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At The Private Trust Company, we partner primarily with financial advisors and their clients who are in need of our experienced trust services. Together, we prepare a plan that works to protect what matters most to the client: their legacy. Ted Massaro of M Financial Planning Services Inc., is an advisor we have had a successful partnership with for over 15 years. Given Ted’s extensive experience in financial services, we asked him to provide some wisdom to other financial advisors, whether they are just starting out or a few years in. Tell me, how long you have been an investment advisor, and how long you have been with LPL? This is my 45th year as an advisor and my 28th with LPL Financial. Can you tell me a little about the role financial planning plays in your practice? When I started the firm in 1982, comprehensive financial planning was my core philosophy. It’s an integral part of everything we do here and how we provide our clients with the best service that we can. More specifically, can you tell me how you normally engage with clients regarding their estate plans? Estate planning is a natural part of the planning process. Depending on the sophistication of the plan, it can become a significant part of the planning process. For example, let’s say we have a family come in with 52 million. Let’s say that they are a third-generation family-owned company. One of our main tasks at that point is working to plan for the fourth generation. We’ll work with their estate attorneys, CPAs, and eventually PTC if there are certain trusts that we need to move forward with. How important is the role of trusts, particularly with your higher-value clients? Personally speaking, I have a number of trusts in my estate plan. I eat my own cooking and I firmly believe that anyone that has any legitimate net worth to protect should seriously consider a trust, provided the size of the assets warrant the costs associated with it. There are many reasons to do so like creditor protection, spendthrift errors, other issues that help for estate tax purposes, and planning strategies that a trust plays a natural part. Can you tell me a little about your experience with LPL’s trust subsidiary, The Private Trust Company? PTC became a subsidiary of LPL in 2003. We began working with them within 18 months of their affiliation with LPL. My original background in financial services started on the insurance side back in 1976. Estate taxes and estate planning were even more onerous in the 70s and 80s than today. Today exemptions are over 23 million. In 76, they were 250 thousand. Trusts with life insurance were always part of our planning. I’ve worked with them forever. I’ve had very good success with them. I’ve worked a lot with Ben Foreman and Susan Murphy, but everyone there is great to work with. They possess a lot of knowledge on complicated topics and are very proactive in helping you when you need assistance whether it’s getting documents to attorneys, stepping in for conversations with clients, etc. We also do a fair amount of charitable trusts with them also, which come with their own set of rules and regulations, so it’s nice to partner with a company that has experience in many different areas of trusts. What is one thing you wish other financial advisors knew about trust planning and what PTC can provide them? I think many financial advisors are not as cognizant of the importance of trust planning and estate planning. My son joined our firm after 5 years with Vanguard out of college. He’s doing phenomenal and has built out a whole financial planning service for young professionals. And one of the first things I emphasized to him was to go out and develop good relationships with estate planning professionals and CPAs. Networking is key. Referrals provide further growth. You do have to know what you’re talking about so you can’t just bluff your way through estate planning and tax laws. PTC is a valuable resource when it comes to all things trusts, so it would behoove all financial advisors to reach out to them and learn more.

What is a generation-skipping trust? By definition, a generation-skipping trust is any trust having beneficiaries who belong to two or more generations below the grantor (i.e., “skip” persons). More specifically, a generation-skipping trust is an irrevocable trust that is designed to minimize estate taxes by transferring principal to skip persons (e.g., grandchildren or great-grandchildren) and limiting distributions of income to intermediary generations (e.g., your own children). In other words, the third generation inherits property directly from the first generation, while the second generation can receive income from the property the third generation will eventually own (although the trust may be continued for several generations, acting as a dynasty trust). What reasons might motivate grandparents to make gifts to grandchildren, skipping over their own children? One common reason is when adult children already have ample money of their own. In this situation, the grandparents might want to ensure funds for their grandchildren’s future welfare, while not adding to their own children’s potential federal gift and estate tax liability (and perhaps state gift and death tax liabilities). Another possible reason is centered on less fortunate circumstances. Grandparents might consider it unwise to leave money to an adult child who does not act like an adult, or has a devious spouse or partner (or ex-spouse), substance abuse problems, or some other serious legal or financial problems. A generation-skipping trust can keep property out of this child’s hands or the hands of the child’s creditors. Understanding generation-skipping transfers Generation-skipping transfer (GST) tax To understand the usefulness of a generation-skipping trust, you must have an understanding of how generation-skipping transfers are taxed. In addition to federal gift and estate tax, there is another federal transfer tax, the generation-skipping transfer (GST) tax. This tax applies when a transfer is made to a skip person (someone who is two or more generations below you). There are three types of transfers that are subject to GST tax: A direct transfer from you to a skip person (this type of transfer is called a direct skip) A distribution of income or principal from a trust to a skip person (this is called a taxable distribution) A distribution of assets to a skip person because a trust has been terminated (this is called a taxable termination) GST tax is flat tax at highest gift and estate tax rate GST tax is a flat tax equal to the highest gift and estate tax rate then in effect (40% in 2022), and is imposed on any transfer (direct skip, taxable distribution, or taxable termination) made to a skip person. For example, if you make a gift of $1 million to your granddaughter in 2022, the applicable GST tax will be $400,000 (although the annual gift tax exclusion and a lifetime GST tax exemption may apply — see below). It should be noted that GST tax is in addition to any gift and estate tax that must be paid. GST tax and gift and estate tax can consume a substantial portion of the underlying transfer. Lifetime exemption from GST tax Although GST tax may seem overly harsh at first, each individual taxpayer is given a cumulative exemption from the GST tax ($12,060,000 in 2022, $11,700,000 in 2021). This means that over his or her lifetime, each person can give away up to the exemption amount to skip persons and not have to pay GST tax. A married couple could give up to double the exemption amount and not incur GST tax. Tip: The GST tax exemption is the same amount as the gift and estate tax applicable exclusion amount. Annual exclusion The $16,000 (in 2022) annual gift tax exclusion applies to direct transfers to skip persons. Thus, the first $16,000 ($32,000 if split with a spouse) of any transfer to a grandchild or great-grandchild will not be subject to GST tax in 2022. A gift to a generation-skipping trust, however, will also qualify for the annual exclusion, but only if the beneficiaries have a present interest in the transfer. This is accomplished by allowing the beneficiaries a limited time period during which they can withdraw gift made to the trust (this is known as a Crummey withdrawal right). However, this withdrawal right is not enough by itself. The annual exclusion for gifts to a generation-skipping trust also requires that there be only one beneficiary for the trust. GST tax is extremely complex The GST tax is one of the most complex areas of the entire Internal Revenue Code. If you plan to make a transfer (directly, indirectly, or through a generation-skipping trust) to anyone who may be a skip person, you should consult a professional advisor who has experience in handling these types of transfers. Failure to comply with all of the requirements of the GST tax could have disastrous results for both you and your heirs. Why use a generation-skipping trust? There are many ways a generation-skipping trust that can be set up. Some generation-skipping trusts are set up to provide income to the next generation while leaving the underlying assets to a lower generation. Other generation-skipping trusts are set up exclusively for the benefit of grandchildren or great-grandchildren. Some professional advisors recommend using a generation-skipping trust to leverage the exemption each individual is given from the GST tax through the use of life insurance. Provide income to children One of the most common uses of a generation-skipping trust is to provide income to the children of the grantor while ultimately transferring the assets to the grandchildren or even lower generations. If the trust is drafted properly, your children can receive all income from the trust for their lifetimes, without the assets being included in their gross estates when they die. A typical trust provides that when the last child dies, the assets in the trust can be distributed to the grandchildren. In some cases, the trust will be drafted to last for as long as legally possible. In a state where the Rule Against Perpetuities has been repealed, the trust could virtually last forever. Each generation would receive income from the trust, but the principal would not be distributed. Use for grandchildren only Another way to set up a generation-skipping trust is where the only beneficiaries are your grandchildren (or even your great-grandchildren). Your children would receive neither income nor principal from the trust. You may want to set up the trust this way if your children are wealthy in their own right, or if they have been provided for in other trusts that you have created. Life insurance generation-skipping trust Many professional advisors recommend that individuals consider leveraging their transfers to a generation-skipping trust through the use of life insurance policies. Typically, you would use your exemption to make transfers (free of the GST tax) into a generation-skipping trust. The trust would then purchase a life insurance policy on you (or on you and your spouse). At your death, the proceeds from the life insurance policy would be available to the beneficiaries of the trust. The proceeds would not be subject to GST tax. This is one way to significantly leverage your GST tax exemption. This article was prepared by Broadridge. LPL Tracking #1-05139756

