Estate

What is a living trust? A living trust is a separate legal entity that you create to own property for you (like a house, boat, or mutual fund shares). You transfer all or some of your property to the living trust as soon as it is established (this is called funding the trust). People generally adopt living trusts to avoid probate entirely or to pass specific property outside the probate process, but it is also a tool you can use to give someone the power to manage your property for you if you become incapacitated. The following is a limited discussion about how a living trust can be used as such a tool. There are many other factors about living trusts that you may also want to consider. How does a living trust work? If you name yourself trustee or cotrustee with another (e.g., your spouse) and, usually, a successor trustee while you retain capacity, you retain total control over the property that has been transferred to the trust. Depending on the terms of the trust, you can take that property back at any time, use that property, change the terms of the trust, add or remove beneficiaries, replace the trustee, or even revoke the trust entirely. If incapacity strikes, the successor trustee (the person you named to run the trust if you can’t) takes immediate control of your property to use it for your care and support, or in whatever way you have directed by the terms of the trust. Upon your death, your property is held in trust or distributed according to your wishes. Technical Note: A living trust may also be referred to as an inter vivos trust or revocable trust. Caution: In some states, you need a cotrustee to have a valid living trust. Tip: You should execute a durable power of attorney (DPOA) at the time you create your living trust. Be sure your DPOA includes a provision that authorizes the transfer of your property to the trust. This will give your personal representative the ability to fund the trust if you have been unable to complete your plans to do so before your death. Tip: A living trust usually becomes irrevocable when you become incapacitated. This means that the successor trustee cannot revoke or change the trust, unless the trust agreement specifically authorizes the trustee to amend the trust or certain provisions of the trust. What are the advantages of a living trust? Avoids the need for guardianship because the trustee takes control upon incapacity Your successor trustee takes immediate control of the property in the trust as soon as you become unable to do so for yourself. Allows you to control your property until you become incapacitated If you are the original trustee, you continue to handle your own affairs as if you still owned the property in your own name. Authority does not transfer to the successor trustee until it is necessary. Allows you to name someone who is qualified to manage your property A cotrustee or successor trustee should possess honesty, integrity, and sound business judgment. Your successor trustee may need expertise if you have a business interest, real estate, or a large portfolio of stocks or securities. You name the person you want and trust to manage your financial affairs if you should become unable to do so for yourself. Is a living trust right for you? Can be expensive and burdensome to implement A living trust is available to anyone and there is no dollar requirement for setting one up. However, because you need to consult with an attorney, the cost of creating, implementing, and managing a trust can be high. It may not make sense to go through the bother and expense unless the value of your property is significant. In addition, transferring property to a living trust can be complex and burdensome. What does a living trust need to say to be effective in case of incapacity? Your living trust must be designed to protect your property and provide for your support during a period of incapacity. Among others, your living trust should contain the following provisions. That income is to be distributed to or for your benefit Although you may understand that this is one of the purposes of your living trust, be sure to specifically direct the successor trustee to take care of you while you need it. That gift-giving authorization is given, if desired This power may be important because it allows the successor trustee to continue your estate and tax planning (by taking advantage of the annual gift tax exclusion or by Medicaid planning, for example). That management of any business interest be delegated to family members or other qualified persons This specific direction will ensure that your business will be delegated to someone you trust to carry it on for you. Example Example(s): Hal has built a business empire and acquired a fortune during his 70 years of life. He’s still able to manage his affairs, but is worried that his ability will diminish in the future. Hal loves his business and wants to keep control of his empire as long as he is able to manage it. Example(s): Hal’s best friend and personal secretary, Dick, has been by his side for the last 40 years. Dick is like a member of the family and knows the business almost as well as Hal. Dick dotes on Hal’s children. Example(s): Hal’s attorney sets up a living trust, naming Hal as trustee and Dick as successor trustee. The terms of the trust provide that the trust property be distributed to Hal’s children at his death. Example(s): Hal continues to run his business empire until his health begins to fail and his ability to manage declines. Dick succeeds Hal as trustee and runs the trust according to its terms. At Hal’s death, Dick distributes the property in the trust equally among Hal’s children. _________________________________________________ This article was prepared by Broadridge. LPL Tracking #1-470647

