Insurance Curator High–net‑worth donors and their advisors frequently evaluate Charitable Remainder Trusts (CRTs) and insurance‑based charitable gifts when designing wealth‑transfer and tax‑efficient philanthropic plans. This article compares the two approaches from the standpoint of income‑tax deductions, capital‑gains treatment, estate‑tax outcomes, liquidity/costs, and practical implementation — with specific, U.S.‑focused guidance and real‑world pricing context.
Quick summary (what high‑net‑worth donors need to know)
- A CRT converts appreciated assets into an income stream while delivering a charitable remainder and an immediate partial income‑tax deduction (present value of the remainder).
- Gifting life insurance — by naming a charity beneficiary, donating a policy outright, or funding an insurance policy inside an irrevocable trust (ILIT) — can be simpler, often cheaper to maintain, and powerful for estate‑tax planning, but it delivers different timing and magnitude of income‑tax deductions.
- For donors concerned about capital gains deferral and current income flow, CRTs typically win. For donors prioritizing a guaranteed large charitable gift at death and estate‑tax removal of death proceeds, insurance (owned outside the estate or in an ILIT) is frequently preferable.
How the vehicles work (brief)
- Charitable Remainder Trust (CRT): Donor transfers assets to an irrevocable trust that pays an income interest (annuity or unitrust) to one or more noncharitable beneficiaries for life or a term of years. The remainder passes to one or more charities. The donor (or donor’s estate) receives a current charitable deduction equal to the present value of the remainder interest, computed using IRS actuarial (Section 7520) rates.
- Insurance Gift: Options include (a) naming a charity as beneficiary (no immediate deduction if only named), (b) transferring ownership of an existing policy to charity (deduction generally equal to cash‑surrender value or replacement value rules), or (c) buying a policy owned by an ILIT for the benefit of heirs while naming charities as beneficiaries of other policies — structures vary and affect current deductions and estate inclusion.
Income‑tax implications: deductions and capital gains
Charitable Remainder Trusts
- Immediate charitable deduction: Donor receives a current itemized charitable deduction equal to the present value of the remainder interest (calculated using IRS Section 7520 rates). The deduction is limited by AGI rules depending on the property donated and trust type; excess deduction may be carried forward subject to standard limitations.
- Capital gains: When appreciated property funds a CRT, the trust can sell the asset without immediate recognition of capital gain at the donor level. The trust pays tax on gains as it recognizes income, but the donor generally avoids immediate capital‑gains tax and benefits from diversification and reinvestment inside the trust.
- Best for donors who want current income, capital‑gains mitigation, and a measurable current deduction.
Sources: IRS Charitable Remainder Trusts overview (IRS) and practical guides (Nolo).
- IRS: https://www.irs.gov/charities-non-profits/charitable-remainder-trusts
- Nolo: https://www.nolo.com/legal-encyclopedia/charitable-remainder-trusts-29635.html
Insurance Gifts (policy donation or beneficiary designation)
- Immediate deduction (policy gift): If you donate an existing life insurance policy to a public charity (you transfer ownership and beneficiary), your deduction generally equals the policy’s fair market or replacement value or the interpolated terminal reserve — rules are technical and depend on whether the charity is a qualified organization and the policy funding method.
- Naming charity as beneficiary only: No current income‑tax deduction. The charitable benefit occurs at death when proceeds pass to the charity tax‑free.
- Capital gains: Not relevant for life insurance (there’s no recognition of capital gain on death proceeds). If you fund the charitable gift by selling appreciated assets to buy insurance, you may trigger capital gains at sale.
- Insurance gifts are ideal when you want a predictable death‑time gift without using appreciated assets to create taxable events today.
Key federal tax figures to keep in mind (U.S., 2024 rules)
- Federal top long‑term capital‑gains tax: 20% plus the 3.8% Net Investment Income Tax for many high‑income donors = 23.8%.
- Federal estate‑tax top rate: 40%; basic exclusion (2024): $13.61 million per individual. (Check current year IRS figures for indexing updates.)
Source: IRS Estate Tax page — https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
Estate‑tax treatment and estate‑inclusion risk
- CRTs remove the remainder interest from the donor’s estate once properly structured and funded; the trust is irrevocable and the remainder is defined as charitable, which reduces the taxable estate.
- Life insurance proceeds are includible in the decedent’s gross estate if the insured retained incidents of ownership or transferred the policy within three years of death (IRC §2035 look‑back). To exclude a policy from the estate, most HNW planners use an ILIT (Irrevocable Life Insurance Trust) where the insured does not retain ownership or control.
- Donor who gifts policy ownership to a public charity more than three years before death generally avoids estate inclusion and receives a charitable deduction at transfer, subject to valuation rules.
