Planned Giving Tools

An estate plan is a very personalized document, which reflects your goals and designates the distribution of the assets which God has entrusted to you.

There are many tools available in the estate planning process. Depending on your situation, you may use one, several or all of these tools. Here is a brief description of some that you may use to accomplish your unique goals and objectives.

Directory:

Basic Planning Instruments
The Will
Revocable Living Trust
Durable Power of Attorney/Physician’s Directive
Life Insurance
Utilization of Trusts in Estate Planning

• Children’s Trust
• Bypass Trust
• Irrevocable Life Insurance Trust

Taxation and Charitable Trust Tools
Charitable Estate Planning Tools

• Income Taxes
• To avoid this IRD tax
• Outright Gift of Retirement Assets
• Charitable Gift Annuities
• Charitable Remainder Unitrust
• Testamentary Charitable Remainder Trust
• Testamentary Charitable Lead Trust

How To Get Started

Basic Planning Instruments

There are two primary instruments used for estate planning, a Will and a Revocable Living Trust. Both are discussed below.

The Will _______________________ Back to Top

The Will is the most basic part of every estate plan. By definition, it is a legal declaration of a person’s wishes regarding the disposal and distribution of his or her estate after death. The Will is the legal document, drafted during your lifetime, which addresses numerous issues:

• Final testimony of your Christian faith
• Property and asset distribution
• Naming an executor
• Naming a legal guardian for minors
• Reducing estate tax liability

• An attorney prepares the trust. It contains language to direct, exactly as you desire, the disbursement of funds at the death of the second spouse.
• Upon creation of the trust, ownership of all of your assets, except qualified retirement plans is generally transferred to the trust.
• A simple Will would be prepared for both spouses, which at death merely transfers any assets to the trust that were previously overlooked.
• For tax planning purposes, the Revocable Living Trust would also contain language to create a second trust called a Bypass Trust (see trust section). This trust would not be funded initially, but could be funded at the death of the first spouse to reduce future estate taxes.

Both spouses would serve as trustees of the Revocable Living Trust during their lifetimes, managing the estate. At the death of the first spouse, the surviving spouse would serve as sole trustee of the surviving Revocable Living Trust, and could also serve as personal representative of the estate.
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Durable Power of Attorney/Physician’s Directive

We recommend that you grant durable power of attorney for property management to a trusted individual. This will enable that individual to manage the assets in your estate should you become incapacitated before death. Secondly, we recommend that you grant durable power of attorney for health care decisions also to a trusted individual. This will enable that individual to make healthcare decisions for you should you become unable to do this on your own. Generally, married couples will name their spouses for both duties and an alternate in case the spouse is unable. In addition to the durable power of attorney for health care, many people wish to establish a physician’s directive, which sets forth directions for providing critical healthcare.

Life Insurance __________________ Back to Top

Life insurance can sometimes play a prominent role in estate planning. We at PhilanthroCorp do not in any way sell life insurance but we do encourage the consideration of strategic aspects that life insurance can have on your planning. Basically, there are three things you want to consider life insurance for.

• Protection of Dependants
  Routinely when you build an estate plan you will want to look at worse case scenarios. Typically you will want to ask yourself, if I were to leave my dependents tomorrow, is there enough financial protection for the surviving spouse, the children’s upbringing and education and to maintain their lifestyle?
• Liquidity in the Estate
  Often it is very important that before the estate is distributed there is significant liquidity in the estate for your wishes to be carried out. This is important should there be some taxes due from the estate because without the liquidity assets that you intended to remain intact might need to be sold to meet the tax requirements.
• Irrevocable Life Insurance Trust (ILIT)
  This is explained in more detail in the next section, but basically, an ILIT permits individuals to pull their life insurance out of their estate so the proceeds to heirs will not be taxable in their estate.

