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How Can I Benefit from
a Wealth Replacement Trust?
Charitable giving can be a
rewarding experience by allowing you to both give and receive. To enjoy the
benefits of charitable giving, you can utilize a variety of strategies.
The Basics of
Charitable Remainder Trusts
To establish a charitable
remainder trust, you transfer appreciated property to an irrevocable trust and
designate the charity of your choice as the beneficiary of the trust. The
property within the trust is then sold and reinvested to provide income. You
retain a lifetime interest in the income generated by the trust, and when the
trust expires at your death, the property within the trust is transferred to the
charitable organization.
You are entitled to a current income tax deduction for the charitable gift, subject to certain limits.
And because the property was sold within the charitable trust, you will not have
to pay tax on any capital gains. This enables the full value of your property to
be reinvested, which will increase the income generated by the trust. It also
enables the charity to receive a larger gift.
If you have heirs,
charitable remainder trusts have one major drawback: When the charitable trust
terminates, the property within the trust is transferred to the charitable
organization — rather than to family heirs. So while the charitable remainder
trust offers many benefits, this strategy can effectively disinherit your heirs.
Replacing Gifted Assets
One effective solution to
this situation is the wealth replacement trust.
To create a wealth
replacement trust, you use a portion of the income from a charitable remainder
trust to buy a life insurance policy.
You decide how much of the
charitable gift to replace. You can buy enough insurance to replace only a
portion of the property that will eventually pass to charity, or you may prefer
to replace all of the property within the charitable remainder trust.
The wealth replacement
trust is often designed so that upon the death of the second spouse, the death
benefit of the life insurance policy goes to your heirs. These funds replace the
property that passes to the charity from the charitable remainder trust.
And because the life
insurance policy is owned by the trust, the proceeds of the policy will
generally not be subject to estate taxes at either death.
An Appropriate
Strategy?
If this strategy sounds
interesting to you, there are a variety of considerations. The cost and
availability of life insurance depend on factors such as age, health, and the
type and amount of insurance. Before implementing this strategy, it would be
prudent to have the policy approved. In addition, you should seek professional
advice from an attorney before establishing such a trust. In many cases, the
wealth replacement trust is an appropriate way to preserve family wealth.
© 2003 Emerald Publications
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