Wealth Replacement Case Study | Allstate

Wealth Replacement Case Study | Allstate


Here’s a hypothetical example. Harry is a 72 year old widower. He owns marketable securities that he bought
many years ago for $100,000. The securities have since grown to a current
worth of $500,000, producing around $15,000 of income each year—a three percent return. Harry has considered selling the securities
and reinvesting the proceeds with the objective of generating a higher income, but he knows
there would be a capital gains tax on the sale because of the securities’ growth. As an alternative, he’s thinking of splitting
the stock in his will among his three grandchildren. Complicating the matter is that Harry also
wants to make a substantial gift to his local hospital. But his thinking right now is that his charitable
motivations may have to take a back seat to the needs of his grandchildren. Fortunately, there’s a logical and effective
solution. First, Harry transfers the securities to a
charitable remainder unitrust, naming his local hospital as trust beneficiary. The trust will pay him a five percent income
for as long as he lives. And he’ll be able to claim a charitable
deduction for the present value of the charity’s remainder interest in the trust, as well as
avoid capital gains tax on the transfer to the trust. Next, Harry uses the tax savings from the
charitable deduction and part of the income generated by the charitable remainder unitrust
to obtain a $500,000 insurance policy on his life, naming his grandchildren as equal beneficiaries. He assigns the policy to an irrevocable life
insurance trust. The life insurance trust is the policyowner. Harry makes annual gifts to the trust from
a portion of the income he receives from the charitable remainder unitrust. The trustee uses the gifts to make premium
payments on the policy. Finally, when Harry dies, the charitable remainder
unitrust will be dissolved, and the trust beneficiary— the hospital— will receive
the trust assets. Harry’s grandchildren will receive the $500,000 death benefit from Harry’s life insurance policy. The irrevocable life insurance trust will
either terminate or hold and invest the insurance proceeds for the benefit of the grandchildren.

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