Preserve Your Assets Through a Wealth Replacement Trust

Madeline, a 65-year-old widow, would like to make a major charitable gift, but she cannot afford to reduce her income. Moreover, she does not want to deprive her son, Henry, of his inheritance, especially because a childhood accident left him unemployable.

After a thorough review of her circumstances with a respected advisor, Madeline creates two trusts: The first is a charitable remainder trust; the second is an irrevocable life insurance trust. Each is in the amount of $250,000.

The first trust will pay Madeline an annuity of $17,500 each year for life (7 percent of $250,000). She funds the trust with stock she owns that currently yields an annual dividend of only $5,000 (a 2 percent yield). After her lifetime, the remaining trust principal will be paid to your favorite charitable organizations.

To fund the second trust, Madeline gives cash to the trustee, who purchases insurance on her life totaling $250,000. At her death, the trustee will collect the proceeds, invest them and use the income and principal to support Henry. Each year, Madeline will give enough money to the trust to cover the premium. To qualify for the annual exclusion gift amount ($12,000 in 2006), she gives Henry the right to withdraw each year's addition to the trust, although he does not intend to do so. (This power may not be limited by oral or written agreement.)

Your Cup Runneth Over
This plan enables Madeline to achieve all of her financial and philanthropic goals. She preserves assets to care for her son and assures a major charitable donation to charitable nonprofits. She is entitled to a substantial income tax deduction. The anticipated tax savings offset the premium on the new insurance policy. She avoids both gift and estate taxes on the assets of both trusts, and she increases her income by $12,500 a year.

You, too, may reap such benefits from a wealth replacement strategy, and you also will benefit from the personal satisfaction of making a gift to a worthwhile cause.

Please contact Mary Ludwig, Development Director at 712-732-5127, for more information.

The information on this site is not intended as legal, tax or investment advice. For such advice, please consult an attorney, tax professional or investment professional.

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