Costs, liquidity, and operational differences
- CRTs:
- Setup and ongoing trustee/accounting/legal costs; typical initial legal/tax setup fees can range from $5,000 to $25,000+ depending on complexity and law‑firm pricing in major markets (e.g., New York City, San Francisco, Houston).
- Investment management and trustee fees (commonly 0.5%–1.5% of trust assets).
- Useful when funding with appreciated securities or real estate to avoid immediate taxes and to create income.
- Insurance Gifts:
- Premiums for permanent policies are significantly higher than term. Sample market pricing (illustrative ranges from recent industry quote aggregators):
- Term life (20‑year), $1 million face amount — a healthy 45‑year‑old male: roughly $70–$150/month depending on carrier and underwriting (sources: Policygenius quoting ranges).
- Permanent (universal/whole) life, $1 million face amount — a 55‑year‑old healthy male: first‑year outlay can be $10,000–$40,000 (premium patterns vary substantially by product and medical classification).
- Carriers commonly used by HNW donors include New York Life, Northwestern Mutual, MassMutual (Haven Life for term retail distribution), and Guardian. Pricing varies by underwriting class and product design.
- Source for market cost context: Policygenius life‑insurance cost guide — https://www.policygenius.com/life-insurance/how-much-life-insurance-costs/
- Premiums for permanent policies are significantly higher than term. Sample market pricing (illustrative ranges from recent industry quote aggregators):
Be explicit with advisors about policy illustrations, guaranteed vs non‑guaranteed elements (especially for indexed/universal products), and how lapses or loans affect charitable outcomes.
Comparative table: CRT vs Insurance Gift (policy donation / ILIT / beneficiary)
| Feature | Charitable Remainder Trust (CRT) | Insurance Gift (policy donation / ILIT / beneficiary) |
|---|---|---|
| Immediate income‑tax deduction | Yes — present value of remainder using Section 7520 | Yes if policy donated; No if charity only named as beneficiary |
| Capital gains treatment | Defers/avoids immediate capital gains on gifted appreciated assets | No capital‑gains benefit unless you transfer appreciated asset to fund premiums (then gains likely recognized on sale) |
| Estate‑tax reduction | Remainder removed from estate (irrevocable trust) | Proceeds excluded if policy owned by ILIT or donated >3 years prior; included if incidents of ownership retained |
| Timing of charitable benefit | Remainder at trust termination (after payout term/decay) | Typically at insured’s death (unless charity owns policy outright earlier) |
| Liquidity & income | Produces income stream to donor/beneficiaries | No income stream (unless policy is sold for value or structured with living benefits) |
| Setup & annual costs | Legal, trustee, tax prep; moderate ongoing fees | Premiums (ongoing), medical underwriting; lower legal setup if simple beneficiary designation |
| Best use case | Turn appreciated, illiquid assets into income and charitable remainder | Guarantee a large future gift at death; remove insurance proceeds from estate; efficient leverage of small premium to large charitable gift |
Practical planning tips for U.S. HNW donors
- If your goal is current cash‑flow plus capital‑gains mitigation while still supporting charity, a CRT funded with appreciated securities or real estate is often optimal.
- If your goal is a large, predictable ultimate charitable gift and estate‑tax reduction with minimal annual maintenance, consider insurance in an ILIT or donating a policy to the charity (mind the three‑year look‑back for transfers).
- Coordinate timing with Section 7520 rates and life expectancy assumptions — the size of the immediate charitable deduction for a CRT depends materially on the IRS interest rate published monthly.
- Get firm premium quotes from carriers used by HNW clients (e.g., New York Life, Northwestern Mutual, MassMutual) and compare term vs permanent illustrations. Use independent aggregators like Policygenius for market context and then secure carrier illustrations for guaranteed vs non‑guaranteed elements.
Internal resources that deepen this cluster (recommended next reads)
- Amplifying Philanthropy: Using Life Insurance with CLTs and CRTs for HNW Charitable Goals
- Designing Insurance-Backed Charitable Plans to Maximize Deductions and Preserve Family Wealth
- Using ILITs and CRTs Together: Structuring Insurance to Deliver Both Charity and Heir Benefits
Final considerations
Selecting between a CRT and an insurance‑based charitable gift requires modeling:
- the current‑year income‑tax deduction,
- the net present value of future charity and heirs’ benefits,
- projected Section 7520 rates, and
- insurance premium economics for the donor’s age and health.
Work with a team (estate attorney, tax CPA, and a life‑insurance advisor) to obtain carrier illustrations, trustee fee estimates, and an actuarial remainder calculation for CRTs. For estate planning based in major U.S. markets (e.g., New York City, Los Angeles, Chicago, Houston), law‑firm setup fees and carrier underwriting lead times should be included in the planning calendar.