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Trusts
Help Your Family and Charity with These Trusts
By Johnny Lowe
Financial Advisor, Merrill Lynch
Like many people, you probably like to support one or more charitable organizations, such as a church, college, hospital or civic group. You may make regular donations of whatever you can afford. Still, you wish that you could do more. Fortunately, you can turn that desire into reality. With smart estate planning, you can provide significant resources to your favorite organization, get major tax benefits, and take care of your family.
Charitable remainder trust
How should you begin? You might consider establishing a charitable remainder trust. Here’s how it works: You gift highly appreciated assets, such as stocks or real estate, to the trustee of a charitable remainder trust. By taking this action, you’ll remove the asset from your estate, so your estate taxes will be reduced. And you’ll also reduce your current income taxes through a charitable income tax deduction. Finally, you’ll avoid paying any capital gains taxes that would have accrued had you simply sold the assets.
After you make your gift, the trustee may sell the assets, and reinvest the proceeds in a diversified portfolio of investments, which pays you an income stream for the remainder of your life. Upon your death, the remaining assets in the trust go directly to the charitable organization you’ve chosen.
Irrevocable life insurance trust
All this is well and good for both you and the charity. But you may have noticed that something is missing from this equation: your children. How can you provide for them at the same time you are supporting the charitable group?
One possible solution is to set up an additional trust. You can use the tax savings and some of the income you receive from the charitable remainder trust to fund an irrevocable life insurance trust. The trustee can use this money to pay the premiums on a “survivorship” life policy, which pays out benefits only upon the death of you and your spouse. You’ll want enough insurance so that the money going to your children or other heirs will equal or exceed the amount they would have received had you made no charitable gift.
Because the life insurance trust is the actual owner of your life insurance policies, the policy will not be included in your taxable estate. And that means your family gets another huge benefit – lower estate taxes.
Both a charitable remainder trust and a life insurance trust offer many advantages. But keep in mind that they are both irrevocable. Typically, once you’ve set these trusts up, you can’t change or cancel them, or remove any assets. So you need to make absolutely sure that the trusts are set up in precisely the way you had intended.
Your financial advisor, tax advisor and attorney can help. When you meet with them, don’t be afraid to ask as many questions as you want. Keep in mind your ultimate objectives: financial support for your family and for the charitable organizations you believe in. That’s a very worthy legacy to leave behind.
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