A lecture on tax planning that combines life insurance with charitable remainder trusts, specifically through use of an irrevocable life insurance trust (ILIT)

1. Life Insurance
and
Charitable
Remainder
Trusts
Russell James, J.D., Ph.D., CFP®, Director of Graduate Studies in Charitable Planning, Texas Tech University

2. Life Insurance
Can Be Used as
Inheritance
Replacement in
Charitable
Planning

3. 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

4. But, they also reduce heirs’ inheritance
Charity Donor
Heir

5. Life insurance can diminish this concern

6. Estate tax law made simple
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)

7. Because the
parent does Insurance Inc.
not own the
policy, it is
not taxed in
his estate Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Parent Child Child

8. Because the
parent does Insurance Inc.
not own the
policy, it is
not taxed in
his estate Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

9. The parent
can use the Insurance Inc.
tax benefit or
income from
a CGA or CRT
to pay for life Estate Tax
insurance Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

10. Charitable
Remainder Insurance Inc.
Trust (CRT)
Estate Tax
Free Death
Lifetime Benefit
Income Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

11. The child gets
a tax free Insurance Inc.
inheritance
instead of
losing up to
55% in estate Estate Tax
taxes Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

12. We give the taxable inheritance to charity,
and create income to purchase the non‐
taxable inheritance to give to children

13. 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%)

14. Sale CRUT
$1,000,000 asset $1,000,000 asset
‐$200,000 capital gains tax $0 capital gains tax
$1,000,000 in 5% unitrust
pays $50,000 annually + a
charitable tax deduction of
$300,000 worth $120,000
+ ILIT
Client 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 Client uses $40,000/year
($800,000 X 5% return)
Charity receives $1,000,000
remainder
Heirs receive $360,000 Heirs receive $400,000
($800,000‐$440,000 est. tax) (tax free from ILIT)

15. 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%).

16. 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.

17. Donor can use
money from CRT
tax deduction to
buy tax free life
insurance (ILIT)
for children’s
inheritance

18. Wealth replacement through ILIT life
insurance creates estate tax free
inheritance for family members and
allows for charitable giving

19. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
Payments
after Donor’s
Death, During
Kids Lives
Donor kids

20. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
Payments
after Donor’s
Death, During
Kids Lives
Donor kids

21. Initial Anything Left
Transfer at Death
Donor CRT Charity
Payments
During Life

22. Anything Left
Initial after Death of
Transfer Donor and Spouse
Payments
During
Donor Donor Life CRT Charity
Payments
after Donor’s
Death, During
Spouse’s Life
Donor’s spouse

23. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
Payments
after Donor’s
Death, During
Kids Lives
Donor kids

24. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
Payments
after Donor’s
Death, During
Kids Lives
Donor kids

25. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
Payments
after Donor’s
Death, During
Kids Lives
At donor death,
ILIT pays annuity Donor kids

26. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
At donor death,
ILIT pays annuity Donor kids

27. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
At donor death,
ILIT pays annuity Donor kids

28. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
At donor death,
ILIT pays annuity Donor kids

29. Anything Left
Initial after Death of
Transfer Donor and Kids
Payments
During
Donor Donor Life CRT Charity
At donor death,
ILIT pays annuity Donor kids

30. Mechanics
of the ILIT

31. Donor cannot be
ILIT trustee, Insurance Inc.
otherwise in
donor’s estate
Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

32. Gifts to the ILIT are
taxable, thus can Insurance Inc.
reduce the
available credit for
estate tax
purposes Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

33. Gifts to the ILIT are
not “present Insurance Inc.
interest” gifts,
because recipients
have to wait to
receive benefit Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

34. We turn the gifts
into “present Insurance Inc.
interest” gifts by
giving beneficiaries
the temporary
right to get the gift Estate Tax
in cash Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Child

35. We turn the gifts
into “present Insurance Inc.
interest” gifts by
giving beneficiaries
the temporary
right to get the gift Estate Tax
in cash Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

36. This temporary
right to get the gift Insurance Inc.
in cash is called a
“Crummey” power
Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

37. 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

38. Gifts for premiums
can be gift tax free Insurance Inc.
if ≤ $13,000 X
beneficiaries X
donors annually
Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

39. 2 parents to 2
children, spouses, Insurance Inc.
and 4 grandchildren
2 X 8 X $13,000 =
$208,000 per year Estate Tax
using “Crummey” Free Death
Benefit
powers Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

40. $208,000 per
year can pay
for a lot of
estate tax free
life insurance

41. The “Crummey”
power creates Insurance Inc.
another problem
Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

42. When the
beneficiary chooses Insurance Inc.
not to take the
cash, he makes a
gift to the other
trust beneficiaries Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

43. This gift is not a
“present interest” Insurance Inc.
gift, and will reduce
the beneficiary’s
available estate tax
credit Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

44. But, beneficiary can
release greater of Insurance Inc.
$5,000 or 5% of
trust amount tax
free
Estate Tax
Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

45. One solution:
beneficiary retains Insurance Inc.
right to demand
cash, except for
$5,000/5% annual
release (a.k.a. Estate Tax
“hanging power” Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to 30 day
Pay right to
Premiums take gift
Irrevocable Life as cash
Insurance Trust
Parent (ILIT) Child

46. Death benefits are
also generation Insurance Inc.
skipping transfer
tax free, therefore
excellent planning
for grandchildren Estate Tax
beneficiaries Free Death
Benefit
Premium
Payments
Policy on
Parent’s
Life
Money to Pay
Premiums
Irrevocable Life
Insurance Trust
Parent (ILIT) Granchildren

47. ILIT‐CRT planning creates flexibility
CRT reduces Use part of CRT
inheritance payments or tax
deduction for ILIT
Remove children
CRT can pay CRT beneficiaries,
to children increase CRT
but creates payments to pay for
estate taxes tax free ILIT owned
life insurance for
children

48. Life Insurance
and
Charitable
Remainder
Trusts
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