The following trusts are useful in removing assets from the estate of a Settlor or Grantor, such that at the death of the Settlor or Grantor the assets in the trust are not counted as a part of the estate of the deceased Settlor. Additionally, these trusts, in varying forms, allow the Settlor to receive the income from the transferred assets and/or use or occupy the property.

These trusts are used to transfer assets to the heirs of the Settlor [with the exception of the Charitable Remainder Trust, which transfers property to a charity] free of estate tax. They are also used to remove property that is or will likely appreciate in value from the estate of the Settlor and transfer it to the estate of the heirs (free of estate tax) and do so at today’s value rather than tomorrow’s values.

Charitable Remainder Trusts

A Charitable Remainder Trust consists of the following: Settlor(s) [sometimes called Donor(s)], those who give property or cash to the trust; Trustee(s); administers the trust according to its terms; Income Beneficiary(ies), named individuals who receive annual/monthly income from the trust for life or a set number of years; and, Remainder Beneficiary; the charity designated to receive what remains as principal in the trust, after the last of the income beneficiaries dies or ceases to receive income from the Trust.


A Charitable Remainder trust can be of two types. (1) An Annuity Trust, or (2) a Unitrust.   The trust can be in existence for (a) the lifetime of any named beneficiary(ies) then living; or (b) a term of years, not to exceed twenty. Thus, a husband and wife could receive income for both of their lifetimes. The examples that follow assume that income is to be received for so long as either of both spouses shall live.


A Charitable Remainder Annuity Trust is where a fixed sum of money [which must be at least 5% of the initial principal of the trust] is paid annually/monthly to the Settlors (the income beneficiaries) for the Settlors’ life (so long as either the husband and/or wife shall live). At the death of the last to die of the two spouses (or income beneficiaries), the amount remaining in the Trust, (ie, the remainder) is paid to the designated charity and the trust is then terminated. No additional contributions to the trust principal, once it is set up, are allowed.


A Charitable Remainder Unitrust differs in that a fixed percentage, of the trust [must be at least 5% of the principal of the trust, revalued annually] is paid annually/monthly to the donors. As can be appreciated, if the value of the trust principal goes up, the fixed percentage payout goes up; and, conversely, if the principal goes down, the fixed percentage payout goes down. At the death of the last income beneficiary, the remainder is paid to the named charity. Additional contributions to the trust, after it is set up, are allowed.


The income beneficiaries of the trust would normally be the Settlor(s). You can name other living individuals as income beneficiaries. For example, you could name yourself as income beneficiaries and your daughter to succeed you for so long as she lives or for a set term of years after your death, if you so designated. [Note: If anyone other than a spouse is named as an income beneficiary, the Settlor or donor is deemed to have made a gift of income (to the non-spouse surviving income beneficiary, at the death of the Settlor) to such recipient and the gift is taxable in the estate of the Settlor]. The remainder beneficiary, of course, is the charity to whom the remainder is paid after the death of the last income beneficiary.


The tax benefits of a Charitable Remainder Trust (CRT) are significant. The donor is entitled to a gift tax and an income tax deduction for the year in which the gift is made. Further, any capital gains tax of appreciated property [such as common stock or real property] is avoided. This is a major reason to consider donating appreciated property to a charitable remainder trust; to avoid capital gains taxes on the appreciated property. As the trust principal generates income the trust is exempt from income tax; unless there is unrelated business income.


If one compares selling property subject to capital gains tax outright and utilizing the tax reduced proceeds to generate income, to gifting the property to a CRT which then sells the property free of capital gains and utilizes the entire proceeds to generate income, the advantage of gifting to a CRT becomes readily apparent. By gifting the property subject to capital gains tax to the trust, the donors receive income for life from that portion of the appreciated property that would have been otherwise taxed away if sold. There is no estate tax on the property in the trust because there is an estate tax charitable deduction available for property in a remainder trust. This is truly a case of having your cake and eating it too.


The present value of the gift to the trust must equal at least 10% of the fair market value.


The beauty of contributing to a Charitable Remainder Trust is that:

  • There is a charitable deduction on the estate tax for the grantor to the extent of the remainder interest which will pass to charity, valued under the government’s valuation tables. IRC 2055(e)(2)(A).
  • Gift tax charitable deduction to the extent of the remainder interest which will pass to charity, valued under the government’s valuation tables. IRC 2522(c)(2)(A)
  • There is no capital gains tax payable by you or the Charitable trust on property that has a capital gain in it. IRC 664(e)(3)
  • You receive an income tax deduction, equal to the remainder value or interest passing to charity of the transferred property (ie. stock or other property that has capital gain in it), against 30% of your adjusted gross income; if it is transferred to a “qualified charity”. The deduction can be used in year one and carried forward for five additional years, if the total value of the gifted property exceeded that year’s allowable deduction. The 30% limitation on deduction against your adjusted gross income applies to capital gain property given to a qualified charity. [Qualified charities refer to those charities listed by the IRS as qualifying as remainder beneficiaries for Charitable Remainder Trusts; these consist of what you would ordinarily imagine charities to be – churches, educational institutions, charitable agencies, etc]. If you give property that has no capital gain in it the income tax deduction would be against 50% of your adjusted gross income, equal to the remainder value of the item gifted. The income tax deduction itself is equal to the extent of the remainder interest which will pass to the charity, valued under the government’s valuation tables. IRC 170 (f)(2)(A).
  • Charitable Remainder Trust is exempt from Federal Income taxes, unless it has unrelated business taxable income. IRC 644(c)


The standard chain of events in setting up a Charitable Remainder Annuity Trust is:


(1) Settlors sign or execute the trust instrument;

(2) Settlor’s assign or transfer ownership of the property to be gifted to the Trust;

(3) Trustee sells the property gifted to the trust on the open market;

(4) Trustee purchases an annuity (using the proceeds generated by sale of the assets assigned to the trust) with the maximum payout to the income beneficiaries that keeps the principal of the annuity intact;

(5) Income beneficiaries receive regular payments from the insurance company that issued the annuity for life; to include any living persons named as successor income beneficiaries in the Trust.