What is it? A charitable remainder annuity trust, or CRAT, is a trust with both charitable and noncharitable beneficiaries. When the trust is created, the charity’s interest in the trust assets is a “remainder interest,” which means it is second in line to someone else’s interest. For this reason, this trust is characterized as a remainder trust. A CRAT works like this: You transfer property to a trust. It can be most anything (money, securities, real property, a statue). You choose a qualified charity (a charity must be a “qualified” one in order for your contributions to be tax deductible). You designate a noncharitable beneficiary. This person can be most anyone (you, your spouse, a friend). You determine, within set guidelines, how much money the noncharitable beneficiary is to be paid each year out of the trust assets (called the annuity rate). IRS rules require this payment to be at least 5%, but no more than 50%, of the initial fair market value of the trust assets. You determine how long the trust will last. It can be for the life of the noncharitable beneficiary (or joint lives for multiple beneficiaries) or for a fixed period of years up to 20 years. At the end of the stated period of time, all the remaining trust assets pass to charity. Example(s): Frank decides to donate some money to the XYZ Charity. He transfers $100,000 to a CRAT and names his wife as the noncharitable beneficiary. Frank decides the annuity rate will be 7% and that the trust will last for 10 years. The result is that every year for 10 years, Frank’s wife will receive an annual payment of $7,000, which is 7% of $100,000 (the initial fair market value of the trust assets). After 10 years, all of the remaining money in the trust will pass to the XYZ Charity. The distinguishing feature of a CRAT is that the annual payment is a fixed amount that remains the same over the life of the trust. The payment is based on the initial fair market value of the trust assets, which are valued only once at the creation of the trust. This is significant because the payment amount cannot be changed later to account for new circumstances, such as an increase in the value of the trust assets, inflation, or a change in the income requirements of the noncharitable beneficiary. A CRAT can be established to take effect either during your life (a living or inter vivos trust) or at your death (a testamentary trust). A CRAT operates in an identical manner in either situation. The reasons you might choose one over the other include tax consequences and the ability to see your trust in operation. For example, in the living trust situation, you are entitled to an immediate income tax deduction for the present value of the remainder interest that will pass to charity. See the Tax Considerations section of this discussion. Caution: On March 30, 2005, the Treasury and the IRS announced that for CRATs created on or after June 28, 2005, a donor’s spouse may be required to sign an irrevocable waiver of his or her right to elect a statutory share of the donor’s estate, and that failure to do so may result in the CRAT failing to qualify for tax exempt status, and the donor may be unable to take the initial income tax deduction. The Treasury and the IRS have since extended the safe harbor date of June 28, 2005, pending further guidance from the IRS. See IRS Rev. Proc. 2005-24 and Notice 2006-15 for more information, and consult a tax professional. When can it be used? You want to donate to charity but want a noncharitable beneficiary to receive an income stream for life or a period of years By establishing a CRAT, you can donate to your favorite qualified charity, reap some tax benefits, and, at the same time, retain control over an income stream derived from the donated assets. The income stream is in the form of a fixed payment, which in turn is based on the initial value of the trust assets. The payment amount is set by you and paid to your designated beneficiary at least once per year. Strengths Provides income tax deduction When you establish a CRAT during your lifetime, you receive an immediate income tax deduction for the present value of the remainder interest that will pass to charity. This deduction is available even though the charity may not benefit from your gift for many years. Provides an income tax haven for assets that have appreciated substantially There is no IRS rule that says you must be 100% charitably motivated to establish a CRAT. Yes, you heard it right. Thus, it’s perfectly acceptable, and even preferable, to set up a CRAT and fund it with an asset that has appreciated substantially in value (for example, stock, a closely held business, or real estate). When the trust sells the asset, it pays no capital gain or income taxes on the sale. The trust can then invest the proceeds and provide you or your designated beneficiary with an income stream off of a much larger principal than if you had sold the asset yourself and paid capital gain tax. Example(s): Gary owns $100,000 of stock that he purchased 20 years ago for $5,000. If Gary were to sell the shares, he would owe capital gain tax of nearly $15,000 (assuming a capital gain tax rate of 15% and no other variables) leaving him only $85,000 to invest. Instead, Gary can set up a CRAT and use his stock to fund it. The trust can then sell the stock and reinvest the entire $100,000, which is exempt from capital gain tax. Pays out fixed income every year Many older income beneficiaries want the security and consistency of a fixed payment every year. Caution: A fixed payment cannot be increased in future years. So, even if the trust assets increase in value or a long period of inflation sets in, the payment remains fixed over the life of the CRAT. Exists with fairly simple administration The annual payment to the noncharitable beneficiary is set at the creation of the CRAT and remains fixed over the life of the trust. It is based on the fair market value of the trust assets, which are valued only once at the inception of the trust. Thus, there are no time-consuming annual valuations of the trust property. Once a CRAT is funded, no additional contributions of property are permitted. Provides you with positive social, religious, and/or psychological benefits for donating to your favorite charity Yes, the tax benefits can be great. In addition, donating to charity can be a real morale booster. Reduces potential federal estate tax liability If all the requirements of a CRAT are met, the IRS allows the executor of your estate to deduct the present value of the remainder interest that will pass to charity from your gross estate. This will reduce the size of your gross estate. Once the value of the charity’s interest is determined (using special IRS tax tables), the entire amount may be deducted from your gross estate. Example(s): In her will, Kathy establishes a CRAT for the life of her friend, Paige, with the remainder to go to a local charity fighting illiteracy. Assuming that the present value of the remainder interest to go to charity is $125,000, Paige’s estate will be entitled to subtract $125,000 from her gross estate. Tradeoffs Requires an irrevocable commitment If you harbor reservations about leaving a portion of your estate to charity, you shouldn’t jump to establish a CRAT. Once you fund it, there’s no turning back. You can’t even amend a CRAT once the ink is dry and it’s properly executed, although you can give the trustee the discretion to choose the exact charitable beneficiary at the end of the term. Assets donated to charity are assets lost to your family Once you decide to donate a portion of your estate to charity with a CRAT, these assets are forever removed from your inheritable estate. Tip: This reality has prompted the creation of “wealth replacement trusts,” so called because their purpose is to replace the wealth lost to your family. A wealth replacement trust is often an irrevocable life insurance trust (ILIT). The idea is that the donor uses part of the income stream generated by the CRAT to pay premiums on a life insurance policy in an amount roughly equal to the amount to be passed to charity. The policy is then held in trust and distributed to the family on the donor’s death (free of estate tax), thus “replacing the wealth.” Requires the fixed annuity to be paid each year, regardless of whether there is sufficient trust income available IRS rules require that if the income from the trust (dividends, gains, and/or interest) is insufficient to meet the required annual payment to the noncharitable beneficiary, then the difference must be paid from capital gains or principal. A drastic result means the charity could end up with nothing. Example(s): Suppose the trust asset is an apartment house and the rents are the income from which the annual payment is made. If the rents were to fall below the required payment amount, the trustee would have to borrow against the property or, even worse, sell the property to make the required payment. Inflation may cause a CRAT to lose some of its value The trust assets are valued only once at the creation of the CRAT, and the fixed annual payment is based on this valuation. Because the payment remains the same over the life of the trust, it cannot be adjusted for inflation. Thus, the purchasing power of a fixed income stream may be eroded by inflation. Tip: Despite this potential problem, older income beneficiaries often prefer a CRAT because they want to plan on a fixed amount of income each year. Prohibits the additional contribution of assets Once a CRAT is funded, IRS rules prohibit you from making any additional contributions. Thus, it is impossible to “pour over” future bequests from your will into the trust. Value of charity’s remainder interest at inception of CRAT must be at least 10% of trust assets The present value of the remainder interest to charity must be at least 10% of the fair market value of the trust property as of the date the property is contributed to the trust. This present value is determined by using special IRS tax tables, which take into account the age of the income beneficiary, the amount of trust assets, and the fixed annuity rate. This rule prevents you from setting up a CRAT with payments made over the life of a very young income beneficiary or with a very high payout rate and an older beneficiary. In such scenarios, it is possible that by the time the income beneficiary died, there would be nothing left for the charity. Example(s): This rule would prohibit a client from setting up a CRAT for 10 years with a payment rate of 10.6% and an interest rate of 3% because the remainder value for charity (using the tax tables) would be only 9.58%. Income beneficiary cannot have more than 5% chance of outliving trust assets This rule is otherwise known as the 5% probability (or probability of exhaustion) test. It is a test devised by the IRS to discourage fraud and has no relation to the rule that at least 5% of the trust assets must be paid out to the income beneficiary every year. The 5% probability rule states that an income beneficiary cannot have more than a 5% probability of outliving the trust assets. Otherwise, there would be no assets left for the charity. This probability is determined using actuarial tables and takes into account the age of the noncharitable beneficiary, the amount of trust assets, and the payout rate. At low interest rates, the use of a CRAT may be greatly limited by the 5% probability test. A CRAT that provides for annuity payments for one or more measuring lives and that is created on or after August 8, 2016 is not subject to the 5% probability test if the CRAT contains a special provision. The  provision must require termination of the trust and payment of  the  remainder to charity immediately before any annuity payment that  would reduce the value of the trust corpus, when multiplied by the specified discount factor, to less than 10% of the value of the initial trust corpus. The specified discount factor is the present value of a single sum factor [1 / (1 + I) t ], where t is the time from inception of the trust to the date of the annuity payment (expressed in years and fractions of a year) and I is the IRC Section 7520 rate that was used to determine the value of the charitable reminder at the inception of the trust. How to do it Consult a competent legal advisor to draft the charitable remainder annuity trust (CRAT) A legal advisor well versed in the area of charitable remainder annuity trusts (CRATs) is your best bet. A CRAT is subject to many technical requirements and must be drafted with the utmost care in order to gain favorable tax benefits. Often, additional advisors (such as tax specialists, accountants, life insurance experts, and/or CERTIFIED FINANCIAL PLANNERS™) will be necessary to devise the best strategies and “crunch the numbers.” Pick a noncharitable beneficiary The noncharitable beneficiary can be you, a spouse, another family member, or friend. You may choose practically anyone, as long as there is not more than a 5% chance that the noncharitable beneficiary will outlive the trust assets. Tip: If you and your spouse, or your spouse, are the only noncharitable beneficiaries, the interest transferred to your spouse qualifies for a gift tax or estate tax marital deduction. Caution: For a lifetime CRAT, if the noncharitable beneficiary is other than you or your spouse, you have made a gift for federal gift tax purposes, part of which may qualify for the annual gift tax exclusion. If you are the grantor and a beneficiary of the CRAT and die during the trust term, the CRAT will be included in your gross estate for federal estate tax purposes, but will generally qualify for a charitable deduction and, if your spouse is the only other noncharitable beneficiary, a marital deduction. Pick a charity you wish to donate to and verify that it is a “qualified charity” The IRS allows you to deduct contributions only to “qualified charities.” Generally, qualified charities are those operated exclusively for religious purposes, educational purposes, medical or hospital care, government units, and certain types of private foundations. Every year, the IRS publishes a list of all qualified organizations in IRS Publication 78, commonly known as the “Blue Book.” Check to make sure your charity is listed in this publication. Tip: Once you have picked a charity, IRS regulations require you to choose an alternate charity in case the one you picked is not in existence when the trustee is to deliver the trust assets. Tip: Once you have picked a charity, it is a good idea to contact the charity to make sure it is willing to accept such a gift. Tip: Alternatively, the IRS does not require you to pick a charity when the CRAT is established. So, you can set up a fully operational CRAT and