Understanding Charitable Life Insurance Trusts

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1 Understanding Charitable Life Insurance Trusts

2 Understanding Charitable Life Insurance Trusts DISCUSSION TOPICS What is a Charitable Life Insurance Trust? How Does a Charitable Life Insurance Trust Work? What Happens When I Die? What are the Benefits of a Revocable Trust? INVEST Trust Services A Charitable Life Insurance Trust is an excellent estate-planning tool to divest yourself of life insurance policies that are no longer needed for wealth replacement protection and strategies; or, due to the ownership registration of them, expose your estate to the federal estate tax liability. What is a Charitable Life Insurance Trust? A Charitable Life Insurance Trust (CLIT) is an irrevocable tax-exempt trust with a charitable organization as the ultimate beneficiary. The Trust is the owner and beneficiary of life insurance policy or policies, usually on the lives of the individuals (donors) establishing the CLIT. Although it is generally assumed that life insurance death benefits are free from federal estate tax liability, the reality is that these proceeds are included in the policy owner s estate (said to be the Incidents of Ownership of the policy), and therefore may be subject to federal estate tax considerations. Since the Charitable Life Insurance Trust (and not you as the donor and insurable interest on the life insurance policy) owns the policy, the insurance proceeds will not be included in your federal gross estate. A Charitable Life Insurance Trust is an excellent estate-planning tool to divest yourself of life insurance policies that are no longer needed for wealth replacement protection and strategies; or, due to the ownership registration of them, expose your estate to the federal estate tax liability. You can establish a Charitable Life Insurance Trust by either donating existing life insurance policies to the Trust or by donating cash to the Trust and having the trustee apply for the insurance on your insurable life. In either case, you will be allowed to take an immediate income tax deduction in the year that you make the gift to the Trust. If you donate existing life insurance policies, your income tax deduction will be calculated on a special internal value (the interpolated value ) of the life insurance contract. The insurance company will calculate this for you. If you donate cash, you may take an immediate tax deduction on your itemized deduction tax form for the actual cash amount donated. Two forms of Life insurance contracts are typically donated: Whole Life and Universal Life Insurance policies.

3 How Does a Charitable Life Insurance Trust Work? Donating an Existing Life Insurance Policy INVEST Trust Services can provide professional administration for all of your assets in your Charitable Life Insurance Trust. You will need an estate planning attorney to draft a trust agreement. In the trust agreement, you will name an IRS qualified non-profit organization as the Trust beneficiary. Once you have established the Charitable Life Insurance Trust, you will irrevocably transfer the incidents of ownership of the life insurance policy by changing the ownership registration of the life insurance contract. You will need to obtain a Change of Ownership form from the insurance company. The change of ownership form will direct that the policy should be registered in the name of the Trust. By signing this form, you agree to allow the change of ownership to occur on the policy. Once submitted and accepted by the insurance company and placed into your Charitable Life Insurance Trust, you cannot request any ownership changes of the policy, including a re-registration in your name. Once the policy is placed into the Charitable Life Insurance Trust, the Trust owns and holds the policy. The trustee of the Trust will complete a Change of Beneficiary form that is obtained from the insurance company. The Trustee will direct in this form and name the Trust as the beneficiary of the life insurance policy. If the life insurance policy is not a paid up policy, an annual premium will be due to the insurance company by the Trust. Each year before the annual premium payment is due, you will make a charitable cash contribution to the Trust equal to the premium payment. The trustee will now have sufficient Trust assets to pay the life insurance contract s annual premium. At the time of your death, the Trust as beneficiary of the policy will receive the death benefit proceeds of the life insurance contract. The non-profit organization will then receive the benefits of the Trust.

4 How Does a Charitable Life Insurance Trust Work? Donating a New Life Insurance Policy The insurance company will approve the policy application and issue the new policy. The Trust will now own and hold the policy. After you have established the Charitable Life Insurance Trust, the trustee will apply for a life insurance contract on your insurable life. In the life insurance contract application, you will agree to allow the policy to be issued on your insurable life. The insurance company will approve the policy application and issue the new policy. The Trust will now own and hold the policy. When the life insurance company issues the new policy, an immediate policy payment is required. You may make an immediate cash donation to the Trust equal to the immediate premium due and in this regard provide the trustee with sufficient assets to pay the policy premium. This charitable cash contribution to the Trust can be sufficient to allow the life insurance contract to be completely paid up and no further premium notices will occur; or it can be sufficient to pay the first month, quarter, semi-annual, or annual premium. In this regard, in order to keep the life insurance contract in force, you will need to make additional cash contributions prior to the premium s due date. A Charitable Life Insurance Trust is an excellent estate-planning tool to divest yourself of life insurance policies that are no longer needed for wealth replacement protection and strategies; or, due to the ownership registration of them, expose your estate to the federal estate tax liability In either case, policies that are not paid up policies require an annual contribution to the Trust in order to keep the life insurance contract in force so that the Charitable Life Insurance Trust can receive the death benefits of the insurance police at the time of your death. It may be best to consider the utilization of paid up life insurance policies so that in the event of your inability to make annual cash contributions (lack of funds or mental incapacitation), the policy does not lapse.