Utilization of Trusts in Estate Planning

Children’s Trust ___________________ Back to Top

It is critically important that the estate planning process addresses the needs of minor children, both in terms of their upbringing (guardianship) and in terms of financial requirements. Ensuring that all children are protected financially is usually accomplished through a children’s trust. To provide for a children’s trust, married couples will typically incorporate language into their will or RLT that states that, at the death of the second spouse, should their youngest child not have attained a certain age, that assets be held in trust for the protection of the children. By holding the funds collectively in trust in this manner, you can ensure that funds remain available to meet the needs of all of your children. Often, these trusts are structured so that the ultimate disbursement to your children is made in increments, as your children reach certain ages. In this manner, the trust can also have an added benefit of preventing children who have just reached the legal age of maturity (18), from receiving a significant inheritance all at once, as most young adults would not be able to manage these funds in a responsible manner.

Bypass Trust ___________________ Back to Top

Individuals can pass to heirs free of federal estate taxes $1.5 million this year (and legislation was enacted to increase this amount over the next six years). Married couples who plan their estates can double the amount that would pass to heirs, tax-free, by utilizing what is called a Bypass Trust.

To illustrate the benefit of the Bypass Trust, let’s assume an estate large enough to fully utilize the Bypass Trust at the death of the first spouse. Property is simply transferred to the trust equal to the amount offset by the federal estate tax credit ($1.5 million in 2004). The surviving spouse would be permitted to receive all or any portion of the income produced by the trust. In addition, an independent trustee would have the power to invade the corpus of the trust (withdraw principal), should this be required to maintain the standard of living of the surviving spouse. At the death of the second spouse, all trust assets would pass to beneficiaries free from estate tax, as they are not a part of the surviving spouse’s estate. Further, the estate of the surviving spouse would be entitled to its own estate tax credit, enabling $1.5 million (in the year 2004) to be distributed to heirs free of estate tax. Hence, by utilizing a Bypass Trust, both marriage partners can take advantage of the federal estate tax exemption of $1.5 million. By doing so, couples can protect $3 million from estate taxes in the year 2004.

Irrevocable Life Insurance Trust ___ Back to Top

The Irrevocable Life Insurance Trust (ILIT) can represent a dramatic means of transferring large sums of wealth to heirs. Generally, if life insurance is owned by the insured, the proceeds are included in his or her estate and are subject to estate tax. This is not a concern unless your estate is subject to estate taxes, but for larger estates, the ILIT presents an effective means of avoiding this problem.

In general, an ILIT would work as follows for a married couple:

• The Irrevocable Life Insurance Trust is first created and then funded by either transferring ownership of existing policies or by purchasing new policies. For new policies, the trustee applies for and becomes the owner of the new policies. In either case, both spouses could transfer assets to the trust to meet insurance premium requirements (which are treated as gifts to the trust beneficiaries). If cash is transferred to the trust and the trust buys insurance policies, the insurance proceeds are immediately sheltered form estate taxation. If, on the other hand, the settlor already owns existing insurance policies and transfers them to the ILIT, the settlor must survive for 3 years after putting the policies into the trust before the insurance proceeds escape estate taxation. For this reason, it is best to have the ILIT buy new policies whenever possible.
• The trustee notifies the beneficiaries that the gifts have been made and they have a right, called a Crummey Power, for a limited period of time to request that these new gifts be distributed immediately.
• If they do not exercise their right, the trustee uses the money to pay the life insurance premium(s).

By giving the beneficiaries the Crummey Power, the annual gifts of the premiums qualify as gifts of a present interest, thereby generally qualifying for the $11,000 annual gift tax exclusions. Under these circumstances the insurance proceeds, when paid to the trust and subsequently distributed to the heirs, will be sheltered from estate taxes. To be sure that the above works as intended, you would, of course, want to review the requirements and restrictions of the ILIT with your attorney before proceeding.

Taxation and Charitable Trust Tools _ Back to Top

Generally, we are concerned about two types of taxes in doing estate planning. The first is the federal estate tax and the second is income in respect of decedent (IRD) tax.