reserve the choice of charity for a future date. However, the trust must set forth the specifics of when and how the charity will be identified. Be sure the charity you ultimately pick is a qualified one. Identify the asset(s) you want to use to fund the trust You can use any type of property to fund the trust (e.g., cash, securities, real property, life insurance, a prized stamp collection). Tip: Because the trust is exempt from capital gain tax on the sale of any property, it is preferable to transfer an asset that has appreciated substantially in value. Tip: It is a good idea to fund the CRAT, at least in part, with marketable securities and/or cash. You don’t want to transfer real estate to the trust and assume it can be sold in time to make the required payment to the income beneficiary. Determine how long the trust will be in existence and set the payment rate You control the duration of the trust. The trust can be in existence for the life of the noncharitable beneficiary (or joint lives for multiple beneficiaries) or for a fixed period of years up to 20 years. The payment rate (also called the annuity rate) is the amount of money paid to the noncharitable beneficiary each year. It is a fixed amount that does not change during the life of the trust. It must be at least 5%, and no more than 50%, of the initial fair market value of the trust assets. IRS regulations allow the payment to be made within a reasonable time after the close of the year. Caution: Once you have established the duration of the trust and the payout rate, you must “crunch the numbers” to make sure you comply with the IRS rule that the present value of the charity’s remainder interest equals at least 10% of the total trust assets and that the 5% probability test (if applicable) is met. Select a trustee Once you transfer an asset to a CRAT, it is the trustee’s responsibility to manage, invest, and conserve this property. The trustee has a dual fiduciary responsibility: to generate income for the noncharitable beneficiary and to preserve the trust assets for the charity. It helps to choose a trustee who is well versed in the world of CRATs. Tip: If you want to appoint the charity as trustee, it is a good idea to contact the charity to make sure it is willing to serve in this capacity. Caution: You can appoint yourself trustee. However, you are then responsible for investing the assets to produce income sufficient to meet the requirements of the trust. If the trust income is insufficient to make the required payment to the income beneficiary, you must invade the principal to make up the difference. Frequent dips into principal may mean an early demise of the entire CRAT. Another pitfall is that the IRS periodically updates the requirements of a CRAT. As trustee, you will need to keep abreast of these regulations and comply with them in order to gain favorable tax benefits. Caution: If you are both the trustee of the CRAT and the income beneficiary, some states require that a co-trustee be appointed who is not a beneficiary. Coordinate the CRAT with your existing will and/or living trust It is a good idea to make sure your CRAT is coordinated with any other estate planning documents to achieve an integrated plan. A competent professional should undertake this review. File Form 5227 — Split Interest Trust Information Return Even though a CRAT is exempt from federal income tax, you must still file Form 5227 (Split Interest Trust Information Return) every year the CRAT is in existence. Further, if it is your first year filing Form 5227, you must also include a copy of the trust instrument and a written declaration that the document is a true and complete copy. Tax considerations Income Tax Income tax deduction for donor of charitable remainder annuity trust (CRAT) established during donor’s lifetime If you itemize deductions, the IRS allows you to take an immediate income tax deduction for the present value of the remainder interest that will pass to charity. You are entitled to the deduction in the year you establish the CRAT, even though the charity may not benefit from your gift for several years. Your deduction for the given year is limited to 50%, 30%, or 20% of your adjusted gross income (AGI), depending on the type of property donated to charity (via the trust) and the classification of the charity as either a public charity or a private foundation. (For 2018 to 2025, the 50% limit is increased to 60% for certain cash gifts.) If you cannot take the full deduction in the given year, you may carry over the difference for up to five succeeding years (assuming you still itemize deductions in those years). Tip: Generally, a “public charity” is a publicly supported domestic organization (e.g., the Red Cross), whereas a “private foundation” does not have the same base of broad public support (e.g., the Rockefeller Foundation). IRS Publication 78 notes whether a charity is a public or private one. Technical Note: The amount of your deduction is figured using special interest rate tables established by the IRS. The current rules require the value of a remainder interest to be calculated in a certain fashion. It is calculated by using an interest rate that is 120% of the federal midterm rate then in effect for valuing certain federal government debt instruments for the month the gift was made. In addition, the calculation uses the most recent mortality table available to determine the mortality factor. Special computer programs now exist to make this calculation easier. Example(s): Helen, an 80-year-old woman, places $100,000 in a CRAT, designating herself income beneficiary for life and setting a fixed annual payment of 5%, or $5,000. Assuming a 3% interest rate (using the IRS tax table described above), her allowable income tax deduction would be $64,960. If Helen’s AGI for the year was $80,000 and her charity was a public charity (allowing for a 50% deduction), Helen would have an allowable income tax deduction of $40,000 for the current year. The remaining $24,960 (the difference between her authorized deduction and her allowed deduction) could then be carried over to the following year and deducted in full. Income tax consequences for income beneficiary of CRAT If you are the income beneficiary of a CRAT, you will owe income tax on any payments you receive out of the income. So, although a CRAT can escape paying capital gain tax on the sale of an asset, this benefit does not trickle down to you, so you must pay income tax on any part of the income that is distributed to you. The IRS uses a special accounting procedure to determine the tax on the income distribution to you. Gift Tax No gift tax if you and/or your spouse are sole beneficiaries If you and/or your spouse are the only income beneficiaries of a CRAT, you do not owe gift tax. The income stream to your spouse falls under the unlimited marital deduction. Caution: In community property states, husband and wife are treated as equal owners. If community property is used to fund a CRAT that benefits only one spouse or if separate property of one of the spouses is used to fund a CRAT that provides lifetime benefits to both parties, there is a recognized gift to the other spouse. This may have implications under the particular state’s gift tax law. Possible gift tax if someone else is beneficiary If the income beneficiary of a CRAT is someone other than you or your spouse (or in addition to you or your spouse), gift tax rules come into play. The present value of the income stream to the beneficiary is determined at the time the gift is established. If the present value is more than the $16,000 (in 2022) annual gift tax exclusion, gift tax must be paid, unless a portion of your applicable exclusion amount (in 2022, $12,060,000 plus any deceased spousal unused exclusion amount) is available to offset the tax due. Caution: Any portion of the applicable exclusion amount you use during life will effectively reduce the amount that will be available at your death. Estate Tax Reduces size of gross estate One of the best features of a CRAT is its ability to reduce the size of your gross estate (and thus any potential estate tax). When you establish a testamentary CRAT, the executor of your estate can deduct the present value of the remainder interest payable to charity from your gross estate. The smaller your gross estate, the less chance you have of owing estate tax. Example(s): Ken sets up a testamentary CRAT, naming his friend the lifetime income beneficiary and ABC Charity the charitable beneficiary. Assume that at Ken’s death the present value of the remainder interest to ABC Charity is valued at $200,000. The result is that the executor of the estate will be entitled to deduct $200,000 from Ken’s gross estate. Caution: If you are the grantor and a beneficiary of the CRAT and die during the trust term, the CRAT will be included in your gross estate for federal estate tax purposes, but will generally qualify for a charitable deduction and, if your spouse is the only other noncharitable beneficiary, a marital deduction. Questions & Answers Can you establish a charitable remainder annuity trust (CRAT) and name yourself the sole income beneficiary? Yes, you can be both the donor and the sole income beneficiary. However, once you establish a CRAT, it is still irrevocable, even if you are the income beneficiary. Can you choose more than one charity as the charitable beneficiary? Yes, you can choose more than one charity as the remainder beneficiary, as long as the trust document sets forth your right to do so and specifies the manner that the trust assets will be distributed. Of course, you must make sure that the second (or third or fourth) charity constitutes a “qualified organization” under IRS rules. Otherwise, you risk losing favorable tax treatment. Can you choose more than one income beneficiary? Yes, you can name more than one income beneficiary. However, if you create a CRAT with a life term for each beneficiary, you may run afoul of the rule requiring the present value of the remainder interest to charity to be at least 10% of the trust assets. So make sure to crunch the numbers when picking more than one income beneficiary. Can you replace the trustee during the life of the CRAT? Yes. As long as the trust agreement provides for it, you can replace the trustee. You are the income recipient of a CRAT. How does the IRS determine the income tax you will pay on this distribution? The extent to which the payment is taxable depends on the character of the payment, which in turn is determined under a special income tax calculation formula unique to charitable remainder trusts. Charitable remainder trusts include charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). The IRS uses a four-tier accounting procedure to determine the tax character of the income distribution to the beneficiary. The acronym used to describe this accounting rule is WIFO, which stands for “worst in, first out.” The amounts distributed by a CRAT are classified as follows: Ordinary income, to the extent of ordinary income earned by the trust in the current year, along with any undistributed ordinary income from prior years (ordinary income includes interest) Capital gain (including qualified dividends), to the extent of the capital gains earned by the trust in the current year, along with any undistributed capital gains from prior years Nontaxable income, to the extent of the nontaxable income earned by the trust in the current year, along with any undistributed nontaxable income from prior years Principal The highest tax the IRS imposes is on ordinary income. If the required annual payment cannot be paid out of ordinary income, it is then paid from capital gains. If the payment still cannot be met after exhausting capital gains, it is paid from tax-exempt income and finally, if necessary, from the principal of the trust. Tip: The trustee must keep track of all sales and gains by the trust in order to make these calculations — a daunting task often completed by a computer tracking system. This is one more reason to question whether you really want to appoint yourself trustee. Also, the IRS cares about the type of property you use to fund the CRAT. If you contribute nonappreciated property (like cash), the payment to the income beneficiary constitutes a return of principal, and no income tax is due. By contrast, if you contribute appreciated property (like stock), the payment from principal has income tax consequences for the income beneficiary. The income tax will be in the form of a capital gain tax to the extent any part of the payment is attributable to gains that were untaxed prior to the asset being transferred to the trust. In other words, the donated asset carries with it the tax characteristics that existed prior to the asset being transferred to the CRAT. What are the advantages of using a CRAT over a CRUT (charitable remainder unitrust)? Although a CRAT and CRUT are both charitable remainder trusts, there are differences between them. A CRAT pays out to the income beneficiary a fixed amount every year for the life of the trust. The amount is set as a percentage of the trust assets, which are valued only once at the inception of the CRAT. If the amount cannot be paid from the current income earned by the trust, the principal must be invaded. By contrast, a CRUT pays out a fixed percentage of the value of the trust assets every year. The value of the trust assets is determined on an annual basis. So the payment fluctuates with the value of the assets. A CRUT will often provide that if the payment cannot be paid from the current income earned by the trust, the principal may, but need not be, invaded. Second, once a CRAT is funded, additional contributions of property are prohibited. By contrast, new property can be added to a CRUT. These differences make the CRUT more complicated and more difficult to administer. This article was prepared by Broadridge. LPL Tracking #1-05109698

