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§ 12.10 WEALTH REPLACEMENT TRUSTSEXAMPLE 12.21H is 50 years of age and has a successful business; last year, his personal income was$130,000. W is 49 and has a degree in special education. She is no longer employed, althoughshe does volunteer work with handicapped children. Their only child, C, is in her final year ofmedical school.H has a pension plan, but it is overfunded; he cannot make any further contributions to thisplan. He had intended to contribute $25,000 each year to the plan until he retired at age 65. His looking for an alternative retirement planning tool.H and W create a CRUT with a payout rate of 6 percent. They plan to contribute $25,000each year to the trust for the next 15 years. H and W will be the income beneficiaries of thetrust. They want to provide an inheritance for C, so they are allocating nearly $5,000 each yearto pay the premiums on an asset replacement policy outside the trust. Additionally, they plan toallocate 25 percent of their contributions to the trust to pay for life insurance inside the trust.This will help assure that their financial objectives will be met regardless of what happens toeither of them.For contributions totaling $375,000, H and W can set aside a substantial retirement nest eggon a tax-favored basis, leave a substantial inheritance to C, and make a meaningfulcontribution to their favorite charitable causes. They will also have the benefit of tax deductionsexceeding $90,000 for their annual contributions.Assuming that H and W both live to their life expectancies, they will receive $1,125,775 inincome from the trust. The life insurance policy inside the trust assures that their financialretirement goals will be met. The asset replacement trust will leave C more than $424,000,which will pass to her outside of her parents’ estate. Assuming that H dies first, the deathproceeds from this policy could also provide additional income benefits to W. In addition tothese advantages, H and W receive immediate recognition for creating a gift of more than $1million that will pass to the charities of their choice after their deaths.H and W are pleased with the benefits they have gained from their charitable remaindertrust. They have multiplied the value of the dollars they are investing in their retirement,provided for their daughter, and made a large gift to several of the organizations for which Wdoes volunteer work. aaThe illustration in Example 12.21 was provided by Renaissance, Inc., Carmel, Indiana.EXAMPLE 12.22C and M, both aged 72, have owned and operated a dairy farm for more than 40 years. Bothraised on farms, they inherited land and acquired much more over the years. Their operationhas been more profitable than most, but in recent years, they have begun to reduce the size oftheir herd and scale back overall operations. They always enjoyed their way of life, but recentlyhave wished to be free from the constant demands of running the farm so they can pursue otherinterests (such as visiting their children and grandchildren). They also want to give more time totheir church, in which they have been very active.C and M have four children and nine grandchildren; none of them has any interest inworking the farm. The family is interested in keeping the house and some of the prime acreage,but C and M realize that the majority of the property will have to be sold either in their lifetimeor during their children’s lifetimes.During good years, C and M were able to save a substantial amount of money. Between theirinterest income, social security payments, and rent from some of their land, they have beenreasonably comfortable. Now, however, they feel the need to increase their income. To thisend, they have considered selling some of the land, worth about $250,000, but the resultingcapital gain tax (about $72,000) has precluded that approach. Although the after-tax proceedsof about $172,000 would generate more than $14,000 per year in additional income, thethought of all that money lost to taxes is unacceptable to them. 471 (continues)