Using Charitable Trusts Strategically

Even though times were challenging, charitable giving reached an estimated $240 billion in 2002, a slight increase over 2001.¹

Most people donate money or other assets to help their favorite charities, but donors who plan carefully may find that they can benefit in other ways.

One strategy, combining a charitable remainder trust (CRT) with a wealth replacement trust, can allow donors to give to a charity, receive income during their lives, and provide a life insurance benefit for their heirs.²

A CRT is an irrevocable trust that designates a charity as the beneficiary of the property the donor wishes to leave when he or she dies. For the duration of the donor's life, he or she receives regular payments (fixed or variable) from the trust. When the donor dies, the charity receives the remaining principal.

Typically, donors will not be subject to capital gains taxes on appreciated assets placed in the trust, and assets will not be included in a donor's taxable estate. Additionally, the donor may take an income tax deduction, subject to certain limits, on a portion of the value of the donated assets for the tax year in which the trust was created.

Donors can avoid "disinheriting" their heirs by creating a wealth replacement trust. The trust purchases a life insurance policy, which usually has a face value equal to the value of the property placed in the CRT, so the heirs will receive the same amount that they would have inherited had the CRT not been created. Potentially, income from the CRT can pay the policy's premiums. When the donor dies, the beneficiaries receive the life insurance death benefit.³

When structured properly, a CRT in combination with a wealth replacement trust may allow charitable givers to accomplish several goals: giving to their favorite charity and family members, all while helping themselves.

1) AAFRC Trust for Philanthropy, 2003
2) The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
3) The cost and availability of life insurance depend on such factors as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved.

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