Introduction A disclaimer is a refusal to accept money or other property by someone who would otherwise be your beneficiary according to your will, trust, gift, insurance policy, retirement account, or your state’s intestacy laws. The person who disclaims the property (the “disclaimant”) is treated as if he or she predeceased you and never received the property. There are several situations where a potential beneficiary might want to forgo property to which he or she is entitled. Often, these situations can be anticipated, and a disclaimer trust can be created to receive disclaimed property, which is then administered and distributed according to the terms of the trust. Why use a trust? Without a disclaimer trust, the disclaimed property would pass directly to other individual beneficiaries according to your state’s laws. Planning with simple disclaimers (i.e., where no trust is used) can be appropriate in many situations. In those situations, you can simply specify in your will that any disclaimed property go directly to someone else (e.g., “If my spouse disclaims any bequest, the bequest shall pass in equal shares to my three children”). However, there are some situations where directing the disclaimed property to a specific individual should be avoided. Providing for a child with special needs What if one of your adult children was receiving state-funded benefits for special needs? A sudden windfall could disqualify the child for state aid, resulting in at least a temporary interruption in his or her care. To avoid this situation, you could provide that some or all of the disclaimed property would go to a disclaimer trust for the benefit of the child with special needs. Caution: Drafting this type of trust requires particular legal expertise to ensure that the child with special needs remains entitled to government benefits under your state’s laws. Marital bypass planning A disclaimer trust is often used as an alternative to a bypass trust (also known as a credit shelter trust) in order to provide more flexibility. Bypass planning is designed to both minimize federal estate taxes for married individuals, and allow the surviving spouse to benefit from the family’s wealth during his or her continuing life. This can be accomplished by taking full advantage of the applicable exclusion amount, which protects $12,060,000 (in 2022, $11,700,000 in 2021) from estate tax, and the unlimited marital deduction, which allows spouses to transfer property between themselves gift and estate tax free. In 2011 and later years, the unused basic exclusion amount of a deceased spouse is portable and can be used by a surviving spouse. Tip: Portability of the basic exclusion amount between spouses in 2011 and later years may reduce the need for marital bypass planning. Caution: The basic exclusion amount is indexed for inflation. However, any portable unused basic exclusion amount transferred to a surviving spouse is not indexed for inflation after the death of the first spouse to die. Here is a typical scenario where bypass planning is needed: Example(s): Dave and Ann are married and Dave has an estate of $20 million. Assume an applicable exclusion amount of $12,060,000 (that will be indexed for inflation after the first spouse dies), a 40 percent top tax rate, portability, and that values (other than any unused exclusion) double over time after the first spouse dies. Dave dies first and leaves $20 million to Ann. The transfer to Ann qualifies for the marital deduction and no estate tax is due at Dave’s death. Dave’s estate elects to transfer Dave’s unused exclusion to Ann. At Ann’s death, Ann’s $40 million estate is greater than her $36,180,000 applicable exclusion amount (Ann’s $24,120,000 exclusion amount and Dave’s $12,060,000 unused exclusion), and federal estate tax of $1,528,000 is due. The children receive only $38,472,000 after federal estate tax is paid. To avoid this situation, the couple in the above example could have used a bypass trust. With a bypass trust, property is transferred from the estate of the first spouse to die to the bypass trust such that his or her applicable exclusion amount is fully used. The remainder of the assets of the first spouse to die is then transferred directly to the surviving spouse or to a marital trust for the surviving spouse’s benefit. To prevent inclusion of the bypass trust in the estate of the surviving spouse, he or she is given only certain rights and limited control over the assets in the trust. The surviving spouse may receive income from the trust or may be given the right to invade the trust principal for his or her health, education, maintenance, or support. The surviving spouse may also be given a limited power of appointment over the assets in the bypass trust. A limited power of appointment permits the power holder to direct that the assets in the trust ultimately pass to a limited class of beneficiaries that does not include himself or herself, his or her estate, his or her creditors, or the creditors of his or her estate. Example(s): Dave and Ann are married and Dave has an estate of $20 million. Assume an applicable exclusion amount of $12,060,000 (that will be indexed for inflation after the first spouse dies), a 40 percent top tax rate, portability, and that values (other than any unused exclusion) double over time after the first spouse dies. Dave dies first. Dave leaves $20 million to Ann and provides that anything disclaimed by Ann passes to a disclaimer credit shelter trust. Ann disclaims $10 million. The $10 million transferred to the credit shelter trust is protected by the applicable exclusion amount and the $10 million transferred to Ann qualifies for the marital deduction, and no estate tax is due at Dave’s death. At Ann’s death, Ann’s $20 million estate is fully protected by her $24,120,000 applicable exclusion amount, and no federal estate tax is due. In addition, the $20 million in the credit shelter trust at Ann’s death bypasses Ann’s estate, so no estate tax is due. The children receive the entire $40,000,000 since no federal estate tax has been paid. A married couple who wishes to set up a bypass trust should first divide up ownership of their assets. After the division, each spouse should own in his or her own name an equal share of the couple’s total assets. If one spouse owns all the assets alone or all their assets are owned jointly, the couple may not be able to fully use the applicable exclusion amount of each spouse. If one spouse owns all the assets alone, and the other spouse dies first, the applicable exclusion amount of the first spouse to die will be wasted as there will be no assets in the estate to which it can be applied. Correspondingly, the estate of the surviving spouse may be overqualified (i.e., have more than the applicable exclusion amount in the estate). Similarly, if both spouses own all assets jointly, when one spouse dies, the other spouse automatically owns all of the assets. When the surviving spouse then dies, his or her estate may be overqualified. If ownership of their assets is split up between the married couple, each individual will have assets to which his or her applicable exclusion amount can be applied. Tip: Portability of the basic exclusion amount between spouses in 2011 and later years may reduce the need to divide up ownership of assets or for marital bypass planning. As an alternative to the bypass trust, which forces (1) the couple to divide their assets, and (2) the estate of the first spouse to die to fund the trust with a specific amount, a disclaimer trust (1) lets the couple own property jointly, and (2) gives the surviving spouse the option to fund the trust with an amount that makes sense, or not to fund the trust at all. The surviving spouse can base his or her decision on the circumstances that then exist. A disclaimer trust is structured like a bypass trust; the surviving spouse receives all the income and can dip into the principal to the extent necessary for his or her health and support. Disadvantages Surviving spouse may fail to make the disclaimer The surviving spouse must act quickly to fund a disclaimer trust, generally within nine months of death. If the surviving spouse does not make the disclaimer in a timely fashion, or otherwise fails to make an effective disclaimer (there are several requirements), this post-mortem planning device will fail to meet your planning objectives. Heirs of the first spouse to die are not guaranteed a share of deceased spouse’s estate With a disclaimer trust, the decision to fund the trust lies with the surviving spouse. If the surviving spouse does not disclaim or fund the trust, the heirs of the deceased spouse may not receive any of the decedent’s estate. Therefore, this type of trust may not be appropriate if a spouse wants to ensure a legacy to his or her heirs. This may be the case, for instance, when there is a second marriage and there are children from a previous marriage. This article was prepared by Broadridge. LPL Tracking #1-05113129

What is it? A living trust (also known as a revocable or inter vivos trust) is a separate legal entity that you create to own property, such as your home, boat, or investments. You transfer some or all of your property to the trust as soon as it is created. During your lifetime, you control the trust; you can change the trust terms, or terminate the trust and take the property back. At your death, the trust becomes irrevocable and may continue to exist for many years. The trustee administers and distributes the trust property according to the terms of the trust. People create living trusts because they’re able to retain control over their assets while achieving other important goals, such as: Controlling the manner and timing of asset distributions to heirs Efficiently transferring assets to heirs Enabling someone else to manage property Protecting property in case of incapacity Avoiding probate Tip: Though a living trust is a separate legal entity, it is not a separate taxpayer during your lifetime. You are considered the owner of the trust assets for income tax purposes; all income, deductions, credits, and losses flow through to you. Upon your death, the trust becomes a separate taxpayer and different tax rules will apply (see Tax Considerations below). Caution: A living trust does not avoid estate taxes and does not protect assets from potential future creditors. To attain these objectives, the trust must be irrevocable. For more information, see Tradeoffs below. When can it be used? Cannot be used for some types of property Although a living trust can hold most types of property, it cannot hold: Qualified stock options or stock acquired under such a plan, at least until the holding period has passed An interest in a partnership, if prohibited by state law An interest in a cooperative or condominium, if prohibited by your contract with your co-owners An interest in a professional corporation (e.g., a law firm), because such an interest generally can only be owned by a professional (e.g., a lawyer) An IRA, although you can name your living trust as beneficiary of your IRA Strengths Lets you control your property until your death A living trust is revocable until your death. That means you can use or withdraw trust property, change the trust terms, add or remove beneficiaries, replace the trustee, or even revoke the trust entirely up until your death. This gives you flexibility to meet unknown future contingencies and still meet other goals. Allows distribution of your property to be customized A will generally transfers specific amounts or percentages of your property to your beneficiaries. By placing your property in a living trust, you can direct the trustee to distribute property only in certain situations, for example “to pay tuition,” or on certain occasions such as “on my son’s 30th birthday,” or at the trustee’s discretion, perhaps “to my children, as necessary to fund their educational needs.” This may be beneficial if you’re worried your heirs may be unable to manage outright gifts, or if you want to create “rewards” for certain behaviors. Caution: Although a trust transfers property like a will, you should still have a will as well because the trust will be unable to