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Charitable Giving & Wealth Replacement Strategy

Case Study: Charitable Giving & Wealth Replacement Strategy

You worked a lifetime to accumulate your wealth. However, upon death, the value of your assets may be subject to federal estate taxes of up to 40%, potentially compromising your wealth transfer intentions. In this case study, we discuss a unique charitable giving and tax efficient wealth replacement strategy, allowing the donor to achieve their philanthropic intent with tax benefits while also taking care of their heirs.

The Situation: 

Linda & Brett (55 years old) sold a business and face a substantial tax bill. The couple considered selling their second residence in New York but are deterred by the tax implications from significant appreciation over the years.   They have enough assets and income to cash flow their lifestyle for the rest of their lives and will likely still have a taxable estate upon their deaths.  Additionally, Linda and Brett have a great sense of gratitude for their alma mater and would like to integrate philanthropy into their wealth transfer plan while also leaving a significant inheritance to their children.  With the help of their trusted advisors, the strategy they are considering can be broken down into 2 components:

Charitable Reminder Trust (CRT):

A CRT is a charitable trust, typically funded with appreciated property, that provides income to beneficiaries over a specified timeframe, after which the remaining assets are donated to a selected charity.  In this case, the appreciated New York property is gifted to the CRT, sold, and then proceeds invested for long term growth and current income.  Utilizing a CRT can help accomplish:

  • Income Tax Savings: Funding the charitable trust with appreciated property allows the family to avoid paying capital gains tax on the sale while also benefiting from a charitable deduction for the value of the charity’s interest in the trust.
  • Estate Tax Savings: The value of the gifted property to the trust is removed from the donor’s taxable estate, potentially reducing future estate tax implications.
  • Income Stream: Linda and Brett can elect an income beneficiary of the Trust.  In this case, the couple selects themselves and use the income toward funding their wealth replacement strategy.
  • Charitable Intention: At the passing of the income beneficiaries, the remaining assets in the trust are gifted to their selected charity.

Irrevocable Life Insurance Trust (ILIT):

As income beneficiaries of the CRT, Linda and Brett use the income toward funding a life insurance policy with a death benefit equal to the value of the gifted property to the CRT.  The life insurance policy is structured to be held outside of their taxable estate in an Irrevocable Life Insurance Trust (ILIT).  Since the life insurance death benefits are income tax-free and the life insurance policy is outside of the taxable estate, Linda and Brett’s children will benefit from the life insurance proceeds both income and estate tax-free.

In Summary:

The charitable giving and wealth replacement strategy accomplishes the following for Linda and Brett:

  • Achieves their charitable intent by gifting asset to their alma mater.
  • Avoids capital gains tax on the sale of their appreciated property.  
  • Receives an immediate charitable tax deduction in a high tax year due to the sale of their business.
  • Replaces the value of their charitable gift for their heirs with an income and estate tax-free death benefit.   

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. 

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. 

This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing. No strategy assures success or protects against loss.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Starkey Financial Partners and LPL Financial do not provide tax and/or legal advice or services.