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A lecture on tax planning that combines life insurance with charitable remainder trusts, specifically through use of an irrevocable life insurance trust (ILIT)
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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
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
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
The parent can use the tax benefit or income from a CGA or CRT to pay for life insurance
Insurance Inc.
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Insurance Inc.
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
Charitable Remainder Trust (CRT)
Lifetime Income
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
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 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
Anything Left after Death of Donor and Kids
Payments During
Donor LifePayments
after Donor’s Death, During Kids Lives
Donor kids
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
Payments after Donor’s Death, During Kids Lives
Donor CRT Charity
Initial Transfer
Anything Left after Death of Donor and Kids
Payments During
Donor Life
Donor kidsILITAt donor death, pays annuity
Donor CRT Charity
Initial Transfer
Anything Left after Death of Donor and Kids
Payments During
Donor Life
Donor kidsILITAt donor death, pays annuity
Donor CRT Charity
Initial Transfer
Anything Left after Death of Donor and Kids
Payments During
Donor Life
Donor kidsILITAt donor death, pays annuity
Donor CRT Charity
Initial Transfer
Anything Left after Death of Donor and Kids
Payments During
Donor Life
Donor kidsILITAt donor death, pays annuity
Donor CRT Charity
Initial Transfer
Anything Left after Death of Donor and Kids
Payments During
Donor Life
Donor kidsILITAt donor death, pays annuity
Mechanics of the ILIT
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
Donor cannot be ILIT trustee, otherwise in donor’s estate
Insurance Inc.
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
Gifts to the ILIT are taxable, thus can reduce the available credit for estate tax purposes
Insurance Inc.
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
Gifts to the ILIT are not “present interest” gifts, because recipients have to wait to receive benefit
Insurance Inc.
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
We turn the gifts into “present interest” gifts by giving beneficiaries the temporary right to get the gift in cash
Insurance Inc.
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
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
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
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
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
Gifts for premiums can be gift tax free if ≤ $13,000 X beneficiaries X donors annually
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
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
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
The “Crummey” power creates another problem
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
When the beneficiary chooses not to take the cash, he makes a gift to the other trust beneficiaries
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
This gift is not a “present interest” gift, and will reduce the beneficiary’s available estate tax credit
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
But, beneficiary can release greater of $5,000 or 5% of trust amount tax free
Irrevocable Life Insurance Trust
(ILIT)Parent Child
Money to Pay
Premiums
Estate Tax Free Death Benefit
Policy on Parent’s Life
Insurance Inc.
Premium Payments
30 day right to take gift as cash
One solution: beneficiary retains right to demand cash, except for $5,000/5% annual release (a.k.a. “hanging power”
Irrevocable Life Insurance Trust
(ILIT)Parent Granchildren
Money to Pay Premiums
Premium Payments
Estate Tax Free Death Benefit
Policy on Parent’s Life
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