CHARITABLE REMAINDER TRUSTS…
May utilize annuities and life insurance to kill several birds with one stone!
In planning for your retirement, you may face several financial issues. Maybe you’d like to generate retirement income, but don’t want to pay capital gains tax on investments you’ve held for several years. Perhaps you’d like to minimize your income taxes during retirement. You also might like to reduce the size of your taxable estate so more of your money goes to your heirs. Finally, you may wish to create a legacy or support a cause, church or charity that is close to your heart.
A Charitable Remainder Trust may help you realize all these objectives.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
How does a Charitable Remainder Trust work?
A CRT is a tax-exempt irrevocable trust. You can transfer cash and highly appreciated assets to the trust, and in return, you may arrange to receive income for life (this is where an annuity typically comes into play) or a specified stretch of time (not to exceed 20 years). Income may potentially be paid out of the CRT not only during your lifetime, but also over the lifetimes of your heirs. Eventually, a percentage of the assets in the CRT go to charities or non-profits of your choice.1
In brief, the Charitable Remainder Trust gives you a chance to:
- Gain a current income tax deduction
- Avoid estate taxes on the gifted assets
- Create an income stream
- Achieve tax-free compounding of assets (until withdrawn from the Charitable Remainder Trust)
- Sell assets with a low cost basis without incurring capital gains taxes2
The transfer of assets to a Charitable Remainder Trust qualifies as a charitable contribution, thereby allowing you to take an income tax deduction based upon the estimated present value of the remainder interest that will eventually go to charity.2
As a CRT is an irrevocable trust, assets transferred into it are no longer included in your taxable estate – though you do retain an interest in the gift or transfer.3
Most charities prefer to offer an annuity that is issued based on their ability to pay; however, it is much more secure to insist upon a highly rated commercial insurance carrier to back your future income. Commercial issuers are highly regulated and participate in the SIGA (State Insurance Guarantee Association). Typically fixed deferred or immediate annuities are the best choice to assure the success of the Charitable Remainder Trust.
A Charitable Remainder Trust does have some disadvantages.
The word to keep in mind here is “irrevocable.” When you set up a Charitable Remainder Trust, you are signaling to the Internal Revenue Service that those assets will have one of two destinies. Either they will go to your heirs and charity when you die, or you will withdraw them before you die and pay the resulting taxes on the withdrawal. In the meantime, you need to make sure that you have enough money outside the trust to provide for any needs you may have.
A second disadvantage in using a CRT is that the income tax deduction for charitable giving does have limits. These limits may prevent the entire amount from being used to lower your income tax.
What about your heirs?
On the surface, a CRT would seem to present a family with one huge disadvantage. After all, it tells the IRS that you plan to leave a bunch of your money to charity – and that money is also removed from your estate.
So the question naturally comes up: “If I do this, am I going to disinherit my kids?”
There’s a way around that.
A good Charitable Remainder Trust strategy actually involves two trusts. Besides the Charitable Remainder Trust, you can set up a parallel wealth replacement trust funded with life insurance.
Through this irrevocable life insurance trust, your heirs may receive a proper inheritance. The wealth replacement trust is ideally administered so that its death benefit is at least equal to the value of the gifted assets. So when you pass away, the Charitable Remainder Trust transfers its assets to charities and your heirs receive tax-free life insurance proceeds.3, 4
To use life insurance, however, you’ll need to be insurable. Furthermore, you’ll want to make sure the benefits of the Charitable Remainder Trust outweigh the costs of the life insurance premiums.
These are the views of AnnuityGuys.com, which does not give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent planner/educator professional. Please consult a financial advisor for further information.
Citations
- charitableremaindertrust.com/faq.html [4/28/10]
- ca-trusts.com/crt.html [4/28/10]
- library.findlaw.com/1997/Dec/1/128372.html [12/1/97]