A Role for Life Insurance…The Wealth Replacement Trust

The Problem:

Through a charitable remainder trust (or charitable gift annuity), a charitably-minded person can realize certain income and estate tax objectives, while ultimately providing assets to a favorite charity. In doing so, however, the donor's family will be deprived of those assets that they might otherwise have received.

A Potential Life Insurance Solution:

In order to replace the value of the assets transferred to a charitable remainder trust (or charitable gift annuity), the donor establishes a second trust - an irrevocable life insurance trust - and the trustee acquires life insurance on the donor's life in an amount equal to the value transferred to the charitable remainder trust or charitable gift annuity. Using the charitable deduction income tax savings and the annual cash flow from the remainder trust or gift annuity, the donor makes gifts to the irrevocable life insurance trust that are then used to pay the life insurance policy premiums. At the donor's death, the life insurance proceeds generally pass to the donor's heirs free of income tax and estate tax, replacing the assets that then belong to the charity.