Wealth Replacement Trust

A Wealth Replacement Trust can be set up to replace the asset gifted to the CRT or possibly even more. This way the heirs still receive an inheritance in the form of cash rather than an asset that may not be liquid. This can create another problem if the asset needs to be liquidated to cover estate taxes that may be due since the asset would be included in the estate.

Here is how this estate planning concept works.

The donor(s) purchase a life insurance policy held inside of a trust with the policy death benefit set up to be paid out to their heirs at death. If structured properly, the Life Policy will pay out 100% Income and Estate Tax Free. This can mean a much larger after-tax inheritance for the heirs than if they received the gifted asset itself.

The key is to have the life insurance policy owned outside the estate. This is usually accomplished with an Irrevocable Life Insurance Trust.

An Irrevocable Life Insurance Trust is used to hold the Life Insurance Policy outside of the estate in order to avoid Income and Estate Taxes. Because the trust is a separate entity from the insured's estate, the Life Insurance is not a part of the insured's estate and therefore not subject to estate tax. In addition, Life Insurance death benefits are not subject to Income Tax. Therefore, the proper use of an Irrevocable Life Insurance Trust will enable the heirs to receive the Death Benefit free and clear of Estate and Income taxes.

The premium for the life policy can be paid from a portion of the tax savings and/or income generated by the Charitable Trust.

A common way to reduce the costs of the life policy is to use a Second to Die Life Insurance Policy. Click here to view one of our other web sites located at www.SecondtoDieLifeInsurance.com for more information.

Harding Financial Services, LLC
The information contained on this site is for educational purposes only, it is not intended to be professional tax or legal advise; consult a tax advisor about your specific situation.