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What is a charitable bailout?

Trying to decide how to leave your company to your children? One option to consider may be the "charitable bailout," which is a creative way to transfer ownership and help save on taxes.

The way it works is that you create a charitable remainder trust, and you put your entire company into that trust. This trust then takes the income and pays it out to your heirs, who you designate as beneficiaries.

While they're alive, they get these payouts and the financial support they need from the company, even though it is technically owned by the trust. When they pass away and no longer need that income, everything that is left goes to charity.

Your children can also take out a life insurance policy in your name. When you pass away, this creates another asset. The policy pays out directly to your children. They turn around and use that money to purchase the business. They buy it back from the trust.

The benefit here is that you can avoid some of the inherent tax burden, and you can also pass the company on to your heirs in a roundabout manner. You get to plan for all of this long before you pass away, but the setup -- with the life insurance policy -- means the whole plan doesn't kick into action until after your death.

This is just one way to transfer a business, but it shows how it sometimes pays to be creative and to think outside of the box. Make sure you carefully consider all of the estate planning options you have.

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