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Wealth Replacement Plan

A Wealth Replacement Plan uses payments and/or tax savings from a life-income gift to pay the premiums on a life insurance policy that replaces the assets used to make the gift.

For example, the donor creates a Life Income Gift such as a Charitable Gift Annuity. The gift annuity is designed to generate gifts to heirs in an amount equivalent to the life insurance premiums. The heirs take out a policy on the life of the donor, using the gift annuity payments to pay the premiums. Since the policy is owned by the heirs, not the donor, it is not included in the donor’s estate and is therefore not subject to estate taxes. Upon the demise of the income beneficiary/insured, the charity receives the gift annuity remainder and the donor’s heirs receive the life insurance benefit.

If a donor were to create a Charitable Remainder Trust as part of a Wealth Replacement Plan, the donor might also set up a non-charitable insurance trust (sometimes called a “Crummey trust.”) In this case, the Crummey trust takes out a policy on the donor’s life to benefit the heirs. The trust, not the donor, is the legal owner of the life insurance policy, which is not included in the donor’s estate. Since life insurance benefits are also not subject to income tax, the heirs receive the benefits of the policy free of tax.

Another approach to a Wealth Replacement Plan is to have the payments from the Life Income Gift used by the heirs to invest in growth instruments. Of course, the heirs will pay capital gains tax on any appreciation but the capital gains tax rate is favorable compared to the ordinary income tax rate.

Your estate-planning or tax advisor is your best resource to determine whether a Wealth Replacement Plan is right for you.

Please contact Dorea Ferris, Director of Gift Planning, at (914) 395-2543 or giftplanning@sarahlawrence.edu for more information.


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Dorea FerrisFor more information, please call Dorea Ferris, Director of Gift Planning, at (914) 395-2543 or e-mail her at giftplanning@sarahlawrence.edu.

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