Chelsea Hussey Article Q3 2025 Frank Talk Newsletter

Table of Contents

Wealth Replacement Trusts

Sophisticated — But Complex — Estate Planning Tools

A wealth replacement trust (WRT) can be paired with a charitable remainder trust (CRT) to enable individuals to support a favorite charity and leave a legacy to their loved ones. If you're in the process of establishing an estate plan — or already have one — you might want to consider including a WRT.

A Bit About CRTs

WRTs are generally adopted by higher net-worth individuals and established by contributing assets to a CRT. The CRT's regular income stream, in turn, is transferred to a WRT. The WRT then purchases a life insurance policy that will eventually benefit those named by the owner. When you die, or the second of you and your spouse dies, the CRT's assets pass to the charity you've selected. At the same time, your insurance proceeds are paid to your WRT, which distributes the funds to your beneficiaries or uses them on behalf of your trust's beneficiaries.

In a typical CRT arrangement, you contribute securities or other assets to the trust. Then the trust pays you (or you and your spouse) an income stream for life — usually a fixed percentage of the trust's value, recalculated annually. At the end of the trust's term, the remaining assets are distributed to the charitable beneficiaries.

CRTs offer several cash flow benefits that can be used to buy life insurance. In addition to receiving periodic income payments, your contribution to the trust generates a charitable income tax deduction equal to the present value of the charitable beneficiaries' remainder interests.

Even greater income tax savings may be available if you contribute appreciated property that would otherwise be subject to capital gains tax if sold. As a tax-exempt entity, the CRT can sell capital assets tax-free and reinvest the proceeds in income-producing assets (but you may be subject to income tax on some or all distributions).

WRT Advantages

It's possible to replace wealth with a stand-alone life insurance policy. However, setting up a WRT to hold your policy can offer benefits. For one thing, if you own the policy under your name, then the proceeds will be included in your taxable estate. This may reduce the policy's wealth replacement power. By contrast, if your policy is owned by a properly structured WRT, the death benefit bypasses your estate (though contributions to the trust to cover premium payments are subject to gift tax). Also, using a WRT allows you to place conditions on distributions to your beneficiaries.

Note that it's possible to transfer an existing life insurance policy to a WRT, but it can be risky. So unless you're uninsurable, you're probably better off making cash gifts to a WRT to buy a new policy.

Strategy at Work

Consider the following hypothetical example: Lydia wishes to donate $2 million to her alma mater, but she's reluctant to deprive her children of those funds. She contributes $2 million to a CRT for the college's benefit, which invests the money in conservative income-producing investments.

Lydia also establishes a WRT, naming her children as beneficiaries. She makes cash gifts each year to the trust (financed in large part by income from her CRT). The WRT's trustee uses these gifts to purchase a $2 million insurance policy on Lydia's life. When she dies, the CRT distributes its assets to the college and the insurance company pays the death benefit to the WRT. This money, which replaces the charitable donation, can then be used by the trustee to benefit Lydia's children.

Large Charitable Donations

With the help of an experienced estate planner, you may be able to arrange to make large charitable donations without depriving your family of its inheritance. Contact your estate planning advisor to discuss your options.

© 2025

Important Disclosures

Investment advisory services are offered through Planned Financial Services, LLC, dba Return on Life^® Wealth Partners, an SEC-registered investment adviser. Registration does not imply a certain level of skill or training.

The views expressed are current as of the date of publication and may change without notice. The strategies and concepts discussed in this article are provided for informational purposes only and may not be suitable for all individuals.

This article does not constitute legal, tax, or investment advice. Individuals should evaluate their own circumstances and seek guidance from qualified professionals — including attorneys, tax advisors, estate planning professionals, or licensed insurance agents — before implementing any strategies discussed.

Life insurance products are offered through licensed insurance agents. Guarantees are subject to the claims-paying ability of the issuing insurance company. Using a wealth replacement trust to own a life insurance policy may have gift tax consequences.

Charitable remainder trusts involve complex tax rules. Charitable deductions are subject to IRS rules and limitations.

For more information about our services and regulatory disclosures, please visit our Form ADV: https://adviserinfo.sec.gov/firm/summary/112879.