITAt donor death, pays annuity

Mechanics of the ILIT


(ILIT)Parent Child


Premium Payments



Donor cannot be ILIT trustee, otherwise in donor’s estate

Insurance Inc.


(ILIT)Parent Child


Premium Payments



Gifts to the ILIT are taxable, thus can reduce the available credit for estate tax purposes

Insurance Inc.


(ILIT)Parent Child


Premium Payments



Gifts to the ILIT are not “present interest” gifts, because recipients have to wait to receive benefit

Insurance Inc.


(ILIT)Parent Child


Premium Payments



We turn the gifts into “present interest” gifts by giving beneficiaries the temporary right to get the gift in cash

Insurance Inc.


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments

30 day right to take gift as cash

We turn the gifts into “present interest” gifts by giving beneficiaries the temporary right to get the gift in cash


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


This temporary right to get the gift in cash is called a “Crummey” power

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


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


Gifts for premiums can be gift tax free if ≤ $13,000 X beneficiaries X donors annually


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


2 parents to 2 children, spouses, and 4 grandchildren

2 X 8 X $13,000 = $208,000 per year using “Crummey” powers

$208,000 per year can pay for a lot of

estate tax free life insurance


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


The “Crummey” power creates another problem


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


When the beneficiary chooses not to take the cash, he makes a gift to the other trust beneficiaries


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


This gift is not a “present interest” gift, and will reduce the beneficiary’s available estate tax credit


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


But, beneficiary can release greater of $5,000 or 5% of trust amount tax free


(ILIT)Parent Child

Money to Pay

Premiums



Insurance Inc.

Premium Payments


One solution: beneficiary retains right to demand cash, except for $5,000/5% annual release (a.k.a. “hanging power”


(ILIT)Parent Granchildren


Premium Payments



Death benefits are also generation skipping transfer tax free, therefore excellent planning for grandchildren beneficiaries

Insurance Inc.

ILIT‐CRT planning creates flexibility

CRT reduces inheritance

Use part of CRT payments or tax deduction for ILIT

CRT can pay to children but creates estate taxes

Remove children CRT beneficiaries, increase CRT payments to pay for tax free ILIT owned life insurance for children

Life Insurance and

More slides and lectures atwww.EncourageGenerosity.com

Charitable Remainder Trusts

life insurance & charitable remainder trusts

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