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“Wealth Replacement” Can Facilitate Gift Plans
Tax-wise donors often contribute highly appreciated assets, such as securities, real estate or business interests. These gifts can be outright, but often are made through gift arrangements that provide donors with lifetime income, plus charitable deductions.
Friends who wish to “replace” contributed assets in their estates can purchase life insurance payable to family members, funded partly by tax savings from their charitable deductions. The life insurance replaces the assets that the charities receive, and if donors employ a so-called irrevocable life insurance trust, their families can receive the insurance proceeds free of federal estate tax. Here is an example of how wealth replacement can work:
Mr. and Mrs. K own a business (a “C” corporation) that their daughter eventually will take over after their deaths. They also have a son who is a surgeon and is not interested in working in the family business. Mr. and Mrs. K want to be fair to each child in their estate plans, but the family business represents most of their net worth. They also wish to make a substantial gift one day to assist our programs. Solution? Mr. and Mrs. K decide to make gifts of stock in the family business to their daughter, and to provide for the son they do the following:
1. They establish a charitable remainder unitrust and transfer to it $1 million in company stock. Mr. and Mrs. K will receive a lifetime income from the trust. The trustee of the unitrust will ask Mr. and Mrs. K’s company to redeem (cash in) the stock and the corporation agrees, retiring the stock that had been placed in trust. The trust owes no capital gains taxes when it receives $1 million cash proceeds and reinvests in a diversified portfolio.
2. Mr. and Mrs. K set up a “wealth replacement” trust, making their son the trust beneficiary. The trust purchases an economical “second to die” life insurance policy on the lives of Mr. and Mrs. K. Every year, the couple transfers cash to the trust sufficient to pay the annual premiums, taking advantage of the gift tax annual exclusion. They pay the premiums out of their charitable deduction tax savings and future income from their unitrust.
3. After Mr. and Mrs. K have both died, we will receive about $1 million from the charitable remainder unitrust. Their son will receive $1 million in life insurance proceeds, free of estate taxes, from the wealth replacement trust, and their daughter will own the family business.
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Copyright © 2009
by R&R Newkirk. All rights reserved.
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