We wrote last week about using a charitable remainder trust to get out of a concentrated stock position without handing roughly a quarter of it to the IRS on the way out. The objection that ends most of those conversations is the same every time: your children don’t get that money. The 10% that goes to charity is real, and so is the principal your heirs aren’t inheriting.
That objection has an answer, and it’s the part most people haven’t seen.
The income the trust pays you can fund a life insurance policy held in a separate irrevocable trust. Your heirs receive the death benefit instead of the shares. Planners call it wealth replacement, and the arithmetic is often better than people expect, because the trust is investing the full pre-tax amount rather than what’s left after a capital gains bill.
The conditions are specific and unforgiving. The insurance trust must own the policy, and you must hold no incidents of ownership in it — serving as your own trustee or keeping the right to change beneficiaries pulls the entire death benefit back into your estate under Section 2042. Have the trust buy a new policy rather than transferring one you already own, because a transfer starts a three-year clock under Section 2035, and dying inside it undoes the whole point. And the money you send the trust each year to pay premiums is a gift, which is why these trusts send beneficiaries withdrawal notices nobody understands. Those notices are what keep the gifts inside the annual exclusion.
Two things are worth saying plainly, because this structure gets oversold. Insurance is not free, and whether the math works depends on your age and health when you start — a policy underwritten at sixty-eight is a different proposition than one underwritten at fifty-two, and if you aren’t insurable the strategy simply isn’t available to you. And the estate-tax argument matters less than it used to. The federal exemption is $15 million per person and $30 million per couple in 2026. For most families the real work here is replacing an inheritance, not dodging estate tax — and an estate-tax pitch aimed at a household well under the exemption isn’t really about estate tax.
Here’s what we’d tell any client: the two trusts are a package, and they should be evaluated as one decision. The charitable trust only makes sense if you have charitable intent. The insurance trust only makes sense if the replacement math works at your age and health. If either leg fails, the structure fails — and a charitable trust entered into on the assumption that insurance will backfill the inheritance, by someone who then can’t get underwritten, is a genuinely bad outcome that can’t be reversed.
We don’t sell insurance and we earn no commission on it. When this structure fits we say so, model it against the alternative of simply paying the tax, and send you to counsel and an independent agent to build it. When it doesn’t fit, we say that too.
If you’re weighing what to do with a position you can’t afford to sell, that’s worth an hour before anything is signed.
For informational and educational purposes only. Not investment, tax, or legal advice. Lake Hills Wealth Management does not provide tax or legal advice and nothing herein is a recommendation with respect to any specific transaction, any security, or any insurance product. Charitable remainder trusts and irrevocable life insurance trusts are irrevocable and involve the permanent transfer of assets; they are not suitable for every investor. A wealth replacement strategy depends on the availability, cost, and underwriting of life insurance, none of which is guaranteed, and insurability is determined solely by the issuing carrier. Lake Hills Wealth Management does not sell insurance and receives no commission or other compensation in connection with any insurance product. The estate and gift tax exemption figures referenced are those in effect for 2026 and are indexed thereafter. The estate treatment of any policy depends on the ownership structure adopted, the trust terms, and the timing of any transfer. Any charitable or insurance trust should be drafted by qualified counsel and confirmed in advance with your certified public accountant and attorney, who are responsible for the tax and legal treatment of the transaction. Additional information about Lake Hills Wealth Management, including our Form ADV Part 2A and Form CRS, is available at lakehillswm.com. Lake Hills Wealth Management is an SEC-registered investment advisor. Registration with the SEC does not imply a certain level of skill or training.