Have you ever considered making a major gift to a non-profit organization/charity, but didn't want to tie up your assets or disinherit your family? You could always structure your will so your assets go to your college, a favorite charity, your religious institution, or the local non-profit of your choice. The problem here is two-fold: your heirs lose out, and you give up huge potential tax deductions._[1]

There is a solution—two, in fact—and most charitable or non-profit recipients will be glad to help you implement one of them.

The solutions involve setting up either a Charitable Remainder Annuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT). Each has certain tax advantages and a few limitations to consider. In either case your heirs still lose your assets, so if that is not your wish, you can still get the tax deductions and benefit your heirs with a potentially tax-free inheritance by replacing the trust assets with life insurance held in an irrevocable life insurance trust (ILIT).

When you decide to leave assets to a non-profit/charitable organization, the most common means is via a CRAT or CRUT. In simplest terms, a CRAT is a trust holding your assets and paying you a fixed income stream. A major downside is that the amount you can receive is set once you receive the first payment. However, if you have other income this may not be a concern, and the trade-off of a guaranteed payment and a nice tax deduction may be more than sufficient for your purposes. The remainder passes to the charity at your death.

If you want flexibility in the amount and timing of your income stream, you may want to consider the CRUT instead. You are not locked into a set monthly, quarterly, or similar payment, although there are limits as to how much you can withdraw in a given time period. Again, the remainder passes to the charity at your death.

Once your money has been placed in the CRUT or CRAT, it is almost always gone. Although you receive income, the money now belongs to the designated charity. It may be possible to change the ultimate recipient, but the trust is probably not revocable.

So, how do you take advantage of the tax breaks for charitable contributions and not disinherit your family? Consider replacing the dollar amount that went into the charitable remainder trust with a life insurance policy with a face amount equal to the amount you put into the trust, and placing the policy into an ILIT. This should ensure that your heirs get their share of your estate and, in most cases, without taxation. And, you can use the income from the CRUT or CRAT to pay the premiums, meanwhile getting a nice tax break!

Charitable remainder trusts (CRATs and CRUTs) and ILITs are rather sophisticated planning tools. If you are considering making a large charitable gift, make sure you work closely with an insurance professional as well as an attorney and tax professional. Irrevocable trusts are not for everyone!

1. Note—this information is only a guide—you must talk to both a legal and a tax professional before implementing any trusts or tax-planning strategies.

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