accomplish certain things that only a will can, such as naming an executor or a guardian for minor children. Minimizes delays in the transfer of property Probate takes time and your property generally won’t be distributed until the process is completed. A small family allowance is sometimes paid, but it may be insufficient to provide for a family’s ongoing needs. Transferring property through a living trust provides for a quicker, almost immediate transfer of property to those who need it. Probate can also interfere with the management of property like a closely held business or stock portfolio. Although your executor is responsible for managing the property until probate is completed, he or she may not have the expertise or authority to make significant management decisions, and the property may lose value. Transferring the property with a living trust can result in a smoother transition in management. Circumvents some limits on your power to transfer property State law may limit your ability to leave property to charity. For example, some states invalidate any bequest to charity written within a month of your death. Other states won’t let you leave more than a certain percentage of your property to charity. These laws often don’t apply to living trusts. State law may also force you to leave a certain percentage of your property to your spouse. In some states, these laws don’t apply to living trusts. Lets someone else manage your property for you You may find that managing certain property is a burden, or that you do not possess the skills required to manage certain property competently. Or, you may be planning to be away from home for a period of time and unable to make financial decisions or transact certain business. Or, you may be entering public service and need to avoid the appearance of a conflict of interest. A living trust lets you name someone who can successfully handle your financial affairs for you in these situations. Caution: You will likely have to pay an annual fee if you hire a professional trustee. Gives someone the power to manage your property if you become incapacitated If incapacity strikes, your trustee (or a co-trustee if you are the trustee) can take 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. This may help avoid the potential need for guardianship. Avoids probate Because property in a living trust is not included in the probate estate, some people may use them to avoid probate. Depending on your situation and your state’s laws, the probate process can be simple, easy, and inexpensive or it can be relatively complex, resulting in delay and expense. This may be the case, for instance, if you own property in more than one state or in a foreign country, or have heirs that live overseas. Avoiding probate may also be desirable if you are concerned about privacy. Probated documents (e.g., will, inventory) become a matter of public record. Generally, a trust document does not. On the other hand, the probate process can serve many important functions, such as protecting the interests of beneficiaries and resolving disputes. Determining whether avoiding probate would be advantageous, then, depends on many factors. Tip: There are other ways to avoid the probate process other than using a living trust, such as titling property jointly. Tradeoffs You may incur attorney’s fees to create A living trust is a sophisticated legal document that should be drafted by a competent attorney who understands your state’s laws as well as your personal situation and objectives. An attorney will help you coordinate your trust with other estate planning and financial goals, and will advise you regarding how to effectively execute and fund this device. Caution: Though there are “do-it-yourself” living trust kits available, you take many risks if you use one of these “one-size-fits-all” forms. It may end up costing you more if the trust is the wrong form, a form that is not valid in your state, is not appropriately customized to your situation, is not properly executed, or is not properly funded. Funding the trust can be burdensome and costly In order to be effective, you must transfer title to property being transferred to the trust. This can be complicated and burdensome, though your attorney will offer advice to help you. Transferring some types of property can be especially difficult and costly: Real estate: Some states assess a transfer tax or reassess property taxes whenever real property changes hands, even if it is only being transferred to a living trust. In other states, homeowner tax deductions are not available if the land is owned by a living trust. Secured or insured property: If property secures a loan, that loan may prohibit any transfer of the property, even to a living trust. Title or property insurance may also prohibit transfer of the property to the trust. Should not be used to transfer some types of property Although a living trust can hold most types of property, it is generally inappropriate for the following types of property: Stock acquired at less than market value under a restricted stock option or stock purchase plan, because income tax will be assessed on the gain Certificate of deposit, because of the penalty that will result if the bank considers the transfer an early withdrawal Real estate generating loss, since you probably cannot take losses on actively managed rental property owned by a living trust Personal property, such as furniture or clothing Does not help achieve Medicaid eligibility Assets in a revocable living trust are countable resources for the purposes of Medicaid eligibility. The assets are treated just as if you (the grantor) owned the them outright. Thus, your eligibility for Medicaid is reduced to reflect any gifts you make from your living trust during the preceding 60 months. Caution: Questions regarding Medicaid eligibility are extremely complex. You should seek specific assistance with these issues. Does not avoid estate taxes Unlike an irrevocable trust, a living trust does not inherently reduce estate taxes. Because you retained control over the trust during your lifetime, property in the living trust at your death will be included in your gross estate for estate tax purposes, even though they won’t be considered part of your estate for probate purposes. Tip: Spouses can use a special living trust (i.e., a bypass or credit shelter trust) to help minimize estate taxes on their combined estates. With such a trust, both spouses can more fully utilize their applicable exclusion amounts. However, you do not need a living trust to accomplish this; you can create the bypass trust at your death by including a provision in a pourover will. Does not protect property from creditors The probate process requires that all claims against your estate be presented within months of your death, preventing delayed claims against your estate and beneficiaries. A creditor may be able to bring a claim against property that passed through your living trust for years after your death. Tax considerations Income Tax During your life While you are living, the IRS will ignore the trust entity. All income, gains, losses, deductions, and credits flow through directly to you. Generally, you do not need to obtain a taxpayer identification number (TIN) for the trust, though you may choose to do so. You may furnish your own name and Social Security number to banks, brokers, and others paying income to the trust. You report all income on your own Form 1040 in the year it is earned, regardless of whether it was distributed to you. You do not need to file Form 1041. If you are not the trustee, however, the trustee must send you a statement with all pertinent information you will need to prepare your Form 1040. You may choose to furnish banks, brokers, and others paying income to the trust with a TIN. In this case, the trustee must file Form 1099 and Form 1041. And, if you are not the trustee, the trustee must also send you a statement with all pertinent information you will need to prepare your Form 1040. If you create a living trust jointly with your spouse, and you and your spouse file separate returns, you must use the second method described above. After your death If your living trust doesn’t distribute all of the property it owns at your death, it becomes an irrevocable trust and is subject to income tax as a separate taxpayer. The tax rules become very complicated and are much less advantageous. Among other things, the trust Cannot take a charitable deduction for income set aside for charity Must use a calendar tax year Cannot file a joint return with your surviving spouse in the year of your death Is allowed a smaller income tax exemption than for individuals Is subject to more compressed tax rates Cannot deduct losses on distributions of assets to beneficiaries Is assessed income tax on the gain if it takes ownership of stock acquired at less than market value under a restricted stock option or stock purchase plan Cannot take rental real estate losses May be unable to continue to hold S corporation stock after your death A living trust can hold S corporation stock during your life without jeopardizing the corporation’s S corporation status, as long as certain conditions are met. However, after you die, the trust is permitted to continue as a shareholder only for the two-year period beginning on the date of your death. Caution: This is an extremely complex area. You should consult an experienced tax professional. Must file gift tax returns when property is transferred to the trust Although transferring property to a living trust does not result in any gift tax liability (because transfers to a revocable trust are not “complete”), you are required to disclose the living trust on a gift tax return. Does not avoid estate taxes Because you retained control over the property during your lifetime, all property in your living trust at your death will be included in your estate for estate tax purposes, even though it is not included in your estate for probate purposes. This article was prepared by Broadridge. LPL Tracking #1-575665

What is it? An intentionally defective trust is an irrevocable trust that has the following characteristics: (1) transfers of property to the trust are considered completed gifts for federal gift and estate tax purposes, (2) property in the trust will not be includable in the gross estate of the grantor (the creator of the trust) for federal gift and estate tax purposes, and (3) income from the trust will be taxed to the grantor. The term “intentionally defective” is used because the trust is specifically designed to violate one of the grantor trust rules, resulting in characteristic (3), above. (These rules in the Internal Revenue Code were enacted to prevent the use of trusts to shift tax liabilities from high-income to lower-income taxpayers.) An intentionally defective irrevocable trust (IDIT) is a useful estate planning tool if you want to reduce your gross estate, and you want the trust income to be taxed to you rather than to the trust beneficiaries or the trust entity. (Such trusts are also commonly referred to as intentionally defective grantor trusts, or IDGTs.) Usually, income from a trust is taxed either to the beneficiaries or to the trust itself (or to a combination of both). As a general rule, if all of the trust income is distributed to the beneficiaries, the beneficiaries will be taxed on the income, and if the trust retains the income, the trust will be taxed on the income (there are separate tax schedules for trusts). There are times, however, when it makes financial sense for you, as the grantor of the trust, to be taxed on the trust income (even if you do not actually receive the income). This may be desirable if, for example, your income tax bracket is substantially lower than that of the trust. Or perhaps you are in a better position to pay the taxes than the beneficiaries (typically, the beneficiaries of an IDIT are children or grandchildren). Or, if the trust is funded with certain partnership interests that generate losses, you might want to use them to offset other income. Caution: Under certain circumstances, the IRS may hold that payment of taxes on trust income you do not receive constitutes a taxable gift to the beneficiaries’ trust. You should consult a tax professional for further information. Caution: The trust document must be drafted precisely to be treated as an IDIT. You should consult an experienced estate planning attorney. Strengths Removes property from your gross estate Because the trust is irrevocable, property in the trust at your death will not be includable in your gross estate for federal estate tax purposes. Rapidly appreciating property is ideally suited to fund an IDIT since any growth in value will also be removed from your gross estate. Income from IDIT will be taxed to you as the grantor One of the main benefits of an IDIT is that income from the trust is taxed to you as the grantor of the trust, even if you do not actually receive the income (with other kinds of trusts, this is usually a tax result to be avoided). There may