WEALTH REPLACEMENT TRUST
This is life insurance folks, pure and simple. They just put a different
name on it to make the purchase of life insurance more palatable. That said,
life insurance is an excellent vehicle to use in
some gifting strategies in order to "reimburse" beneficiaries for gifts given
to a charity. Unfortunately, the costs may still be so high that it is not
worth while to purchase. Anyway, let's review the basics.
Assume a couple are both 68 years of age and have a mutual fund or other
securities currently worth $200,000 with a current/existing basis of just
$25,000. Unfortunately, the stocks are paying a dismal return and the couple
wants/needs to increase their income. But if they were to sell the assets,
there is $175,000 of appreciation that would be taxed at a LTCG rate of 20%
federal bracket resulting in a $35,000 tax bill. That leaves, $165,000 on
which to earn income. Assuming a 6% return, that amounts to $9,900 a year.
However, if they had the whole $200,000 to invest, the income is 21% greater at $12,000. It may initially not look like much, but assuming the last to die would live another 15 years (age 83) the $2,100 annual income stream at 6%, and assuming a 3% rate of inflation, would be equivalent to a $25,229 lump sum. That's not too shabby. But let's explore this further. According to the American Cancer Society (1997 tax rules) and a printout through Crescendo Software, and using a Remainder trust growing at 8%, there would be a $303,133 value going to the Charity when both are deceased- $266,478 if the trust was to pay 7%.
If we assumed the 6% payout, it would result in a $70,046 tax deduction to the couple ($59,462 at the 7% payout). In a 28% bracket, this would provide a $19,613 tax savings- and greater if one is in the highest bracket of 39.6%.
The aversion of such a gift may be that the previous beneficiaries would be "disinherited" of the $200,000. True, so what is suggested by many planners is the purchase of life insurance- which could be second to die- of $200,000. The issue is, what is the cost? Well it's going to be over $3,000 a year. Using just the tax savings of $19,000+ will pay for the premiums for about 6 years. But the actuarial lifetimes for both people would exceed that so additional payments of premiums must come from the extra income generated from the annuity. Unfortunately, that negates most of the reason for the remainder annuity to begin with so it is debatable if life insurance could be purchased. Now if there was only ONE person and one annuity payout, the figures would be more flexible, but one should probably look to gifts WITHOUT LIFE INSURANCE unless they wish to use some of the extra income to pay the premiums.
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