The rules of financial health are simple, but remarkably hard to follow. Be frugal in order to save, use your savings to buy the whole market not parts of it, if this system ain't broke, don't fix it. And don't underestimate your longevity.
It's complicated: a CRUT in a FF, administered by a DAF, and purchasing life insurance in an ILIT.
Life insurance escapes estate tax, but only when owned by an irrevocable life insurance trust. The amount of life insurance is limited by the money available for premiums in the family foundation, extended by virtual gifts (ie Crummey). One alternative exists to use a public charity instead of a family foundation, which increases the limits of the charitable remainder trust (CRUT) from 30% of annual gross adjusted income to 50%. However, control of the resultant charity passes to the public charity from the trustees of the family foundation. (In some families, that may not be important.) Generally speaking, the family foundation approaches shelters at most approximately a million dollars of the estate, while the public charity might shelter twice that. I am not clear whether the use of one precludes the other, or whether they can be added together. The basic point is that this estate tax shelter is mainly limited by the size of current income; whereas that income can be tailored by shifting assets to and from the non-income-producing property, there is created tension between income tax on extra income and estate tax consequences. Because of partisan political disputes, the size of future offsets is presently uncertain. The distinction between present asset value and future value must be remembered, but can be calculated if income and estate tax rates are guessed at. Finally, there is added inflation risk because insurance tends to convert equity value into a fixed-income asset. At its root, this complicated approach attempts to combine the tax exemptions of charity gifts with the tax exemptions of ILITs.
The complexity can be reduced somewhat by turning over the administration and investing of a family foundation -- to a donor-advised fund, as run by Fidelity and Vanguard, but also by the American Friends Service Committee, who may have originated the idea. The AFSC may be appealing to those donors who foresee waning future interest in charity within their own family, but who trust this institutional surrogate to turn charity decisions from donor-advised into donor's surrogate-directed, once family interest fades.
Originally published: Tuesday, December 26, 2006; most-recently modified: Thursday, May 16, 2019