A charitable remainder trust previously offers tax savings and can actually increase the donor's income. Despite these potential benefits, some people are reluctant to give away an asset they have always planned to leave to their children or grandchildren.

But by using a creative strategy called "wealth replacement," the donor can receive the personal satisfaction and financial benefits that come from making a gift to OSU and, at the same time, provide a major bequest to surviving family members.

In this technique, the donor uses tax savings and/or increased income produced by the gift to purchase a permanent life insurance policy. The policy, then, replaces the value of the asset that was given to charity.

EXAMPLE: John Smith, age 63, and his wife Mary, 60, own stock in XYZ Corporation, which is valued today at $169,000. The stock has a cost basis of $67,000 and pays annual dividends of $6,760.

To increase the income from their investment, Mr. and Mrs. Smith could sell the stock and reinvest the proceeds. But they will be faced with a capital gain in excess of $100,000. Instead, the Smiths use the stock to fund a charitable remainder annuity trust, avoiding the capital gains tax. The trust will pay $12,675 annually to Mr. and Mrs. Smith while both are living, then to the survivor. In addition, they will receive a charitable contribution income tax deduction of $46,000 for setting up the trust.

Next, the Smiths use their $5,915 increased income ($6,760 from the stock, compared with $12,675 from the trust) to purchase a $169,000 "second­to-die" insurance policy on their joint lives.

After paying a $5,900 annual premium for six years, the Smiths will pay no more to keep the policy in force. Future premiums will be covered by accumulated cash and dividends in the policy.

When both Mr. and Mrs. Smith are deceased, the $169,000 insurance proceeds will be divided among the grandchildren. By using an irrevocable life insurance trust to pass the funds to the grandchildren, the bequest is removed from the Smith's estate, reducing estate taxes.

In summary, the benefits of this gift plan are:

• In the first six years, the Smith's annual income is the same from the trust as it was originally from the stock. However, they will gain another $1,000 of income each year by investing the tax savings generated by the trust's charitable contribution deduction. When the insurance policy premiums cease after six years, the Smiths will realize the full $12,675 annually from the trust. And they will continue to receive this amount for as long as either of them lives.
  
  
• When Mr. and Mrs. Smith's life interests in the trust terminate, the $169,000 in assets will come to the Foundation to establish a scholarship fund in their memory.
  
  
• In addition, through the insurance proceeds, they will provide a $169,000 bequest for their grandchildren, with no estate tax due.
  

Note: Tax deductions for charitable remainder trusts depend on the applicable federal mid-term rate in effect when the gift is made. This rate changes monthly.