As we discussed earlier, presently, the exemption for federal estate tax is $1.5 million. This increases incrementally to a level of $3.5 million in the year 2009. After that, in the year 2010, the estate tax is repealed. However, the following year it is reinserted at the $1 million level, as the new legislature that increased these exemptions is subject to what is called a sunset provision. In other words, at the end of the ten years, unless Congress reinstates it, the old exemption would go into place. Therefore, for any long term planning, we suggest that all individuals plan conservatively and base planning assumptions on a $1 million exemption. Amounts beyond this exemption are subject to estate tax, at rates historically starting at 41% and increasing to a maximum of 55%.

Many items in your estate might be subject to IRD tax upon death. The most prominent of these types of assets would be tax deferred retirement assets. At death, these assets are taxed as ordinary income. There are various estate planning tools, particularly the charitable tools itemized below that will avoid this tax and bring considerable benefits to your heirs as well as charitable beneficiaries. To illustrate how heavily these assets can be taxed without planning, it should be noted that for somebody who has these assets and also has an estate that is taxable the combined impact of both the estate tax and the IRD tax can erode as much as 70% of the asset’s value through taxation.

Charitable Estate Planning Tools ___ Back to Top

There are several charitable tools available for individuals who have a heart for charity. These tools also can yield some dramatic tax advantages. They are described briefly below. Because of your interest in OCF, we hope you will consider providing a gift to this ministry. That decision, of course, should be based on a belief that it is God’s plan of stewardship for you and your estate.

“There were not needy persons among them. For from time to time those who owned lands or houses sold them, brought the money from the sales and put it at the apostles’ feet, at it was distributed to anyone as he had need.” – Acts 4:34-35

Income Taxes __________________ Back to Top

Certain estate assets carry with them adverse income tax implications to personal beneficiaries, which are in addition to any estate tax obligation. For estate planning purposes it is very important to identify these tax-encumbered items. These are summarized below:

• Tax deferred retirement funds, such as traditional IRAs (not Roth IRAs), 401(k)s and 403(b)s.
• Series EE and HH Savings Bonds (to the extent that income has not been reported annually).
• Stock options (those which have not expired at the time of death).
• Deferred income and other accrued but not realized income such as partnership income, royalties, etc.
• Accounts Receivable from a trade or business.

In the list above, the first item, tax deferred retirement accounts, deserves special consideration. This is because the ramifications of income tax on these accounts can be so significant. As you are probably aware, any withdrawals made during your lifetime from these accounts are taxed as ordinary income. Moreover, should death occur prior to the withdrawal of these accounts, any distribution to personal beneficiaries would be subject to an income in respect of decedent (IRD) tax. Basically, the funds would be taxed as ordinary income before distribution to your beneficiaries, with a deduction given for any estate taxes paid.

To avoid this IRD tax, the retirement assets, at the time of death, could be given outright to charity, distributed to charity in exchange for charitable Gift Annuities, or through a charitable remainder trust agreement. These threes are detailed below:

Outright Gift of Retirement Assets __ Back to Top

If retirement assets are given to a charity at the time of death of the surviving spouse, the IRD tax is eliminated, since the charitable organization is tax exempt. Further, because the retirement assets are gifted directly to charity a full estate tax deduction for the amount of the assets is obtained. In this arrangement, assets are distributed directly to charity instead of personal beneficiaries. To accomplish this you need just designate each other as primary beneficiaries on the accounts, and your charitable organizations as secondary beneficiaries.

