A common planning technique that is seeing an increase in application due, in part, to an increasing interest rate environment is a Charitable Remainder Trust (CRT). A CRT is a unique estate planning strategy that enables you to support your favorite charitable organization while still providing income for yourself or your loved ones. It is a type of trust that allows you to donate assets, such as stocks or real estate, to a charitable organization while retaining the right to receive income from those assets for a specified period.
One of the most popular and flexible forms of a charitable remainder trust is a Charitable Remainder Unitrust (CRUT). In a CRUT, you contribute assets to the trust, and the trust pays you or your beneficiaries a fixed percentage of the trust's value each year. The percentage payout can be set between 5-50% and is determined when the trust is established. The trust also pays a charitable organization a specified amount or a percentage of the trust's assets when the trust terminates.
The interest rate a CRT utilizes to establish the annual payout is determined by IRC §7520. This is the rate used to determine the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest. IRC §7520 rates are calculated by rounding the Annual Mid-term 120% Rate to the nearest 2 tenths with the rate set at 5% in April of this year (2023). For comparison, the rate was 1.20% three years ago in April 2020. The higher the IRC §7520 rate, the larger the annuity payout under a CRUT.
A CRT has several benefits. First, it provides you with a source of income for the rest of your life. Second, it allows you to support a charitable organization of your choice while also receiving a tax deduction for the gift. Finally, it provides for the efficient transfer of assets to your heirs.
Life Insurance Completes Your Planning
Life insurance can be an excellent tool to incorporate into a CRT. By adding life insurance to the trust, you can help ensure that your beneficiaries receive the maximum possible payout from the trust when you pass away. This is especially important if the value of the trust assets declines during your lifetime, as the payout to your beneficiaries will be reduced.
There are several ways to incorporate life insurance into a CRT. One option is to purchase a life insurance policy on yourself and name the trust as the beneficiary. The trust can then use the death benefit from the policy to pay the charitable organization and provide income to your beneficiaries.
Another option is to contribute an existing life insurance policy to the CRT. The trust can then either surrender the policy for its cash value or keep the policy in force and receive the death benefit when you pass away. By contributing an existing policy, you can receive an immediate tax deduction for the policy's cash value or the policy's fair market value.
Incorporating life insurance into a CRT is a complex process that requires careful planning and expert advice. It's essential to work with an experienced trusts and estates attorney and a life insurance professional to ensure that the trust is structured correctly, and that the life insurance policy is appropriately funded.
It May be Time to Consider a CRT
Particularly in a rising interest rate environment, a CRT is a powerful estate planning strategy that can help you support your favorite charitable organization while providing income for yourself or your loved ones. By incorporating life insurance into the trust, you can ensure that your beneficiaries receive the maximum possible payout and that your charitable goals are met.
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