Articles Posted in Irrevocable Life Insurance Trust

Many in our area have decided to visit a New York estate planning attorney this year in order to learn how they can take advantage of Tax Relief Act which President Obama signed in December. As many are aware, the law allows individuals to give gifts up to $5 million without triggering any tax losses. Couples can give twice that amount. This is five times more than under previous law. The rule changes only apply until 2012, however, so it remains vital that all families take advantage of this favorable condition while they still can. recently provided a nice summary of a few ways that residents can act while the tax law is in effect. Perhaps the simplest way to use the increased exemption rate is to give a gift to a responsible adult child or grandchild. If you were considering creating a portfolio for a loved one, now might be the ideal time to do it.

Also, this year is the perfect time to create an irrevocable life insurance trust, because the trust can be funded with the new $5 million exemption. Even without the increased tax-free amount these trusts are important parts of an estate plan. They pay for life insurance premiums and can also be used to help settle how much each heir will receive in the future.

Another option might be the creation of a qualified personal residence trust (QPRT). The QPRT is helpful for those who have value tied into residential property. If the individual seeks to have their children own that property than the new law is helpful because it allows them to allocate a larger amount to this trust. A defective grantor trust may be used this year to take advantage of the exemption. As the article notes, “if you seed a defective grantor trust with, say, $1 million, then sell assets worth up to nine times that amount with the trust issuing a note to the grantor, any gains in the trust assets in excess of the note’s interest grow tax-free.”
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Historically, charitable giving rises about one-third as fast as the stock market. While the stock market gains of 2010 remain slight (Dow is up 1.13% at the time of this writing), New York residents may still want to consider using the charitable remainder trust (CRT) in their estate planning.

This trust works well for those who:
• hold highly appreciated assets • desire an income stream off of the assets • want to donate to charity; and • achieve tax benefits.

Because the CRT is irrevocable, this planning should be done with an experienced estate planning attorney.

How the CRT Works, in brief
Your assets and/or property are transferred to a CRT whereby your charity administers the trust. The charity serves as trustee, managing or investing your assets.
The charity pays you and/or your beneficiary a portion of the income generated by the trust for a certain number of years, or for the remainder of your life. At your death or the end of the set period, your charity receives the trust’s remaining principal.

CRT Tax Benefits
By establishing a CRT, you avoid capital gains tax on the donated assets, because the charity is exempt from taxes. An income tax deduction may also be declared on the fair market value of the remainder interest in the trust. Additional savings are effected by removing these assets from your estate, reducing subsequent estate taxes.

Two Types of CRTs:
With the charitable remainder unitrust, the percentage rate on the value of the assets determines your and/or beneficiaries’ annual payment. If the trust value changes, the payment to you and/or your beneficiaries changes.
A charitable remainder annuity trust is set up to pay a fixed rate of return based on the initial valuation at the time the property is placed in the trust. The trust’s assets are never re-valued, so if the assets of the trust increase, the income portion does not change.

The remaining principal of the trust reverts to the charity of choice upon death and/or the end of the set term. (The trust life may be based on the life expectancy of the income beneficiary). Because some grantors may object to the loss of principal, they may purchase life insurance to replace the principal assets. An estate planning attorney then uses an Irrevocable Life Insurance Trust in conjunction with the CRT to assure the trust’s value is also distributed to the income beneficiaries.

Online resources to charitable giving:
The National Center for Family Philanthropy

This website promotes philanthropic values, vision and excellence across generations of donors.

The American Institute of Philanthropy

This website rates and grades public charities to help donors make informed decisions.

The Foundation Center

This website provides news on charitable activities and links to private and public foundation websites.

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