5 What Happens When I Die? The ultimate goal of any charitable trust is to provide a financial benefit for charitable organizations and purposes. However, there are a number of ways that a Charitable Life Insurance Trust can accomplish the goal. While the Trust is irrevocable and it is not possible to change the charitable beneficiary after your death, most Charitable Life Insurance Trusts do provide a limited power of appointment to you during your life to change the actual non-profit beneficiary of the Trust. So should your charitable goals or desires change during your lifetime, you do have the flexibility to amend the Trust in order for it to more accurately meet you charitable goals. In the Charitable Life Insurance Trust agreement, you can provide the trustee with terms and conditions as to when and how the Trust assets will be distributed to the non-profit organization after the Trust receives the death benefit proceeds from the life insurance contract. However, the terms and conditions cannot benefit you or your loved ones in any way. The terms and conditions must also be reasonable and legal and the terms and conditions cannot impose improper restrictions on how the non-profit organization can use the distributions from the Trust. Since the death benefit proceeds from the insurance contract go to the trusts for the benefit of a non-profit organization and not your loved ones, many individuals incorporate the estate planning strategy of also creating an Irrevocable Life Insurance Trust, (see Irrevocable Life Insurance Trust brochure), or an ILIT as an estate planning strategy for their loved ones. You may wish to consider that the distribution from the Trust fund a specific scholarship fund or endowment fund that the non-profit organization is willing to set up and operate with the funds received from your Trust. In this regard, your gift can be used for a very special purpose or class of individuals that you and the non-profit agree to support through the scholarship fund or endowment fund. Most often, the non-profit organization will name the scholarship fund or endowment fund in your name. This allows you to leave a legacy for the charitable support of your goals. In the Charitable Life Insurance Trust agreement, you can provide the trustee with terms and conditions as to when and how the Trust assets will be distributed. Another means of assuring that your charitable goals are met after your death is to establish a Donor Advised Fund with a non-profit organization and have the Trust proceeds fund the Donor Advised Fund. Many non-profit organizations will allow you to appoint a Donor Advised Fund committee to make the grant distributions to the non-profit organizations. Many non-profit organizations allow your family members or close personal friends to be members of the Donor Advised Fund Committee. Your family members usually understand best your charitable goals. This is another excellent way to leave a legacy for your charitable goals.

6 Benefits of a Charitable Life Trust By changing the ownership of the life insurance contract to the Charitable Life Insurance Trust, the death benefit proceeds will avoid federal estate tax liabilities. Initial and subsequent gifts to the Trust may qualify for an immediate income tax deduction. Premium payments on the life insurance contract usually result in your ability to make a much larger gift to your favorite charity. INVEST Trust Services offers a complete suite of trust services. INVEST Trust Services is a Trust Representative Office of National Advisors Trust Company, NATC. The Trust Company is one of the largest independent trust companies in the nation. It is governed by the Office of Thrift Supervision, ( OTS ), a bureau of the U.S. Treasury Department. The Trust Company is also a member of the Federal Deposit Insurance Corporation ( FDIC ). By law, the Trust Company segregates all trust account assets from the capital assets of the Trust Company, ensuring they are never subject to potential creditor claims against the Trust Company. The Trust Company has a professional team of experienced trust executives that will serve all of your trust needs. Please contact your Trust Relationship Manager at INVEST Trust Services for more information. This information is general in nature and should not be construed as tax or legal advice. INVEST Trust Services does not provide tax or legal advice. Please consult your tax and/or legal adviser for guidance on your particular situation. Personal Trust Services Revocable Trusts Charitable Trusts Irrevocable Life Insurance Trusts Special Needs Trusts Irrevocable Trust transfers from other Corporate Trustees Marital Deduction Trusts Credit Shelter Trusts Bill Payment Accounts Investment Management accounts Retirement Plan Services IRAs Custodian or Trustee Defined Benefit Plans 401(k) Daily Valuation Platform Defined Contribution Plans Roth 401(k) Distribution processing and 1099R filings Contribution processing INVEST Trust Services is provided by INVEST Financial Corporation (INVEST), member FINRA/SIPC. INVEST is not affiliated with NATC or FiPar. Products offered through INVEST are: Not FDIC or NCUA insured Not Bank or Credit Union Guaranteed May lose value including loss of principal. 11bi

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