Mr. & Mrs. Benefactor create a foundation,
donate qualifying assets to it, and appoint a director.
Mr. & Mrs. Benefactor gift premiums to
irrevocable life insurance trust (ILIT). The ILIT purchases life insurance on Mr. & Mrs.
Benefactor's lives.
Tax savings from income or estate tax
deductions.
The foundation sells the assets and
reinvests the proceeds in income producing assets.
The foundation makes grants to the family's
favorite charities.
Death benefit helps replace value of
assets gifted to the foundation upon death of Mr. & Mrs. Benefactor.
Mr. and Mrs. Benefactor are philanthropically inclined. They would like to
support several different charitable organizations on an ongoing basis, but have only one or two
highly appreciated assets with which to fund their gifts. In order to make yearly contributions to
various organizations, they will have to liquidate the assets, but want to avoid the corresponding
capital gains tax liability. Any solution to this problem must avoid payment of capital gains
taxes on the sale of their assets, allow the reinvestment of the proceeds in income producing assets,
and permit the Benefactors' family to maintain control over their ongoing philanthropic activities.
To achieve their goals, Mr. and Mrs. Benefactor can establish either a private
or public foundation, fund it (preferably with highly appreciated assets), and install themselves or a
relative as the director of the foundation. The foundation may be funded through bequests or lifetime gifts.
The director will control the foundation's investments, and donate all or a portion of the foundation's
capital earnings to the charities the family wishes to support each year. The Benefactors create an ILIT,
sometimes called a wealth replacement trust, to replace the donated assets. Life insurance puchased by the
ILIT should pass income, estate and gift tax-free to Mr. and Mrs. Benefactor's heirs at their death.
Step 1: Mr. And Mrs. Benefactor establish a foundation (named, e.g., the
Benefactor Foundation), install a director, and transfer qualified appreciated asset to it (or make
bequests to be completed at death).
Step 2: The Benefactors generally receive income tax deductions for the
calculated value of their lifetime gifts to the foundation.
Step 3: Mr. and Mrs. Benefactor make gifts to their ILIT, which then purchases
life insurance on their lives for the benefit of their heirs. Any available income tax savings from
lifetime gifts can be used to help pay premiums.
Step 4: The Benefactor Foundation sells the donated asset(s) and purchases
income-producing investments with the proceeds.
Step 5: Each year, the Benefactor Foundation contributes all or a portion of its
capital earnings to the charitable organizations the Benefactor family wishes to support that year.
Step 6: Upon death, the life insurance policy proceeds will be paid to the ILIT.
The Benefactor' heirs, as beneficiaries of the trust, should receive the proceeds estate tax-free.
Federal income tax deductions for charitable contributions are complex, and vary
based on the asset donated, and the type of organization to which it is donated. Deductions for donations
made to a public foundation or charity are limited to 50% of the donor's adjusted gross income (AGI) for that
year. If the asset includes long-term capital gain, then the deduction is generally limited to 30% of AGI.
For contributions to most private foundations, deductions are restricted to 30% of AGI. This limit is
reduced to 20% for long-term capital gain. Any deduction that is rejected due to the 50%, 30% or 20%
limits can be carried over and deducted in each of the 5 years following the year of the gifts.
In addition to providing for ongoing philanthropic activity in their name,
The Benefactors generally should have received income tax deductions, removed the asset(s) donated
to the foundation from their taxable estate (thereby reducing their estate tax burden), and provided
estate tax-free wealth replacement for their heirs by purchasing life insurance, through an ILIT, with
the tax savings.
