Advanced Estate Planning -- Life Insurance Trusts and Charitable
Planning
Presented By:Richard J. Shapiro, J.D.
and
Mindy Menke, J.D.Blustein, Shapiro, Rich & Barone, LLP
www.mid-hudsonlaw.com
The Objectives Of Using Life Insurance:
Liquidity – funds available when needed
Leverage – the biggest bang for the buck
Estate Tax Funding
Compounding the ProblemShould Not Be Part of the Plan
Estate Tax Funding
$2.5 Million Estate
+
$1,000,000 Life Ins. Policy
=
$3.5 Million Taxable Estate
With
$801,060 Estate Tax Due (in 2008)
vs
$301,340 ET due if Life Ins. Outside of Estate
Estate Tax Funding
The $1,000,000 Life Policy
Should be Held Outside of the Estate
Estate Tax Funding
With or without a trust, we can get money out of the estate.
Annual Exclusion Gifts Taxable Gifts (Unified Credit) Leveraging life insurance
– Cash Value vs. Death Benefit
Irrevocable Giving
The Objectives:
Exclusion From Taxable Estate
Control of Distributions
Protection From Creditors
Irrevocable Life Insurance Trust
Established During Life Three Parties
– Trustmakers (Grantor)– Beneficiaries– Trustee T r u s t
Irrevocable Life Insurance Trust
Irrevocable Life Insurance Trust
During Lifetime
•Establishes Trust•Trustee Acquires Policies (or the Grantor makes Gifts of Policies)•Makes Gifts for Premiums
ILIT
Crummey Rules forPresent Interest GiftsTrustee
Irrevocable Life Insurance Trust
During Lifetime
Pays Premiums
ILIT
Insurance Policy
Trustee•Establishes Trust•Trustee Acquires Policies (or the Grantor makes Gifts of Policies)•Makes Gifts for Premiums
Upon Death
Pays Death BenefitProperty Passes to
Estate
Makes Loans
Sell Assets
Insurance Policy
ILIT
Estate
Deceased
Irrevocable Life Insurance Trust
Trustee
During Settlement
PropertySubject toEstate Tax
Income &
Property
ILIT Estate
Irrevocable Life Insurance Trust
Trustee
NotSubject toEstate Tax
Power of Appointment– Crummey vs. Commissioner
Present Interest Gifts– Cristofani vs. Commissioner
Contingent Beneficiaries
IRS
Cristofani vs. Commissioner
Contingent Beneficiaries– Children
Robert - Sarah - Donald
– Children’s children Robert’s - Bobby, Sue & Doug Sarah’s - Tom, Troy & Trent Donald’s - Chris
– Estate Exclusion– Creditor Protection– Trust Protector– Income taxation – to whom?– “Crummey” powers– Control of Distributions - standards
Trust Document Drafting Some Important Issues:
Charitable Planning Basics Charitable Deductions
Amount you give to charity entitles you to an income tax deduction
Write off up to 50% of your AGI Example:
– Made $80,000 this year– Contribute $20,000 to 501(c)(3) organization– Pay income tax on $60,000
Charitable Planning Basics Charitable Deductions
Donate appreciated assets Stock you bought for $5,000 but now is
worth $20,000 If you do anything else with that stock, it is
only worth $16,723 ($3,277 less) Capital gain taxes of 21.85% of $15,000 Contribute: tax deduction for $20,000
Charitable Planning Basics Split Interest Gift Trusts
Form a Trust - an agreement One party gets the Income for a term - a
defined period of time The other party gets the assets later - the
RemainderWealth is like an orchard you’ve built up over a
lifetime. Taxes take the trees. When the trees are gone, no more apples!
Charitable Remainder Trusts
Charitable Remainder Trusts – You keep the apples for life, and the charity gets
the trees when you die– Use some of the apples to replace the orchard for
your kids
Charitable Remainder Trust
Donate an asset to the Trust highly appreciated asset works best
Sell and reinvest proceeds (diversified for safety and at higher rate of return)
Keep income (some tax-free) for life Use excess income to buy tax free insurance
policy in “ILIT” At death everything goes tax-free!
Charitable Remainder Trust
John &
Mary
Charitable Remainder Trust
John &
Mary
Asset placed in Trust
CRTIncomeTrust
Charitable Remainder Trust
John &
Mary
Income for life
CRTIncomeTrust
Charitable Remainder Trust
John &
Mary,Deceased
501(c)(3) Charity Receives remainder
CRTIncomeTrust
Charitable Remainder Trust
John &
Mary,Deceased
501(c)(3) Charity Receives remainder
CRTIncomeTrust
The transaction is a gift to the
end Beneficiary, subject to the
retained right to income for a number of
years.
