If you like the idea of a Charitable Remainder Trust (CRT) but have some reservations, an ILIT, CGA, or pooled income fund are alternatives.
A Charitable Remainder Trust (CRT) is a potentially terrific tool for those of us with strong charitable legacy goals, but charitable legacy planning must be tailored to fit the needs of the individual. As with any estate planning tool, a CRT has both its advantages and disadvantages, and some of these potential disadvantages may create concerns. The good news is that options exist to address these concerns, either as complements to a CRT or as alternatives to a CRT.
What is a Charitable Remainder Trust?
First, a brief refresher on Charitable Remainder Trusts (CRTs). A CRT is an irrevocable trust that you fund with assets, then for the term of the trust (either a set number of years or your lifetime) you receive periodic payments. At the conclusion of the trust’s term, any remaining assets are donated to the charities you’ve designated.
For those who wish to create a strong charitable legacy while avoiding longevity risk and minimizing their tax burden, a CRT may sound promising. But as with any estate planning tool, it also comes with some implications that may prove problematic for some.
Potential Disadvantages of a Charitable Remainder Trust
In my experience, there are two concerns people may have about CRTs.
The first applies to those wishing to balance their charitable legacy goals with their inheritance goals. They feel strongly about supporting charitable causes but want to avoid doing so to such an extent that it leaves their heirs vulnerable.
The second concern is about the expenses posed by the creation and maintenance of a CRT. This is certainly understandable since the attorney fees and trustee fees can quickly add up. For many high-net-worth folks, the fees may be worth it, and CRTs do come with tax advantages that can save you money in the long run, but depending on your specific financial situation and priorities, you may prefer a cheaper alternative that works similarly to a CRT.
The good news is that options exist to address both these concerns.
Irrevocable Life Insurance Trusts (ILITs)
For legacy builders who may have reservations about a CRT due to a fear of giving too much of their net worth to charity and leaving their heirs vulnerable, an Irrevocable Life Insurance Trust (ILIT) can be a good complement to a CRT.
What is an Irrevocable Life Insurance Trust (ILIT)?
An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust where the asset in the trust is a life insurance policy, either one purchased and transferred to the trust or purchased by the trust.
Using an ILIT as a Complement to a CRT
If you chose to create an ILIT to complement a CRT, you would create a second irrevocable trust alongside the CRT and fund it with the tax savings and part of the income from the CRT. The ILIT trustee could then purchase enough life insurance on the grantor’s life to fully replace the assets funding the CRT, with the heirs as beneficiaries.
This works because life insurance is an inexpensive way to replace assets, with every dollar of premiums typically purchasing several dollars of insurance. Life insurance proceeds are paid out immediately on your death without getting bogged down in probate, but because they remain in the ILIT, you control the timing of the disposition of those funds through the trust document. Furthermore, these proceeds are paid out income-tax free, and because they are not considered part of your estate, they avoid estate taxes as well.
The idea here is to leverage tax savings to maximize wealth surplus that will be used to meet your legacy giving goals, both charitable and inheritance.
Charitable Gift Annuities
For those who like the split-interest nature of a CRT, where you can benefit from a stream of income for life before passing assets on to charity, but are not crazy about the attorney fees and trustee fees of a CRT, a charitable gift annuity (CGA) may be an option to consider.
What is a Charitable Gift Annuity (CGA)?
CGAs are offered by many large non-profits and involve signing a contract with the non-profit in which you give them a large donation, and in exchange they will send you fixed annual payments from the donation over your lifetime. At the end of your life (as well as your spouse’s life, if it’s a joint gift), the charity receives the remainder. You are then entitled to a charitable income tax deduction for the present value of the gift, and a portion of the annuity payments may be tax-free as well. Finally, you can gift appreciated property to get an extra tax benefit.
Pooled Income Funds
Another option for those who aren’t crazy about the fees that come with a CRT, but still like the split-interest nature of a CRT, is a pooled income fund. Like a CGA, a pooled income fund serves as an alternative to a CRT.
What is a Pooled Income Fund?
Pooled income funds are like CGAs, except you pool your donation with other donors, kind of like a charitable mutual fund, and receive income distributions from the fund based on your ownership share. After your death, the portion of the fund attributable to your ownership share is severed from the fund and used by the charity. Assets contributed to the fund receive an immediate charitable income tax deduction for the present value of the future charitable gift.
Which Option is Right for You?
Whether a CRT, CRT with an ILIT, CGA, or pooled income fund is right for you (or something else entirely) will all depend on your goals, your current financial situation, your priorities, and much more. At Charis Legacy Partners, we work with you to create a plan tailored to help you meet your unique legacy planning goals. If you’re interested in discussing any of these or other wealth planning topics further, you are welcome to schedule a free consultation using the button in the navigation menu above.