How are trusts treated for federal estate, gift, and GST tax purposes? A trust is created when you (the grantor) transfer property to a trustee for the benefit of a third person (the beneficiary). The act of transferring property to a trust is generally treated no differently than if it were transferred to an individual outright. That is, transfers of property (whether into a trust or otherwise) may be subject to excise taxes known as transfer taxes. There are three types of transfer taxes: (1) estate tax, (2) gift tax, and (3) generation-skipping transfer (GST) tax. Estate tax may be imposed on transfers of property made after death (these are called bequests). Gift tax may be imposed on transfers of property made during life (these are called gifts). GST tax is imposed on transfers of property made to “skip persons.” A “skip person” is someone who is more than one generation younger than you (e.g., a grandchild or great-nephew). Estate taxation of trusts Trust property may be included in your gross estate for estate tax purposes if you have retained certain rights in the trust or if the trust is created at your death. The estate representative (executor) is responsible for filing an estate tax return on Federal Form 706 within nine months of your death (or at a later time if an extension is granted) and paying any estate tax owed from the estate proceeds. Grantor retained interest Life estate — A life estate is the right for life to (1) receive trust income, (2) use trust property, or (3) specify who gets to enjoy the trust income or use of trust property. If any of these rights are retained, the entire value of the property is includable in your gross estate. Reversionary interest — A reversionary interest means that the trust property will revert to you (the grantor) if the beneficiary does not survive you (i.e., dies before you). A reversionary interest is includable in your gross estate if, immediately before your death, the value of the interest exceeds 5 percent of the value of the trust. Rights of revocation — The right to revoke (i.e., terminate or end), amend, or alter the trust brings the trust back into your estate for estate tax purposes. “Incidents of ownership” in life insurance — The value of life insurance proceeds is includable in your gross estate if, either at the time of your death or within the three years prior to your death, the proceeds were payable to your estate, either directly or indirectly, or you owned the policy, or you possessed any “incidents of ownership.” “Incidents of ownership” is a legal term and means any right to benefit economically. Incidents of ownership include the right to change the beneficiary, the right to surrender or cancel the policy, the right to assign the policy, the right to revoke an assignment, the right to pledge the policy for a loan, and the right to obtain a policy loan. Annuity interests — If you (the grantor) retain an interest in annuities in the trust, part or all of the trust may be includable in your gross estate. In general, a trust may be includable in your gross estate if you (the grantor) have retained an interest in the trust at the time of death — or given such interest away within three years of death. Such interests include: General power of appointment A power of appointment is the right to say who gets the trust property. The person holding the power is called the powerholder. The powerholder can be the grantor (creator of the trust) or anyone the grantor names. A general power of appointment is one that is exercisable in the powerholder’s favor directly or in favor of the powerholder’s creditors, estate, or estate’s creditors. In other words, there are no restrictions on the powerholder’s choice of appointees (i.e., beneficiaries), and the powerholder can use the trust for his or her own benefit. A general power of appointment held by the powerholder on the date of his death is subject to estate taxes. Because the general powerholder has the right to declare himself or herself as the owner of the property, the IRS deems that he or she is, in fact, the owner of that property. That means that the entire value of the property over which the power is held is includable in the powerholder’s gross estate for federal estate tax purposes. Trusts created at death A trust that is created upon your death (i.e., a testamentary trust) is generally includable in your gross estate for estate tax purposes. Tip: If the transfer has already been treated as a gift (subject to gift tax), adjustments may be made in the estate