Charitable Remainder Trust
What good is a CRT? Provide future benefit to charity of choice Take profits: Liquidate appreciated asset
without paying capital gain taxes Diversify client’s investments Current income tax deduction Removes asset from taxable estate
Charitable Remainder Trust
Bank Stock worth $3,000,000Basis $100,000
Increase Income Current income:
– dividend 2.5% $75,000 ----------------------------------------------------------------------------------------------------------------------------------------------------
– Transfer to CRT, sell stock,
– reinvest, take 7% per year $210,000
Increase of $135,000Bonus! Up to $105,000 for 6 years is income tax
free!
Charitable Remainder Trust
Bank Stock worth $3,000,000Basis $100,000
Avoid Capital Gain Tax/Increase Income Sell as is, lose 21.85% of $2.9M gain
lost $633,650; balance of $2,366,350 invested at 7% return
$165,644 -----------------------------------------------------------------------------------------------------------------------------------------------------
Using CRT, sell stock, no capital gain tax– reinvest full $3M at 7% $210,000
Increase per year of $44,356
Charitable Remainder Trust
Bank Stock worth $3,000,000Also avoid Estate Tax
$3M >> $2,344,500 after Cap Gain tax $655,500 Death: Federal and State estate taxes $284,050To IRS from original $3M: $939,550To Heirs from original $3M: $2,060,450
-----------------------------------------------------------------------------------------------------------------------------------------------------
Using CRT & investing some of the extra $37,450 into a guaranteed $3,000,000 2nd to Die Life Insurance Policy held in an ILIT
To Charity at Death $3,000,000To Heirs at Death $3,000,000TO IRS: $0
Charitable Remainder Trust PLUS
John &
Mary
Income for life
Asset placed in Trust
Charitable Remainder
Trust
Charitable Remainder Trust PLUS
John &
Mary
Income for life
Asset placed in Trust
Charitable Remainder
Trust
From extra income, invest Gifts into Trust
Life Insurance
Trust
Family Receives $3,000,000
Charity Receives $3,000,000
No Death Taxes!!
Charitable Remainder Trust PLUS
John &
Mary
Income for life
Asset placed in Trust
Charitable Remainder
Trust
From extra income, invest small Gifts into Trust
Life Insurance
Trust
CRT Variations: NIMCRUT
John &
Mary,Deceased
501(c)(3) Charity Receives remainder
CRTIncomeTrust
More flexibility on distributions vs. pushing growth inside the CRT
John &
Mary
Another twist Charitable Lead Trust
ZERO-OUT your estate taxes At death, from Living Trust, place part of
estate in the CLT Income for a few years goes to Charity After those years, property to kids
Let charity “pick the apples” for a few years, then the kids get the trees
Another twist Charitable Lead Trust
John &
Mary
Asset placed in Trust
Charitable LeadTrust
Another twist Charitable Lead Trust
John &
Mary
Income
Charitable LeadTrust
Another twist Charitable Lead Trust
John &
Mary
Children Receive Remaining assets
Charitable LeadTrust
Basic Estate Tax Planning
John’s Death
Mary’s Death
IRS Supermarket
Children Family Trust plus Mary’s coupon, tax free;
Estate Taxes on all over that
Family Trust
(coupon)
Mary’s Living Trust
Marital Trust
John’s RLTMary’s
Living Trust
Children
Charitable Lead Trust
Basic Estate Tax Planning plus a
Testamentary CLT
Family Trust
IRS Supermarket
Mary’s RLTMarital Trust
Mary’s RLTJohn’s RLT
Social Capital
How to use our Social Capital Government: 1/4 gets to end user Private charity: 90% + to end user
Which makes more sense?
Who has paid enough?“So you’ve made $20 million in your lifetime. After
you paid income taxes, your net worth is $13.2 million.
“After your children pay estate taxes upon your death, it will be worth $6.33 million.
“After your grandchildren pay estate taxes on the death of your children, it will be worth $3,401,400.
“Your estate will be worth only 17% of its original value after only two generations of taxation.”
Barry Kaye, Save a Fortune on Your Estate Taxes
Advanced Estate Planning -- Life Insurance Trusts and Charitable
Planning
Presented By:Richard J. Shapiro, J.D.
and
Mindy Menke, J.D.Blustein, Shapiro, Rich & Barone, LLP
www.mid-hudsonlaw.com