The Trifecta Challenge

     In the world of high-stakes wagering on horse races, winning the Trifecta is a most noteworthy achievement. To win, you must pick not only the winner of the race, but also the second and third place finishers. When it comes to gracious giving, most taxpayers would prefer to benefit their charities first, themselves second, their loved ones third … and the IRS dead last. This Charitable Planning Trifecta can be achieved through a carefully coordinated financial and legal strategy that includes both a Charitable Remainder Trust (CRT) and a Wealth Replacement Trust (WRT).

The Trifecta Challenge

     The creation of a CRT helps your charity finish first, with you (and your spouse) a close second. Before the charity inherits the assets held in the CRT upon your death (or upon the death of your spouse, if later), you (and your spouse) enjoy a lifetime income from the CRT and valuable charitable tax deductions. However, when the charity inherits the assets held in the CRT, they are forever unavailable to your loved ones. That is where the WRT comes in.

The WRT Solution

     With your CRT generating income sweetened by income tax deductions, you may have a total annual income in excess of the amount necessary to maintain your lifestyle. If so, then you may want to consider acquiring Life Insurance in a WRT to replace the value of the CRT assets ultimately passing to charity instead of to loved ones. To keep the value of the Life Insurance death benefit out of your estate (and that of your spouse) you must be very careful to follow the WRT dance steps to ensure proper ownership of the Life Insurance from the outset.

WRT Dance Steps

     First, you create a WRT. While you may not serve as a Trustee (nor should your spouse), you may select the current and successor Trustees. The beneficiaries of the WRT will be your loved ones.
     Second, you (and your spouse) make gifts to the Trustee on behalf of the WRT beneficiaries in an amount roughly equal to the insurance premiums. The Trustee then provides written notice of the completed gift to each WRT beneficiary and notes that each beneficiary has a designated period of time (not less than 30 days is typical) to request distribution of their respective share of the gift. After the designated period has lapsed, the Trustee applies for the appropriate Life Insurance and pays the initial premium. [Note: This annual gifting ritual continues until your death or the death of your spouse, if an insured and your survivor.]
     Third, assuming all of the WRT dance steps have been followed, the death benefit will be estate tax free when paid to the WRT for your loved ones. This will replace the value of the CRT assets paid to the charity.

Conclusion

     With careful planning and crisp execution, your Charitable Planning Trifecta will enrich your charity, yourself (and your spouse) and your loved ones … disinheriting only the IRS.