tax calculations to avoid double taxation. Tip: There are exclusions and deductions available that may help to reduce your gross estate (e.g., annual gift tax exclusion, unlimited marital deduction, and applicable exclusion amount). Gift taxation of trusts A gratuitous transfer of property to a trust during life may be a taxable gift, just as if you had given the property outright. However, with respect to a trust, the taxable event may occur either at the time the property is transferred or at some later time. You (the grantor) are responsible for filing Federal Form 709 and paying any gift taxes owed. The taxes are due on April 15 of the year following the year in which the transfer is made. Taxable gift occurs immediately upon transfer Transfers made into an irrevocable trust in which the grantor (the creator) is not a beneficiary or retains no interest are taxable upon transfer. Caution: Some transfers of property to a trust for the benefit of a spouse or lower-generation family members in which the grantor has retained an interest may be treated as a taxable gift at the time of the transfer. Taxable gift occurs upon distributions to beneficiary A transfer made to a revocable trust, a trust in which the grantor is a beneficiary, or a trust in which the grantor has retained an interest is not a taxable gift at the time the transfer is made. Think of it this way: A grantor cannot make a gift to himself or herself. Therefore, the gift cannot occur until distributions are made to other beneficiaries. Taxable gift occurs upon powerholder’s exercise, release, or lapse of the power A taxable gift may occur if a powerholder (either the holder of a power of appointment or the holder of Crummey withdrawal powers) exercises or releases the power or allows the power to lapse. These are considered gifts made by the powerholder to the beneficiary. These gifts are not being made by the grantor but by the powerholder and are thus taxable to the powerholder. There are exclusions and deductions available that may help to reduce your gross taxable gifts (e.g., annual gift tax exclusion, unlimited marital deduction, and applicable exclusion amount). GST tax taxation of trusts Generation-skipping transfer (GST) tax may be imposed if the beneficiaries of the trust are skip persons (i.e., persons who are two or more generations below you). The GST tax is imposed in addition to gift and estate tax. GST tax transfers are taxed at the maximum gift and estate tax rate in effect at the time the transfer is made. Whether a transfer to a trust is subject to GST tax depends upon who the transferor is and how the transfer is classified (i.e., a direct skip, taxable termination, or taxable distribution). GST tax is reported on Federal Form 706 if the transfer is a lifetime gift or Federal Form 709 if the transfer is a bequest. Who is the transferor? Whether a transfer to a skip person has occurred necessarily depends upon who the transferor is. Direct skips A direct skip is a transfer made to a skip person that is subject to federal gift and estate tax. A transfer to a trust is considered a direct skip if all the beneficiaries with an interest in the trust are skip persons. A direct skip is taxable when the transfer is made. The trustee is liable for the tax. If the direct skip is made at death, your personal representative pays the tax from your estate. The amount subject to tax is the value of the property or interest in the property transferred (reduced by the amount paid for the property, if any). Caution: The tax you or your trustee pays on direct skip gifts increases the amount of the taxable gift for gift tax purposes by the amount of the tax. Likewise, the tax is part of your gross estate if you make a direct skip at death. Example(s): Hal dies in 2022. Hal’s will provided that $1,000 goes to his grandson, Fred, a skip person. Hal’s bequest is a taxable transfer that is subject to gift and estate tax. Hal’s bequest is also a direct skip, which is subject to the GST tax (assume no GST exemption is available for this transfer). Hal’s executor is liable for the GST tax of $400 ($1,000 x 40 percent, the maximum estate tax rate in 2022). Taxable termination A taxable termination is a termination of an interest in a trust, which results in the skip person(s) holding all the interests in the trust. Termination can result from death, lapse time, release of a power, or otherwise. A taxable termination is taxable at the time the termination occurs. Example(s): Phil creates a trust and funds it with $1 million. The terms of the trust provide that Phil’s daughter, Marlene, a nonskip person, receives the income from the trust for 10 years, and then the principal (the remainder) goes to Phil’s granddaughter, Susan, a skip person. A taxable termination occurs after 10 years, when Marlene’s interest in the trust terminates and only Susan’s interest remains. But, there is no taxable termination if gift and estate tax is imposed on the nonskip person. Example(s): Assume the same facts as described, except that Marlene has an income interest for life. Marlene dies. The value of the trust is includable in Marlene’s gross estate for gift