be several reasons for this strategy. You may be in a lower tax bracket than the trust entity, or in a better financial position than the beneficiaries to pay the taxes. Moreover, paying the taxes on the trust income can reduce the size of your gross estate, and, because neither the trust nor the beneficiaries of the trust will be liable for the taxes, the trust income essentially compounds tax free. If you’re funding the IDIT with property that generates losses such as certain real estate partnerships, you may want to use the losses to offset other income. Tradeoffs Trust is irrevocable Because it is irrevocable, the trust can’t be changed or ended except by its own terms, and you will be unable to access the property transferred to the trust. Transfers to IDIT are taxable gifts Transfers of property to the trust are considered taxable gifts, and federal gift and estate tax might be due if the amount of the gift is in excess of the $16,000 (in 2022) annual gift tax exclusion and your gift and estate tax applicable exclusion amount (which in 2022 is $12,060,000 plus any deceased spousal unused exclusion amount) has been exhausted. Caution: Any portion of your exclusion you use during your life effectively reduces the exclusion that will be available at your death. Tip: You may want to transfer property to the trust (and out of your gross estate) without incurring gift tax. Perhaps, for instance, you lack the funds to pay the tax or can’t otherwise afford to just give the property away. If that’s the case, selling the property to the trust can avoid treatment of the transfer as a gift. You simply take an installment note from the trust in exchange for the property. Since the IDIT is a grantor trust, there are no capital gains or other income tax consequences from the sale. There is no taxable event because the IRS regards the trust and the grantor as one and the same. Many grantor-retained powers that would cause grantor to be taxed on trust income can also cause trust assets to be included in grantor’s estate The rules that determine whether trust property is part of your gross estate are different from the rules that determine income taxation. That is why an IDIT works. However, many of the powers that cause you as the grantor to be taxed on the trust income will also cause the property to be includable in your gross estate. Trust property will be includable in the gross estate of the grantor if (among certain other conditions): The grantor retains a reversionary interest of 5 percent or more of the trust property The grantor retains control over the enjoyment of the trust property The grantor retains certain administrative powers over the trust property The grantor retains the trust income You will incur costs to create and maintain the trust You’ll need to pay an attorney to draft the necessary documentation and transfer property into the trust. You should also consider paying an annual fee to a professional trustee (e.g., a bank trust department) to manage the trust. Questions & Answers Can a defective trust be used in conjunction with an irrevocable life insurance trust? Yes. Under Internal Revenue Code (IRC) Section 677, if the trust uses (or may use) trust income to pay life insurance premiums on the life of the grantor or the grantor’s spouse, then the trust will be considered a grantor trust. The grantor may transfer income-producing property into the trust and then use the income from the trust to pay the premiums on a life insurance policy. The grantor will then be responsible for paying the tax on the trust income. If the trust is drafted properly, both the income-producing property and the life insurance proceeds will not be included in the grantor’s taxable estate. Can the grantor name himself or herself as the trustee of the IDIT? Yes, but the grantor generally should not serve as trustee. When creating a trust, many people would like to retain some control over the assets in the trust and the disposition of those assets. The danger is that if you retain too much control over the trust, the assets in the trust will then be included in your gross estate. Can other individuals or entities be named as the trustee of the IDIT? Yes. In fact, many of the same powers that may be given to the grantor may also be given to what is called a nonadverse party. A nonadverse party is an individual or entity other than an adverse party. The IRC defines an adverse party as anyone who has a substantial beneficial interest in the trust that would be adversely affected by the exercise or nonexercise of the power that he or she possesses with respect to the trust. There are also special rules if a related or subordinate (to the grantor) party is named as the trustee. To avoid inclusion of the trust in your gross estate, you should avoid using any such parties as trustee. The IRC defines a related or subordinate party as one of the following individuals, if the individual is also a nonadverse party: the grantor’s spouse (if living with the grantor); the grantor’s father, mother, issue, brother, or sister; an employee of the grantor; a corporation or employee of a corporation in which the stock holdings of the grantor and the trust are significant in terms of voting control; or a subordinate employee of a corporation in which the grantor is an executive. This article was prepared by Broadridge. LPL Tracking #1-05113481

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 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: 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. 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. This article was prepared by Broadridge. LPL Tracking #1-05108902

What is it? A bypass trust is used to minimize federal estate tax on the combined estates of a married couple A bypass trust (also called a B trust or a credit shelter trust) is a trust that can be used by married couples in conjunction with a marital trust to minimize federal estate tax that will be due on their combined estates. Assets will be transferred from the estate of the first spouse to die into the bypass trust such that his or her federal applicable exclusion amount (the amount that can be sheltered from gift and estate tax by the unified credit) is fully used. The remainder of the assets of the first spouse to die will then be transferred into the marital trust. To prevent inclusion of the bypass trust in the estate of the surviving spouse, he or she can be given only certain rights and limited control over the assets in the bypass trust. He or she may receive income from the trust or may be given the right to invade the trust principal for his or her health, education, maintenance, or support. The surviving spouse may also be given a limited power of appointment over the assets in the bypass trust. A limited power of appointment permits the power holder to direct that the assets in the trust ultimately pass to a limited class of beneficiaries that does not include himself or herself, his or her estate, his or her creditors, or the creditors of his or her estate. Caution: This may not be the proper strategy for some married couples. A   tax law   passed in 2001 replaced the state death credit with a deduction starting in 2005. As a result, many of the states that imposed a death tax equal to the credit, decoupled their tax systems, imposing a stand-alone death tax. Many of these states allow an exemption that is less than the federal exclusion. This may leave some couples vulnerable to higher state death taxation. See your financial professional for more information. Tip: In 2011 and later years, the unused basic exclusion amount of a deceased spouse is portable and can be used by the surviving spouse. Portability of the exclusion may provide some protection against wasting of the exclusion of the first spouse to die and reduce the need for a credit shelter or bypass trust. A bypass trust typically is used by a married couple with assets in excess of the applicable exclusion amount Typically, both a bypass trust and a marital trust will be used by married couples who expect to have assets in excess of the applicable exclusion amount at the death of the first spouse. A married couple will set up both a bypass trust and a marital trust so that the applicable exclusion amount of the first spouse to die can be used to exempt the bypass trust from estate tax while the surviving spouse’s applicable exclusion amount can be applied to exempt some or all of the assets in the marital trust from estate tax. The assets in the bypass trust will not be included in the taxable estate of the surviving spouse. By using the two trusts, a married couple could protect up to $24,120,000 (in 2022) from estate taxes. Ownership of marital assets should be divided between the husband and the wife A married couple who wish to set up a bypass and marital trust should first divide up ownership of their assets. After the division, each spouse should own in his or her own name an equal share of the couple’s total assets. If one spouse owns all the assets alone or all their assets are owned jointly, the couple may not be able to fully use the applicable exclusion amount of each spouse. If one spouse owns all the assets alone, and the other spouse dies first, the applicable exclusion amount of the first spouse to die will be wasted as there will be no assets in the estate to which it can be applied. Correspondingly, the estate of the surviving spouse may be overqualified (i.e., have more than the applicable exclusion amount in the estate). Similarly, if both spouses own all assets jointly, when one spouse dies, the other spouse automatically owns all of the assets. When the surviving spouse then dies, his or her estate may be overqualified. If ownership of their assets is split up between the married couple, each individual will have assets to which his or her applicable exclusion amount can be applied. Assets not transferred into the bypass trust will fund a marital trust The assets that are not transferred into the bypass trust will fund the marital trust. In many cases, the marital trust will be set up as a qualified terminable interest property (QTIP) trust. With a QTIP trust, the surviving spouse must receive all income (at least annually) for life from the trust, but the grantor (creator) of the trust can designate where the assets pass when the surviving spouse dies. The assets in the marital trust will be included in the estate of the surviving spouse. However, that spouse can use his or her applicable exclusion amount to shelter some or all of the assets from estate tax. Because of the unlimited marital deduction, the assets transferred to the marital trust will not be taxed at the death of the first spouse. Therefore, the estate tax will be postponed until the second spouse dies. When can it be used? A married couple should expect to have assets in excess of the applicable exclusion amount at the death of the first spouse before setting up a bypass trust Generally, only couples who expect to have assets in excess of the applicable exclusion amount should incur the expense and trouble to set up both a bypass and a marital trust. Many married couples who have assets below the applicable exclusion amount will have joint wills, in which all of their assets are left to one another outright, or they may own all assets jointly with right of survivorship. Either way, the surviving spouse will receive all of the assets after the death of the first spouse tax free due to application of the unlimited marital deduction. Since the total amount of the assets owned by the surviving spouse will be below the applicable exclusion amount upon his or her death, the surviving spouse’s estate will not incur estate taxes. Example(s): Say you and your spouse have net assets of over $24,120,000 in 2022. Both you and your spouse would like to minimize the estate taxes due on your combined estates. Your estate planning attorney suggests setting up bypass and marital trusts. When the first spouse dies, sufficient assets will be transferred to the bypass trust to fully use his or her applicable exclusion amount. The remaining assets will go to the marital trust. Because of the unlimited marital deduction, the assets in the marital trust (if it is properly structured) will not be taxed in the estate of the first spouse to die. The assets in the marital trust will, however, be included in the taxable estate of the surviving spouse. The surviving spouse can use his or her applicable exclusion amount to shelter assets in the marital trust for his or her benefit from estate tax that would otherwise be incurred as a result of his or her death. By using the two trusts, all or almost all of your assets should be able to pass to your heirs free from estate tax. Tip: In 2011 and later years, the unused basic exclusion amount of a deceased spouse is portable and can be used by the surviving spouse. Portability of the exclusion may provide some protection against wasting of the exclusion of the first spouse to die and reduce the need for a credit shelter or bypass trust. The assets of a