Wealth Replacement Trusts

Charitable giving is a great way to give and receive assets. When combining a Charitable Remainder Trust with a Wealth Replacement Trust, there are many benefits for the donor and his beneficiaries.

The Basics Of Charitable Remainder And Wealth Remainder Trusts

When setting up a Charitable Remainder Trust, appreciated property is transferred to an irrevocable trust and a charity is named to be the beneficiary of the trust. The property in the trust is then sold and reinvested to provide income. You as donor retain a lifetime interest in the income generated by the trust. When the trust ends at your death, the property in the trust is transferred to the charity. You receive a current income tax deduction for the charitable gift. Additionally, you do not have to pay tax on any capital gains, because the property was sold within the charitable trust. In this way, you can reinvest the full value of your property, which maximizes the income generated by the trust. It also gives the charity a larger gift. One of the drawbacks to using a Charitable Remainder Trust is that when the trust ends, the property is transferred to the charity and not to your family.

Replacing The Gifted Assets

An effective way to replace the gifted assets is to add a Wealth Replacement Trust, when setting up a Charitable Remainder Trust. A Wealth Replacement Trust is a special type of Irrevocable Life Insurance Trust (ILIT) that creates tax-free life insurance dollars. These assets provide for the benefit of your beneficiaries and will replace the assets that you gave to charity with the Charitable Remainder Trust. To set up a Wealth Replacement Trust, a portion of the income from a Charitable Remainder Trust is used to buy the life insurance policy to replace that portion of the property that will eventually pass to charity. If you prefer, you can purchase enough insurance to replace all of the property within the Charitable Remainder Trust.

At death, the insurance policy proceeds will replace the assets that were given to charity through the Charitable Remainder Trust. The Wealth Replacement Trust proceeds are then distributed to your family beneficiaries tax-free, so there are no estate taxes or probate costs. In this way the use of a Charitable Remainder Trust combined with a Wealth Replacement Trust can provide for the donor, his heirs, as well as the charitable beneficiaries.

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