and estate tax purposes. A taxable termination has not occurred. The taxable amount of a taxable termination is the net value of all property that goes to the skip person. As opposed to the direct skip, a taxable termination is tax inclusive. That means that the skip person receives the property after tax. For instance, in the above example, the tax due is $400,000 (40 percent of $1 million) (assuming no GST exemption is available for this transfer). Susan would receive $600,000 ($1 million – $400,000). The trustee is liable for the tax. Certain partial taxable terminations are treated as taxable terminations. If a property interest in a trust terminates because of the death of your lineal descendant (e.g., a child), and if a specified portion of the trust is distributed to at least one skip person, then such partial termination is a taxable termination with respect to that portion. Example(s): Bill sets up a trust that provides that income be paid to his children, Joan and David. The terms of the trust further provide that when the first child dies, half the trust principal is distributed to Bill’s grandchildren. The other half of the principal is paid to Bill’s grandchildren after the second child dies. Joan dies. The distribution to Bill’s grandchildren is a taxable termination (not a taxable distribution) because it is only a partial distribution that occurs as a result of Joan’s death (Bill’s lineal descendant). Tip: A taxable termination can also be a direct skip. A taxable termination that is also a direct skip is treated as a direct skip. Taxable distributions A taxable distribution is any distribution (other than a direct skip or a taxable termination) of income or principal from a trust to a skip person (or from a trust to another trust if all interests in the second trust are held by skip persons) that is not otherwise subject to gift and estate tax. Generally, gift and estate tax is owed when the trust is funded, not when the funds are distributed. The taxable event occurs when the distribution is made. The amount subject to the GST tax is the net value of the property received by the distributee (the recipient) less anything the distributee paid for the property. Like a taxable termination, a taxable distribution is tax inclusive (i.e., the distributee receives the property after tax). The distributee is obligated to pay the tax. If the trust pays the tax, the payment will be treated as an additional taxable distribution. Example(s): Jane creates a trust and funds it with $1 million. Jane pays gift and estate tax on $1 million at the time she funds the trust (assume no other variables). The terms of the trust provide that the trust income be distributed, at the trustee’s discretion, among Jane’s husband, Hal, her son, Ken, her daughter-in-law, Sue, and her granddaughter, Jill. Any distributions made to Hal, Ken, and Sue are not subject to the GST tax because Hal, Ken, and Sue are not skip persons. Any distributions made to Jill are subject to the GST tax, and Jill is liable for the tax. Tip: There is an exemption ($12,060,000 in 2022) and there are exclusions available that may help to reduce your gross taxable transfers subject to GST tax. Important Disclosures: This article was prepared by Broadridge. LPL Tracking #1-05108902

If you give away money or property during your life, those transfers may be subject to federal gift and estate tax and perhaps state gift tax. The money and property you own when you die (i.e., your estate) may also be subject to federal gift and estate tax and some form of state death tax. These property transfers may also be subject to generation-skipping transfer taxes. You should understand all of these taxes, especially since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act), the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), and the Tax Cuts and Jobs Act. The recent Tax Acts contain several changes that make estate planning much easier. Federal gift and estate tax — background Under pre-2001 Tax Act law, no federal gift and estate tax was imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one — that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift). The 2001 Tax Act, the 2010 Tax Act, the 2012 Tax Act, and the Tax Cuts and Jobs Act substantially changed this tax regime. Federal gift and estate tax — current The 2001 Tax Act increased the applicable exclusion amount for gift tax purposes to $1 million through 2010. The applicable exclusion amount for estate tax purposes gradually increased over the years until it reached $3.5 million in 2009. The 2010 Tax Act repealed the estate tax for 2010 (and taxpayers received a carryover income tax basis in the property transferred at death), or taxpayers could elect to pay the estate tax (and get the step-up in basis). The 2010 Tax Act also re-unified the gift and estate tax and increased the applicable exclusion amount to $5,120,000 in 2012. The top gift and estate tax rate was 35 percent in 2012. The 2012 Tax Act increased the applicable exclusion amount to $5,490,000 (in 2017) and the top gift and estate tax rate to 40 percent (in 2013 and later years). The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax exclusion amount and the GST tax exemption (see below) to $11,180,000 in 2018. The amount is $12,060,000 in 2022 ($11,700,000 in 2021). After 2025, they are scheduled to revert to their pre-2018 levels and cut by about one-half. However, many transfers can still be made tax free, including: Gifts to your U.S. citizen spouse; you may give up to $164,000 in 2022 ($159,000 in 2021) tax free to your noncitizen spouse Gifts to qualified charities Gifts totaling up to $16,000 (in 2022, $15,000 in 2021) to any one person or entity during the tax year, or $32,000 (in 2022, $30,000 in 2021) if the gift is made by both you and your spouse (and you are both U.S. citizens) Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual Federal generation-skipping transfer tax The federal generation-skipping transfer (GST) tax imposes tax on transfers of property you make, either during life or at death, to someone who is two or more generations below you, such as a grandchild. The GST tax is imposed in addition to, not instead of, federal gift and estate tax. You need to be aware of the GST tax if you make cumulative generation-skipping transfers in excess of the GST tax exemption ($12,060,000 in 2022, $11,700,000 in 2021). A flat tax equal to the highest estate tax bracket in effect in the year you make the transfer (40 percent in 2021 and 2022) is imposed on every transfer you make after your exemption has been exhausted. State transfer taxes Currently, a few states impose a gift tax, and a few states impose a generation-skipping transfer tax. Some states also impose a death tax, which could be in the form of estate tax, inheritance tax, or credit estate tax (also known as a sponge or pickup tax). Contact an attorney or your state’s department of revenue or taxation to find out more information Important Disclosures: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. This article was prepared by Broadridge. LPL Tracking #1-05104689

Hopefully, you’re planning to give all of your loved ones plenty of affection this Valentine’s Day. But what if you weren’t around? To make sure everyone is fully protected when you’re gone, you need an estate plan. This year, show everyone you care by making sure your plan is fully updated. Check out these tips to do this task properly. 1. Ensure your children will be taken care of This part of your estate plan will change as your children get older. When they are young, you may need to take out life insurance and nominate a guardian for them. As they get older, you may want to set up a trust that distributes assets slowly to them. At some point, you may decide that your kids are mature enough so that you don’t need these provisions, even if you still want to make sure your assets go to them. 2. Make sure your estate plan reflects your current family Ideally, you should update your estate plan any time you have a major family event such as a marriage, divorce, birth, or death. However, often when these disruptive events happen, an already-completed estate plan is the last thing on your mind. This February, look over your estate plan and make sure that it includes – or leaves out – certain people. Keep in mind that in many cases, a will can define beneficiaries by relationship rather than a specific person’s name. For instance, you may have a will that stipulates all of your assets go to your children. It may automatically distribute assets to your grandchildren if a child passes away before you do. However, if you or your children have step-children, they are not automatically included in a will drafted this way. Although you may feel like they are family and want them to have the same rights as everyone else, you should structure your will to reflect this fact. Be aware of nuances like this when updating your estate plan. 3. Give some love to charity If you want some of your estate to go to charity, you need to ensure that the charities listed in your estate plan remain active. You may want to designate backups to be on the safe side. Consult with an estate planning professional to ensure that you maximize your contributions in a way that preserves your wealth and reduces your tax burden as much as possible. 4. Update your tax planning strategy Tax laws change all the time, and they heavily influence estate planning. When you check in with your estate plan, make sure that it works in the current tax environment. You don’t want to pay more tax than you have to. At the same time, however, you don’t want to pay for tax-shielding vehicles if your estate is below the threshold that necessitates those strategies.  5. Update the people involved in your estate plan In addition to the beneficiaries of your estate, your estate plan may also include several other roles for important people in your life. You may have a medical and financial power-of-attorney, a trustee, a substitute trustee, or even people named in your business succession plan. Review the roles you have designated for all of these people and make updates as needed.  Important Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. This article was prepared by WriterAccess. LPL Tracking # 1-05351241.