(6) At death of last income beneficiary, the Trustee collects the proceeds of the annuity and delivers the trust corpus or principal to the designated charitable remainder beneficiary(ies). Trust is now terminated.


The difference with a Unitust is that the assets are revalued on an annual basis and using that revalued basis the percentage payout is made to the income beneficiaries.


No deduction is allowed to a taxpayer for a charitable contribution of $250 or more, unless the taxpayer receives from the charity a written acknowledgment from the charitable donee. Alternatively, this requirement is satisfied if the donee organization files a return with the IRS reporting the contribution.


The written acknowledgment must contain the following information:


  1. The amount of cash and a description, but not the value, of any property other than cash contributions;


  1. Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property contributed; and


  1. A description and good-faith estimate of the value of any goods or services provided to the donor, or, if the goods and services consist solely of intangible religious benefits, a statement to that effect.


The taxpayer must obtain the written acknowledgment on or before the earlier of: the date the taxpayer files a return for the tax year in which the contribution was made; or, the due date, including extensions, for filling the return. [IRC Sec. 170(f)(8)].

Irrevocable Life Insurance Trusts 

It consists of: Settlor; one who pays the premium on the life insurance policy, Trustee; administers the trust according to its terms and purchases life insurance policy on life of Settlor(s); demand/remainder beneficiaries; those who are named as beneficiaries in the instrument and who additionally have the right to demand of the trustee that the trustee pay to them their proportionate share of any funds donated to the trust.

These trusts are set up to purchase and own life insurance policies on the life of Settlor(s) so that the policy proceeds are not included in the estate of the Settlor. Many people are not aware that life insurance policy proceeds, even when payable to an heir or other third party, are often included in the estate of the named insured; whether or not the proceeds are payable to the estate. In fact, if the deceased held any “incidents of ownership” in the policy [such as the right to change beneficiary] then the value of the policy proceeds are subject to estate tax in the estate of the deceased; no matter who actually receives the policy proceeds.


For an existing life insurance policy assigned to the trust to be not included in the estate of a decedent, the Settlor must survive for three years after assigning the in force policy. If the Settlor dies within three years of assigning the ownership of an existing policy on Settlor’s life to the trust, then the proceeds of the policy are included in the estate of the Settlor. On all new life insurance policies purchased by the Irrevocable Life Insurance Trust there is no three year waiting period to avoid estate taxes, as they are immediately excludable from the estate of the insured. The Trust must own all incidents of ownership in the policies.


These trusts are called “Crummey” trusts after the name of an IRS tax case that established the right of a Settlor to give money to a trust [for the payment of insurance premiums on any policy owned by the Trust] and to claim for such gifted money the $14,000 annual gift tax exclusion, for each beneficiary in the trust.   The gift tax exclusion is utilized in order to avoid any gift taxes on the money donated to the trust to pay the insurance premium. For example, if there are three demand beneficiaries, then $42,000 could be given to the trust annually gift tax free [$84,000 if a spouse gave also].


The key feature of these Crummey trusts is that the beneficiary [ie, demand beneficiary] is given the right to demand that the Trustee pay to that beneficiary his or her proportionate share [measured according to the percentage share of the trust principal that will ultimately be paid to that particular beneficiary] of any funds donated by anybody to the trust. Because the demand beneficiary has the right to force the trustee to pay to the beneficiary his or her percentage share of the donated money, the courts have held that this is a “present gift” and therefore entitled to the $13,000 annual gift tax exclusion. (If the beneficiaries did not have this “demand” right they would receive no present benefit, because they would only receive benefits at the death of the Settlor. That being the case, any money given to the trust would not qualify for the gift tax annual exclusion).


Of course, the demand beneficiary does not have to exercise the right to receive property from the Trustee and in fact would be foolish to do so; because then the Trustee would not have the money to pay the premiums and the policy would lapse. Since the demand beneficiary will ultimately receive the death benefit, then it is clearly in the best interest of the demand beneficiary not to exercise the right to receive the money gifted to the trust. [However, if there are concerns that a particular demand beneficiary would demand the money now anyway; then the Settlor can restrict the gift to the trust stating that no demand right be given to that particular beneficiary(ies). Of course, the $14,000 annual gift tax exclusion could not be utilized for the particular beneficiary(ies) that this restriction applies to].


The tax advantage of setting up an Irrevocable Life Insurance Trust is that the insurance policy on the life of the Settlor(s) is not included in Settlor’s estate [as it would otherwise be] and thus passes estate and income tax free to the beneficiaries. These policies are often purchased to pay estate taxes of the Settlor (if any) and/or create a financial legacy for the named beneficiaries; free of any estate or income taxes. Last To Die policies of two spouses are cost effective and can create a large estate.


Used in conjunction with a Charitable Remainder Trust, Settlors can leave a significant sum of money to their favorite charity and still leave that same sum given to charity, or more, to their children; by means of the Irrevocable Life Insurance Trust – which names the children as the beneficiaries. The Settlors are heroes. They have funded their favorite charity(ies) and have not reduced any inheritance that would have otherwise gone to their children but for the gift to the charities. And last but not least, the Settlors have taken advantage of significant tax advantages while still alive (ie, current income tax deductions and avoidance of capital gains taxes) and have, in addition, avoided estate taxes on all sums in these trusts.

Either of these trusts used alone or especially together is a powerful estate planning tool to maximize resources available to the Settlors, the Settlors’ family and/or designated charities.