DUAL TRUST STRATEGY INCREASES WEALTH TRANSFER TO HEIRS AND CHARITY
By Matthew Leek, CRPC, Ameriprise Financial Services, Inc.
In the game of chess, using two of the chess pieces in tandem often provides a powerful and winning combination. In the game of life, establishing two trusts supporting each other can maximize wealth transfer to heirs as well as to your favorite charities.
Here is how it works.
The individual that is supporting charities sets up two trusts: one is a Charitable Remainder Trust, or CRT, and the second is an Irrevocable Life Insurance Trust, or an ILIT. Many of you are familiar with the CRT. It can be beneficial to establish a CRT to transfer appreciated assets into either stocks or real estate and then to have the assets converted to cash, then invested within the CRT. This move avoids paying capital gains tax on the asset for future benefit of the charity. The charity supporter also benefits because the converted assets generate an ongoing lifetime income (typically 5 to 7% annually) for the donor and donor's spouse (or named relative). In addition, the donor receives an income tax deduction based on the IRS formula (which has current tax year limits tied to adjusted gross income and possible additional five-year carry forward). In other words, the donor receives lifetime income benefits, immediate tax reduction benefits and elimination of capital gain tax on the appreciated asset.
In tandem, a life insurance trust is established with a death benefit equal to the appreciated asset value residing within the CRT. Life insurance policy payments are paid out of the lifetime income stream emanating from the CRT. The type of life insurance should be a permanent type (universal or variable universal) and it may include either separate policies on the donor and donor spouse or a combined policy on both.
When you roll the clock forward, after both donor and spouse have passed, the charity benefits by receiving the amount of asset value remaining in the CRT. The donor's heirs receive the insurance-backed death benefit, which is paid to the heirs income tax free and estate tax free. This last part, owing no estate tax, is due to the trust ownership of the life insurance policy. Without the trust ownership position, life insurance death benefits might be accumulated within the donor’s estate and become subject to an estate tax depending on the Federal estate tax rules in place at that time.
Note that the end result of this dual trust strategy is not intended to avoid taxes due but to correctly utilize IRS rules established for the benefit of heirs and charities. Also note that estate taxation rules are in a constant state of change. Donors should consult with their tax advisor and estate planning attorney prior to recommending or proceeding with the dual trust strategy.
Matthew Leek
Matthew has been a Financial Advisor and Chartered Retirement Planning Counselor (CRPC) for 8 years. He specializes in wealth creation, retirement transition and estate preservation and transfer. He has held previous management positions at ThinDisc Media Inc. as CFO; Trace Mountain in strategic planning and business development; and Meridian Data as Eastern Area Manager. He gained his strategic analysis skills at General Electric where he worked for 10 years. He holds a BSEE degree from Lehigh University in Bethlehem, PA.
