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.

Madeline's Plan in Summary
Trust Number Size Asset Current
Beneficiary After
Madeline's Lifetime
One $250,000 Stock Madeline Gustavus Adolphus College
Two $250,000 Insurance NA Henry

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 Gustavus Adolphus College.

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 ($13,000 in 2010), 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 Gustavus. 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 Jackie Peterson at 507-933-7543, or via e-mail at, for more information.

*Federal estate taxes are repealed for any deaths that occur in 2010. In 2011, federal estate taxes will be reinstated in full at rates as high as 55 percent. Congress, however, has indicated its intent to reinstate estate taxes earlier—as soon as early 2010. Check back for updates on this legislation.