Many charitably inclined families face a common dilemma: how do you support the causes you care about today without unintentionally reducing the inheritance you hope to leave behind for your children or grandchildren?
For those seeking to balance philanthropic intentions with long-term legacy goals, a wealth replacement (or capital replacement) strategy may provide an effective solution.
What Is a Wealth Replacement Strategy?
A wealth replacement strategy is designed to allow individuals to make meaningful charitable gifts during their lifetime while helping preserve the value of assets ultimately passed on to heirs.
This approach typically involves two key planning tools:
- A Charitable Remainder Trust (CRT)
- An Irrevocable Life Insurance Trust (ILIT)
First, the donor establishes a CRT and makes an irrevocable contribution to the trust. In return, they may receive:
- A partial charitable income tax deduction in the year of the gift, and
- An income stream generated by the trust for a specified period of time.
Next, the donor establishes an ILIT. The income received from the CRT can then be used to make annual gifts to the ILIT, which are used to purchase a life insurance policy owned by the trust.
Because the ILIT owns the policy outside of the donor’s estate, the death benefit is generally received income-tax free by the trust and can be distributed to beneficiaries according to its terms.
What Does This Strategy Accomplish?
This coordinated strategy may help accomplish two important objectives:
- Provide meaningful support to charitable organizations
- Replace the value of donated assets for heirs
At the end of the CRT’s term, the remaining assets are distributed to the designated charity. Upon the donor’s passing, the ILIT receives the life insurance proceeds and distributes those assets to beneficiaries—potentially income- and estate-tax free.
In other words, assets directed toward charitable giving during life may effectively be “replaced” for heirs through the life insurance trust.
Important Considerations
While wealth replacement strategies can be powerful planning tools, they require careful coordination among financial advisors, estate planning attorneys, and insurance professionals to ensure the trusts are structured and managed properly.
When implemented thoughtfully, this approach can help families pursue both their charitable values and their desire to build a strong financial foundation for future generations.
If you’re interested in exploring how a wealth replacement strategy could support both your charitable goals and your family’s long-term legacy, our team would welcome the opportunity to review your plan and discuss whether this approach may be appropriate for your situation.
Bibliography
Protective Life. (2025). Wealth Replacement Technique. Omaha, IL; Protective Life.
Fidelity. (2025a). Charitable remainder trusts. Fidelity Charitable. https://www.fidelitycharitable.org/guidance/philanthropy/charitable-remainder-trusts.html
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