Making Gifts While Providing for Inheritances

Making a Temporary Gift

Did you know there is a way to make a charitable gift using funds that will eventually be returned to you or your loved ones?  Remarkably, such a plan exists. A charitable lead trust can be used to achieve what might at first seem to be conflicting goals. Consider the benefits of a charitable lead trust:

  • You can provide a regular source of gifts to Junior Achievement that will begin immediately and continue for as long as you wish.
  • Such a gift can serve to reduce or eliminate income, estate, and gift taxes now and in future years as well.
  • Your gift can be part of a plan that helps assure future economic security for you and your loved ones.
  • You may be able to provide your heirs with a larger inheritance than would otherwise be possible.

There are other gift plans that feature annual income for you or others you choose. Under such plans, when income ceases, any remaining funds are transferred to Junior Achievement. Under the terms of a charitable lead trust, however, the charity receives its gift in the form of payments from the trust that begin immediately and last for a period of time you determine. At the end of that time period, assets remaining in the trust are returned to you or other loved ones you designate. One result can be to provide an inheritance for loved ones at little or no after-tax cost.

As you can see, the charitable lead trust can be an especially attractive way to meet multiple personal and charitable planning goals.

For example: Richard and Mary would eventually like to leave $500,000 to their teenage children. They have been told by their advisors that they will have to leave a much larger amount to their children for them to realize $500,000 after estate taxes. As an alternative to a gift to their children through their estates, Richard and Mary decide to fund a charitable lead trust for $500,000 to benefit Junior Achievement. The trust will make payments for charitable purposes each year equal to 7% of the amount used to fund the trust, or $35,000. The couple will not owe income tax on the earnings of the trust, as they are devoted to charitable use. The payment amount will be fixed and will not change over the term of the trust, which they decide will be 20 years.

At the end of the 20-year period, after charitable gifts totaling $700,000 to Junior Achievement have been made, Richard and Mary’s children will receive $500,000, or whatever other amount remains in the trust, at a time in life when they may be more responsible and have greater need. Because of the charitable gifts to be made from the trust over time, little or no estate or gift tax will be due when funds are placed in the trust. Even if the assets in the trust grow in value during the term of the trust, there will be no additional gift or estate tax due when the children receive the funds.

To summarize, Richard and Mary have:

  • Made a wonderful gift to Junior Achievement
  • Provided for a significant inheritance for their children at a time when they have reached maturity
  • Greatly reduced or eliminated gift and estate taxes that would otherwise be due on the $500,000 originally placed in the trust, along with the amount of any growth that occurs in the assets over time
  • Avoided taxes on the income from the property used to fund the trust that they would have otherwise paid during the period the trust is in existence.

Replacing Gifts With Life Insurance

Life insurance can be used in many ways to help you make charitable gifts more effectively. One example is the use of life insurance to “replace” funds in your estate that have been devoted to charitable use. The life insurance policy proceeds thus serve to provide an inheritance for heirs that might not otherwise be available.

For example, you might use the tax savings and all or a portion of the income generated by a charitable remainder trust or other gift plan to purchase life insurance benefiting your heirs. That way, your charitable interests receive the gift you intend, while your heirs enjoy their inheritance—often at little cost to you or your heirs. Check with your life insurance professional or other advisors for additional information regarding this option.