husband and wife should be equalized before setting up bypass and marital trusts If a married couple expect that their combined estates will be above the applicable exclusion amount when the first spouse dies, they should divide up ownership of their assets so that each spouse owns approximately one-half of the assets. You do not want one of the spouses to own all the assets, and you do not want the spouses to own all of the assets jointly. If one spouse owns all of the assets and the other spouse dies first, the applicable exclusion amount of the first spouse to die will be wasted as there will be no assets in his or her estate to which it can be applied. The surviving spouse’s estate may also be overqualified (i.e., have assets in excess of the applicable exclusion amount). Similarly, if the spouses hold all of the assets jointly, when one spouse dies, the other spouse will automatically own all of the assets, which will pass to him or her free from estate tax due to application of the unlimited marital deduction. Again, the applicable exclusion amount of the first spouse to die will be wasted because there will be no assets in his or her estate to which the exclusion can apply. Example(s): Say you expect that you and your spouse will have assets in excess of $24,120,000 if one spouse were to die in 2022. You and your spouse currently own all of your assets jointly. Your estate planning attorney recommends that you divide up the ownership of the assets so that you and your spouse each own approximately one-half of the assets. If the assets are split evenly ($12,060,000 to each spouse), then at the death of the first spouse, an amount equal to the applicable exclusion amount of that spouse can be transferred to the bypass trust, and the remaining assets can be transferred to the marital trust. The assets in the marital trust will be included in the surviving spouse’s taxable estate. However, the surviving spouse can use his or her applicable exclusion amount to avoid the federal estate tax due (partially or fully) on these assets at his or her death. By splitting up your assets and using a bypass trust and a marital trust, you may each be able to fully use your applicable exclusion amounts, maximizing the amount that you can leave to your heirs free from estate tax. A marital trust is not necessary to minimize federal estate taxes It is not necessary to use a marital trust in conjunction with a bypass trust to minimize the federal estate taxes of both spouses. Rather than using a marital trust, assets from the estate of the first spouse to die could be transferred to a bypass trust such that his or her applicable exclusion amount was fully used. The remainder of the assets could be left outright to his or her surviving spouse. The surviving spouse could then use his or her applicable exclusion amount to shelter the assets from estate tax at his or her death. A married couple may want to use a marital trust (usually a qualified terminable interest property (QTIP) trust) if they have children and are concerned that the surviving spouse will remarry or where there is a second marriage and one or both spouses are concerned about the surviving spouse “cutting out” children from a first marriage in favor of their own family members or children. With a QTIP marital trust, the surviving spouse must receive all income from the trust for life. However, you can designate in the QTIP trust who will receive the assets at the death of the surviving spouse. Example(s): Say you and your spouse have been married for 10 years and have three children. You have net assets in excess of your combined applicable exclusion amounts, and both you and your spouse would like all of your assets to eventually go to your three children. You should first divide ownership of the assets and then set up both a bypass trust and a QTIP marital trust. At the death of the first spouse, sufficient assets could be transferred to the bypass trust to fully use that spouse’s applicable exclusion amount. The remaining assets could then be transferred to the QTIP marital trust, and the surviving spouse would receive all of the income from that trust for his or her lifetime. When the surviving spouse dies, all of the assets from both trusts could then pass to the children. If you and your spouse did not have children, or you were not concerned about the assets passing to the children, you might not want to incur the expense to set up the QTIP marital trust. Any assets remaining after funding the bypass trust could simply be left to the surviving spouse. Strengths Use of both bypass and marital trusts allows married couple to have full benefit of wealth while minimizing estate taxes The main reason for using both bypass and marital trusts is to allow the surviving spouse to benefit from family wealth during his or her lifetime while minimizing the federal estate tax that may be incurred on the couple’s combined estates. The use of these two trusts in conjunction is an especially effective estate planning strategy when the married couple would like some or all of their assets to pass to their children or others when the surviving spouse dies. Although the surviving spouse must receive all income from a qualified terminable interest property (QTIP) marital trust, the grantor of the trust may designate to whom the assets in the trust pass upon the surviving spouse’s death. You can thus prevent your assets from eventually ending up in the hands of the new spouse if your spouse remarries, or you can ensure that your assets pass to your children from a previous marriage rather than to your second spouse’s relatives. The use of the bypass and the marital trusts can also minimize the federal estate tax incurred in each spouse’s estate by allowing each spouse to fully use his or her applicable exclusion amount. Example(s): Say you and your spouse expect to have a taxable estate in excess of your combined applicable exclusion amounts at the death of the first spouse. You have three minor children, and you would like your children to inherit all of your assets when the surviving spouse dies. On the advice of your estate planning attorney, you have equally divided the ownership of your assets between you and your spouse (to prevent wasting of the applicable exclusion amount of the first spouse to die and possibly overloading the surviving spouse’s estate). Your attorney has drafted both a bypass trust and a QTIP marital trust. At the death of the first spouse, sufficient assets are transferred to the bypass trust to fully use that spouse’s applicable exclusion amount. The remainder of the assets is transferred to the QTIP trust. The surviving spouse receives all income from the QTIP trust for life, and your children are named as the remainderpersons of the trust. At the death of the surviving spouse, all of the assets in the QTIP trust will pass to your children. Although the assets in the QTIP trust will be included in the surviving spouse’s taxable estate, the surviving spouse can use his or her applicable exclusion amount to protect some or all of these assets from federal estate tax. By using the bypass trust and the marital trust, you have permitted the surviving spouse to benefit from family wealth (through lifetime income), minimized the federal estate taxes incurred at the deaths of both you and your spouse, and ensured that your children will inherit the bulk of your assets upon the death of the survivor of you and your spouse. Tip: In 2011 and later years, the unused basic exclusion amount of a deceased spouse is portable and can be used by the surviving spouse. Portability of the exclusion may provide some protection against wasting of the exclusion of the first spouse to die and reduce the need for a credit shelter or bypass trust. Use of a bypass trust can provide professional management of assets to surviving spouse and beneficiaries Another advantage of using a bypass trust is that you can name a professional trustee to manage the assets in the trust. If you are concerned that your spouse lacks the sophistication and experience to wisely manage your assets, you can appoint a bank trust department or professional fiduciary to be the trustee of the bypass trust. Once the trust is funded (either during your lifetime or at your death), the professional trustee can then manage the assets for the benefit of the beneficiary. You may even designate that the professional management of the trust continue past the death of the surviving spouse if you think that your children may be too young or too irresponsible at that time to handle the assets themselves. Use of a bypass trust will allow assets to avoid probate If you fund a bypass trust while you are alive, those assets will avoid probate at your death. Assets held in a trust do not have to be probated. There are two main disadvantages to probating an estate. The first disadvantage to probating an estate is the time delay between the death of the decedent and the distribution of the assets. In almost all states, the heirs may have to wait six months to two years before they receive their assets. With a trust, the assets can be distributed immediately upon the death of the grantor. A second disadvantage is that the probate process is public. Anyone can go down to the probate court and obtain a copy of your will to see what assets you owned and how those assets will be distributed. A trust is a private instrument that allows your assets and the distribution of those assets to remain private. Both the bypass and the marital trust may be used to maximize use of each spouse’s exemption from the generation-skipping transfer tax exemption of both spouses In recent years, many estate planning attorneys have designed both the bypass and the marital trust to maximize use of each spouse’s exemption from the generation-skipping transfer (GST) tax). The GST tax applies to a transfer from one individual to another individual (called a skip person) who is two generations or more below the transferor. The GST tax rate is 40 percent (in 2022). This tax is in addition to any other gift or estate tax that may be assessed on the transfer. Each individual has a lifetime exemption from the GST tax of $12,060,000 (in 2022, $11,700,000 in 2021). The exemption may be allocated between the bypass trust and the marital trust. The surviving spouse’s GST tax exemption can also be allocated to the marital trust, making it more likely that both the husband and wife can fully use their respective GST tax exemptions. By using this method, spouses can leave an amount equal to their combined maximum available exemptions to skip persons without incurring the GST tax. Caution: Unlike the gift and estate tax basic exclusion amount in 2011 and later years, the GST tax exemption is not portable for spouses. Tradeoffs Attorney should be hired to draft the bypass trust You should hire a competent and experienced estate planning attorney to draft the bypass trust. Your attorney should also advise you on the estate and tax implications of setting up a bypass trust. As noted before, a bypass trust is typically used in conjunction with some type of marital trust. Because this strategy involves fairly sophisticated estate planning, you should have your estate planning attorney review your entire estate plan. Furthermore, in many cases, the ownership of assets will have to be split up, and the trusts may even be funded during your lifetime. You will need an attorney to retitle assets and to transfer assets into the various trusts. This level of estate planning can be quite expensive, with legal fees running possibly into the thousands of dollars. Trustee will be needed for the bypass trust You will need to appoint a trustee for the bypass trust. Depending on the size of the trust, you may want to hire a professional trustee for the trust. Many people hire a bank trust department or a private trust company, or even an individual who is a professional fiduciary, to be the trustee of the bypass trust. A professional trustee will have to be compensated for his or her services. Typically, he or she receives a percentage (usually 1 percent or more) of the assets under management. Surviving spouse will not have full control over the assets in the bypass trust Another tradeoff to using a bypass trust is that the surviving spouse will not have complete control over the assets in the bypass trust. If the spouse does have complete control over the assets, then the assets in the trust would be included in his or her taxable estate when he or she dies and might therefore be subject to estate tax. This outcome would completely defeat the purpose of using a bypass trust, which is to use the applicable exclusion amount (the amount that can be sheltered from gift and estate tax by the unified credit) of the first spouse to die to allow the assets in the bypass trust to pass to the remainder beneficiaries tax free. Unfortunately, your spouse may not relish the idea of having no control over assets that you may have spent your lifetimes accumulating. Of course, the surviving spouse can be given