Getting Started

Leaving a Legacy

For millions of Americans, “charity begins at home.” Many have decided to make a difference by leaving a legacy to local religious, educational, social, or cultural organizations. In addition to the immense satisfaction that comes from giving to others, charitable giving can provide tax benefits for the donor and his or her heirs when done as part of an overall estate plan.

Charitable Gifts of Life Insurance
Gifts of life insurance have unique advantages, including the following:

Gifts of life insurance can be made in one of two ways:

If the donor gives an existing policy to a charity, the fair market value of the policy (generally, its full cash value) is allowable as an income tax deduction. The tax consequences of future premium payments for the gifted policy would be the same as the situation described above, in which the charity is both owner and beneficiary.

Charitable Remainder Trusts

If the prospective charitable donor is seeking a way to increase income, reduce estate and income taxes, avoid taxes on gains, and make a significant charitable contribution without reducing his or her family’s inheritance, a charitable remainder trust (CRT) or a wealth replacement trust may be appropriate. A CRT can allow an individual to make a gift to a charity while retaining a current income interest in the gifted asset during his or her lifetime.

In general, it may be best to fund a CRT with an asset that, if sold outside the trust, would produce substantial long-term capital gains tax. After the trust is executed, the donor may transfer this appreciated, low- or non-income-producing asset to the CRT. The CRT can then sell the asset and provide the donor an income for life, for a term of years, or for joint lives. Upon the death of the donor or the donor’s named non-charitable-income beneficiary, the remaining trust assets will pass to the charity.

Here are some of the benefits of this strategy:

After the donor’s death, the remaining assets in the trust pass to the charity, not to the donor’s heirs. However, the tax savings produced by the charitable donation and the income generated by the trust can be used to pay premiums on a life insurance policy owned by an irrevocable life insurance trust (ILIT)—sometimes known as a “wealth replacement” trust. The life insurance policy in this trust replaces the value of the assets that pass to the charity in the CRT. Since the life insurance is purchased and owned by the irrevocable trust, the proceeds are free of income tax, as well as estate tax.

There are a variety of charitable giving tools and techniques that can provide generous donors with certain tax benefits. For specific guidance, consult your qualified tax and legal professionals.