Charitable Gift Annuities __________ Back to Top

Charitable Gift Annuities eliminate the IRD tax on the retirement assets and at the same time provide a benefit to heirs during their lifetimes. Here, instead of gifting the retirement assets directly to charity, the assets are transferred to the charitable organizations in exchange for Gift Annuities. These annuities then provide a source of income to personal beneficiaries for their lifetimes. The income paid is based on the size of the retirement assets, the number of personal beneficiaries, the age of each beneficiary, and current interest rates. It is important to note that while these Gift Annuities eliminate the IRD tax exposure associated with tax deferred retirement plans, it only removes a portion (not all) of the assets from the estate for federal estate tax purposes. Also, most charities that administer Gift Annuities set minimum gift thresholds of at least $10,000 per beneficiary.

Charitable Remainder Unitrust _____ Back to Top

A charitable remainder unitrust (CRUT) eliminates the IRD tax on retirement assets, removes a portion of the assets from the estate for federal estate tax purposes, and at the same time provides income for heirs. When retirement assets are used to fund a CRUT, the assets benefit personal beneficiaries for a term of one or two lives, or a specific term of years, and then the remainder of the assets passes to charity.

With a CRUT, the donor selects the payout percentage (5% or more) and a period of time for the unitrust to make distributions to personal beneficiaries. Actual payments would be determined by this payout percentage and the value of the assets in the trust. Many donors choose to pay the unitrust amount to family members for a period of time that would pay out an amount equal to the initial value of the property. For example, a trust, which pays 7% for fifteen years, will pay to family members income, which equals approximately the initial fair market value of the property. By this method the donor is able to double the total benefits from the property once to the family through income payments and once to the charities through distribution of the principal after all income payments are completed.

One advantage of the charitable remainder unitrust is that the amount remaining in the trust grows tax-free. For example, if a person selected a 6% payout trust and the trust investments earned 8%, there would be 2% growth tax-free each year. This tax-free growth could substantially increase the value of the trust over time and since the selected 6% payout is based on this value, distributions to personal beneficiaries would increase proportionally. The ability of the unitrust to increase both in principal and in income payments over a period of years is frequently referred to as an inflation hedge. However, please understand that this benefit does not come without risk. In the above example, if the growth in the trust falls short of the payout (6% in this instance), then income payments to beneficiaries would actually decline with time.

In accessing the utilization of CRUTs, we generally recommend that this option only be considered if at least $50,000 is available to fund this trust, as otherwise administrative expenses will likely negate much of the benefit.
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Testamentary Charitable Remainder Trust (TCRT)

To utilize a Testamentary Charitable Remainder Trust, assets at death, are transferred to a trust. The trust will pay out a set percent of the assets value to heirs for a period of years. The percent and duration would be determined in the estate documents with certain guidelines. At the conclusion of the time set to pay heirs, a designated charity would receive the remainder of the interest in the trust. The trust assets grow tax-free. The Testamentary Charitable Remainder Trust gives the estate an estate tax deduction on a portion of the assets that go into the trust. It also eliminates any IRD tax exposure from these assets.
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Testamentary Charitable Lead Trust (TCLT)

This works in much the same manner as the TCRT, and features the same tax advantages. Here, however, the charity would be paid a certain percentage of the assets for a number of years, and the remainder interest would go to the heirs. This is used more often on large estates where heirs do not have significant need for near term funds.

How To Get Started ______________ Back to Top

To get started and implement your estate plan, you could either use the guide we have furnished and work toward this on your own or utilize the services of PhilanthroCorp. If you decide you want to work this alone, you will probably want to reflect upon the tools illustrated in this guide, make a list of all of your property and then seek the counsel of a competent attorney. On the other hand, you could utilize the services of PhilanthroCorp. Our service is provided at no cost to you in most cases, courtesy of OCF in appreciation of the support you have given them.

Be assured that all information you provide PhilanthroCorp will be held in strictest confidence and there is no obligation to you. You have complete control over the distribution of your finances. Our only function is to provide you with sound Christian financial and spiritual counsel.

We would greatly appreciate the opportunity to serve you on behalf of Officers' Christian Fellowship. Please contact us at 800-876-7958 ext 2127 and ask for an appointment to be scheduled with one of our Estate Specialists or email (click here)