If I told you that there’s an estate planning technique out there that would allow you to increase your income, reduce your tax burden, and support charity — all at the same time — would you believe me? Well, it absolutely does exist. The charitable remainder trust (CRT) lets you take highly appreciated assets, like long-held stocks, and convert them into a lifetime income stream. You get a tax deduction when the assets are transferred into the trust and can even reduce your estate tax burden later on. You’ll also be committing support to the charities of your choosing. Sounds good, doesn’t it?
Let’s take a look at how this works:
Our client, Carl, is a 65-year-old retiree with $10 million in assets. In a taxable brokerage account, he owns $2 million of stock with large capital gains from years of holding on. Carl needs income from his account to fund his retirement. If Carl were to sell that stock to buy income-producing investments instead, he would owe federal and state taxes on the entire gain. Should Carl die before spending down some of his assets, he may also be looking at hefty estate taxes. The solution? He can transfer that $2 million of stock into a CRT and resolve a few issues at once.
By placing the appreciated stock in a CRT, Carl can remove that asset from his estate, shielding the asset, along with its future appreciation, from any potential estate taxation. At the time he transfers the assets into the trust, he also receives a massive tax deduction. His trustee can then sell the stocks and buy income-producing investments that he can live off of. When Carl passes away, the balance remaining in the trust would go to charity.
Life Insurance and Charitable Remainder Trusts
The CRT solves a few problems: It allows you to convert appreciated and often illiquid assets into current income sources, it creates a platform for supporting charity, and it reduces your eventual estate tax bill. What it won’t do, though, is enhance the inheritance you leave to your family. In fact, funding a CRT specifically reduces the amount of money that passes to your family. One potential solution to this problem is using the income generated by the CRT to purchase life insurance.
Let’s assume you don’t need to spend all of the income generated inside the CRT. Using part or all of that income to purchase life insurance can accomplish a few things: First, it ensures that your family receives an adequate inheritance. If you purchase the insurance inside of an irrevocable life insurance trust (ILIT), it will keep those proceeds outside of your estate so that the eventual death benefit is fully income and estate tax-free. The use of life insurance also creates a fixed, guaranteed return so that you and your heirs don’t have to worry about stock and bond market volatility.
These strategies should give you a glimpse into just how flexible the CRT can be for tax, estate, and retirement income planning, as well as for charitable gifting. Combining a CRT with an ILIT can further improve your estate planning by creating two separate, tax-free inheritances—one for charity and one for your family.
At Howard Kaye, our primary concern is helping you pass along as much money as possible to your family and charity. We’ve been helping people achieve this objective for decades. We can help design an estate plan that meets your specific objectives when it comes to income, liquidity, taxation, and ease of administration. Call us at 800-DIE-RICH and let’s get started.
