❗ Key Takeaway: In our experience, one of the main concerns our clients have with Charitable Remainder Trusts—and especially the lifetime version—is that their family might lose the money if something happens to them during the trust's term. This shouldn't be much of a concern, because we offer a common tool—the Wealth Replacement Trust—that can ensure that assets are available to your family if the worst happens.
The ChallengeMost of our users are interested first in the bottom line: How much money can they earn by moving their assets into a tax-protected account? The answer, for most people, is to use a Lifetime Charitable Remainder Trust. But the word "lifetime" is a hang-up for many because they're worried about what might happen if they pass away before they've had a chance to withdraw most of the value from their trust. (Importantly, with a Lifetime CRT, if you are the sole income beneficiary and you die, the money immediately goes to charity. That's the situation we're trying to protect against here—and it's not a concern if you decide to sign up for a Term CRT.)
From a wealth planning perspective, this shouldn't be a concern even with Lifetime trusts; we offer a common tool that helps our customers arrange their affairs so they can ensure that there will be money to pass on to their heirs—spouse, children, or others—and that they'll be able to take advantage of the magic of the CRT if the worst should happen.
The Solution: Wealth Replacement TrustsThat common tool is called a Wealth Replacement Trust and, used in tandem with a Charitable Remainder Trust, it has two key use cases. First, it can protect your money and make sure it will make it to your heirs if you die during the term of the trust. And second, it can "replace" any wealth that is ultimately transferred to the charity of your choice when the trust ends.
In practice, this means that you can choose the best structure for you—often, a lifetime Charitable Remainder Trust—to minimize the taxes you pay on your highly appreciated asset, maximize your charitable deduction, and avoid any reduction in the wealth you are able to pull out of the trust.
How It WorksHow does Wealth Replacement Trusts work? It's pretty simple: You can purchase a life insurance policy that covers whatever portion of the trust's assets you want to guarantee. Say you put $5 million into a lifetime trust, and you expect it to pay out $20 million over your lifetime. You could buy a policy covering as much or as little of those amounts as you want. Say, for example, that you wanted to make sure you didn't lose your initial $5 million investment if you get hit by a bus. You can buy a $5 million term life insurance policy to cover that amount (and, all the while, you can take your planned distributions from the trust, so that you and your family end up with much more than that $5 million back no matter what). And because the life insurance policy is owned by the trust, the proceeds of the policy will generally not be subject to estate taxes at either death.
The logistics, moreover, are straightforward: You can pay for a wealth replacement trust/life insurance policy using (1) a portion of the income from your CRT, (2) the tax deduction you get when you set up the CRT, or (3) cash out of your pocket. (Premiums vary depending on your situation, but they tend to be around $400-500 per million dollars of coverage.
ConclusionIn the end, the Wealth Replacement Trust will allow you to sell a highly appreciated asset (like startup equity or cryptocurrency), defer your income (that is, capital gain) taxes, guarantee an income stream from the trust, and ensure that your wealth is transferred to your intended beneficiaries without triggering estate tax concerns.