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Getting Started: Wealth Replacement Trusts

Perhaps you would like to make a sizable contribution to Sisters Hospital Foundation now to help meet our current needs, but you don't want to reduce the estate you will pass to your family. The solution? Purchase life insurance.

"Sounds like a good idea," you say, "but then I'll have to pay the premiums on the policy." True enough, but depending on your age, health and tax bracket, the income tax savings from your charitable gift may be enough to cover the premium cost.

Assuming your estate is taxable, dollar-for-dollar asset replacement isn't necessary. A smaller amount of insurance can be enough to restore your family's after-tax inheritance. If you are married, a second-to-die policy can offer the most coverage per premium dollar.

Strategies Avoid Tax
If you own the insurance policy, ultimately the proceeds will be included in your taxable estate. The remedy: If your sole heir to the policy value is a responsible adult, make him or her the policy owner and beneficiary. Then give that individual a yearly amount adequate to pay the premium, utilizing your annual gift tax exclusion.

For multiple heirs or a larger gift, take advantage of an exceptional plan called a "wealth replacement trust" and name your spouse, children or other individuals as trust beneficiaries. The trustee is the owner of the policy and eventually will receive and manage the proceeds. The trust is irrevocable, and if designed correctly, the insurance will be excluded from your taxable estate. You transfer enough money to the trust each year so that the trustee can pay the policy premiums.

To avoid any gift tax (or use of your $1 million gift tax unified credit) on yearly gifts to the trust over the annual gift tax exclusion, the trust agreement must give your beneficiaries the temporary right each year to withdraw these funds. However, should your beneficiaries exercise this power, the insurance may lapse due to insufficient funds to pay the yearly premium.

Together with you and your attorney, we can help design a plan that preserves your estate's value while fulfilling your desire to benefit our cause.

Please call Julie Snyder at 716-862-1992, or e-mail us at jsnyder@chsbuffalo.org, for more information.

The information in this Web site is not intended as legal advice. For legal advice, please consult an attorney. Figures cited in examples are for hypothetical purposes only and are subject to change. References to estate and income tax include federal taxes only. Individual state taxes and/or state law may impact your results.