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§ 12.10 WEALTH REPLACEMENT TRUSTSEXAMPLE 12.18H is 35 and W is 34. Their combined annual income is $55,000. They do not have anychildren, although they plan to start a family soon. They are purchasing a new condominiumand trying to set some money aside for the future.Although retirement planning is not a high financial priority for H and W, they realize thatthis is a good time to be setting money aside, while they are both working and do not havechildren. They have been contributing $4,000 each year to an individual retirement account.Because there is no federal income tax deduction for these contributions, they cannot receiveincome from the IRA without penalty until one of them is 59-1/2 years of age. They are not asenamored of the IRA as they once were. This year, they have decided to explore somealternatives before making their annual IRA contribution.After investigating several options, H and W decide to create a NIMCRUT with a 6 percentpayout. They can make annual contributions to the unitrust just as they did to the IRA. Moneyin the trust grows tax-free and they receive a partial income tax deduction for making theannual contributions (total of $29,608, based on some assumptions stated below). Thisdeduction will increase each year as H and W grow older.Aside from providing the same types of benefits that first attracted H and W to an IRA, theCRT offers several other distinct advantages: (1) there is no contribution limit; (2) they can beginreceiving income at any time; (3) if they need to increase the flow of income from the trust topay educational expenses and then decrease the flow until retirement, they can do so; (4) byusing some of the funds in the trust to purchase life insurance, they can assure that their goalswill be met even if something happens to one of them before retirement; and (5) H and W canthus make a substantial gift to a local community charitable organization. (Both employers of Hand W are community oriented, and the fact that they were farsighted enough to make this giftdid not go unnoticed.)If H and W continued to make contributions of $4,000 each year to the trust until H reached64 (30 years), they would contribute a total of $120,000. Assuming a normal retirement span(i.e., both H and W live to their life expectancies), they would receive $807,965 in netspendable income. They would ultimately cause the making of $820,672 in charitablecontributions. aaThe illustrations in Examples 12.17 and 12.18 were provided courtesy of Renaissance, Inc., Carmel, Indiana.EXAMPLE 12.19A, an executive (vice president of marketing) of a large company, has a dilemma. In recentyears, she has profited nicely through a bonus and incentive stock option plan. She conferswith her accountant each year to determine how many options she should exercise withouttriggering taxes.A has watched her net worth increase dramatically in recent years. However, she has grownincreasingly concerned that a considerable amount of her financial security is tied to theperformance of the company. Although she is not aware of any immediate problems with thecompany, she is enough of a realist to know that some of the biggest and best-run companieshave undergone significant reversals. Consequently, A is considering several strategies thatwould enable her to diversify.Selling some of her stock is a possibility, but that would entail some significant capital gainstax consequences. Selling short against the box and margin accounts are other possibilities, butthey are risky. Coupled with her visibility as an insider, her dilemma is indeed a difficult one.A then learns about a strategy that would enable her to sell some of her stock without payingcapital gains tax. The strategy, which involves the use of a NIMCRUT, offers several significantbenefits: (1) A would receive an income tax deduction for each contribution she makes to thetrust; (2) she would be able to avoid capital gains tax when she sold the stock; (3) she wouldhave the right to receive income from the trust during her lifetime; (4) as trustee of the trust, shecould manage the trust to produce income when she needs it or to grow tax-free if she wants todefer income; and (5) she could make a significant gift to the charitable organizations withwhich she is involved. This is a particularly compelling benefit to A, not only because of herpersonal interest in these charitable organizations but also because of her position within the 469