some limited rights in the bypass trust. He or she can receive all of the trust’s income for life, or he or she can be given trust principal to pay for health, education, maintenance, and support. An independent trustee can give unlimited amounts of trust principal to the surviving spouse at the trustee’s discretion. The surviving spouse can have a limited power of appointment over trust assets to make lifetime or testamentary gifts to children or grandchildren, or anyone except himself or herself, his or her estate, and his or her creditors. Finally, the surviving spouse can be given the noncumulative right to withdraw each year the greater of $5,000 or 5 percent of the value of trust assets. How to do it Hire competent and experienced estate planning attorney to draft the bypass trust Setting up a bypass trust (usually in conjunction with a marital trust) is a fairly complex estate planning strategy. You should seek the advice of a capable estate planning attorney to determine if setting up a bypass trust would be beneficial in your situation. If you decide to set up a bypass trust, a competent and experienced estate planning attorney should be hired to draft the trust. Furthermore, if you fund the trust during your lifetime, you may also need your attorney to transfer assets into the trust. Choose an individual or institution to be the trustee of the bypass trust If your estate is large, you should consider hiring a professional trustee, either a corporate trustee (such as a bank trust department or a private trust company) or an individual who is a professional fiduciary. Your estate planning attorney should be able to recommend several qualified trustees to you. The trustee has two primary responsibilities. First, the trustee must manage and invest the trust assets to generate income for the beneficiaries. Second, the trustee must attempt to preserve the corpus of the trust assets for the remainderpersons — the individuals who will ultimately inherit the trust assets (usually your children). If you have substantial assets, you should hire an individual or institution that has experience in managing these types of trusts. You must choose beneficiaries and remainderpersons for the bypass trust You must choose the beneficiaries and remainderpersons for the bypass trust. In almost all cases, the beneficiary will be the surviving spouse. Typically, the surviving spouse will be given at least all income from the trust. He or she may also be given access to the trust principal (for health, education, maintenance, or support). The individuals who will ultimately inherit the assets in the trust when the income beneficiary dies may be anyone you choose. In community property state, one-half of property accumulated by married couple automatically belongs to surviving spouse In a community property state, one-half of the property accumulated by a married couple during the marriage automatically belongs to the surviving spouse. This property is not subject to the provisions of the will of the first spouse to die. This fact can cause complications for estate planning purposes. The first spouse to die can specify that he or she wants all of the community property to be subject to the provisions of his or her will, but the surviving spouse must affirmatively acquiesce to this instruction before it will be effective as to the surviving spouse’s share of such property. If you live in a community property state or own property in a community property state, you should hire an experienced attorney in that state to assist you with your estate planning. Marital deduction rules apply to community property states The marital deduction rules apply to community property states. By taking advantage of the unlimited marital deduction, a married couple in a community property state can defer payment of federal estate taxes until the death of the surviving spouse. Some or all of the assets of the first spouse to die can be transferred into a bypass trust that may be shielded from federal estate tax by the applicable exclusion amount. The remainder of the assets of the first spouse to die can then be left to the surviving spouse, either outright or in a marital trust that will qualify for the unlimited marital deduction. Tax considerations Income Tax Income from assets transferred to a revocable living trust will be taxed to the grantor of trust If you transfer assets into a revocable bypass trust while you are alive, you will still be subject to income tax on any income generated by those assets. Since the transfers of assets are not irrevocable transfers into the trust, you are still considered the owner of the assets for income tax purposes. After your death, the income from the trust will be taxed to either the beneficiary (usually the surviving spouse) or the trust, depending on whether the income is paid out to the beneficiary or retained by the trust. Example(s): Say you set up a revocable bypass trust during your lifetime and transfer $500,000 to the trust. The trust generates $20,000 per year of income. You must include this amount in your taxable income each year. After you die, the beneficiary of the trust (usually your spouse) will then be taxed on this income if it is distributed to him or her. If the trust retains the income, it will be taxed on the income. Gift and Estate Tax No gift tax due for transfers into a revocable living trust Since you retain the right to terminate a revocable living trust, no gift tax is due at the time of the transfer into the trust. Those assets, however, will be included in your gross taxable estate when you die. Gift tax may be due on transfers into an irrevocable trust A gift tax may be due if you make transfers into an irrevocable trust during your lifetime. Any gift tax due may be offset by your available applicable exclusion amount of $12,060,000 (in 2022, $11,700,000 in 2021). Caution: Any portion of your applicable exclusion amount you use during your lifetime effectively reduces the amount that will be available at your death. Tip: Lifetime gifts may qualify for the annual gift tax exclusion if trust beneficiaries are given Crummey withdrawal powers. These gifts are not taxable and do not use up your applicable exclusion amount. Assets transferred into a testamentary bypass trust are included in the taxable estate of the grantor Any assets that are transferred into the bypass trust at your death will be included in your taxable estate. However, you can use your applicable exclusion amount to shelter these assets from the federal estate tax. Most people using the bypass trust authorize their executor to transfer just enough assets into the bypass trust to fully use their applicable exclusion amounts then available. The remaining assets will then either be left directly to the surviving spouse or transferred into a marital trust. These assets will qualify for the unlimited marital deduction, and no estate tax will be due at the death of the first spouse. In some rare instances, however, you may want to give your executor the discretion to overfund the bypass trust so your estate has to pay some estate tax at your death. Since the estate tax is graduated, it may make sense to incur estate tax at a lower rate at your death rather than overload the surviving spouse’s estate, where the marginal estate tax rate may be much higher. Tip: In 2013 and later years, a federal gift and estate tax rate of 40 percent generally applies to taxable amounts in excess of the applicable exclusion amount. In those years, there may be no advantage to equalizing estates in order to avoid graduated tax rates. Generation-skipping transfer tax will apply to transfers to beneficiaries two generations or more below grantor The generation-skipping transfer (GST) tax may apply to distributions from a trust in which there are beneficiaries (known as skip persons) who are two or more generations below the grantor. See the discussion above. Caution: The GST tax is a very complicated and onerous tax. If you think that you have any beneficiaries that may be skip persons, you should consult a competent and experienced estate planning attorney about the best ways to avoid the GST tax. Questions & Answers What size estate should a married couple have before they consider using a bypass trust? Most married couples will not need to set up a bypass trust if their combined assets are below the applicable exclusion amount. Couples with larger combined estates can use a bypass trust in conjunction with a qualified terminable interest property trust to take maximum advantage of the applicable exclusion amounts of both spouses. Most couples who have assets below the applicable exclusion amount can either hold all of the assets in joint name or have simple wills in which each spouse leaves all of his or her assets to the other spouse. If assets are held jointly, then upon the death of one joint owner, the other owner automatically owns all of the assets. If the value of the assets in the surviving spouse’s estate (including any assets transferred to the surviving spouse as a result of the death of the first spouse to die) is below his or her available applicable exclusion amount, no federal estate taxes will be due upon his or her death. A similar result would ensue if both spouses simply left all of their assets to each other. A trust may be desirable if one or both spouses would like his or her assets to pass to specific individuals upon the surviving spouse’s death. If so, it may make sense to set up a trust whereby the surviving spouse receives the income from the trust for life with the principal to pass to these specific individuals (possibly the couple’s children) at the death of the surviving spouse. Should a married couple with assets in excess of the applicable exclusion amount hold their assets jointly? No. In general, a married couple who expect to have assets in excess of the applicable exclusion amount should not hold their assets in joint name. If the assets are held jointly, then upon the death of the first spouse, the other spouse would automatically own all of the assets that would pass to that spouse tax free due to application of the unlimited marital deduction. The applicable exclusion amount of the first spouse to die would then be wasted, as there would be no assets taxable in his or her estate to which the exclusion can be applied. The surviving spouse’s estate may then be overqualified (i.e., have assets in excess of the applicable exclusion amount) due to inclusion of the joint assets. The married couple should divide up the ownership of the assets so that each one owns approximately an equal amount. Can life insurance be used in conjunction with a bypass trust? Yes. Many people use a revocable trust to hold life insurance in conjunction with a bypass trust (and sometimes a marital trust). One way to use a life insurance trust in conjunction with a bypass trust is to take out a life insurance policy on your life and then name the trustee of the revocable life insurance trust to be the beneficiary of the policy. Upon your death, the proceeds from the life insurance policy flow directly into the trust. The residue from your estate (i.e., what is left over after specific bequests, taxes, debts, and expenses) will also flow into the trust. The trust document will then authorize the trustee to divide the assets in the trust into both the bypass trust and the marital trusts. The trustee can decide at the time of your death how to best divide the assets to minimize taxes and to provide for your family. Does it ever make sense for a married couple to pay estate taxes at the death of the first spouse? Yes. There may be situations in which a couple with substantial assets will actually be better off paying some estate taxes at the death of the first spouse. If the estate of the first spouse to die would be taxed at a lower marginal rate, it may make sense to cause some assets to be included in his or her estate thereby incurring federal estate taxes at the lower marginal rate applicable to that estate. These assets will then not be included in the surviving spouse’s taxable estate, where the marginal estate tax rates may be much higher. Tip: In 2013 and later years, a federal gift and estate tax rate of 40 percent generally applies to taxable amounts in excess of the applicable exclusion amount. In those years, there may be no advantage to equalizing estates in order to avoid graduated tax rates. Can a bypass trust be set up in your will? Yes. The bypass trust would then be known as a testamentary trust. At your death, the assets in from your estate will fund the trust. One tradeoff to setting up a testamentary trust is that the trust cannot be funded until your estate has been probated. The probate of an estate can take from six months to two years. In contrast, an inter vivos trust may be funded during your lifetime. A testamentary trust may also be subject to supervision by the court making it more expensive to administer than an inter vivos trust. Why might it be useful to use the full applicable exclusion amount (or a portion of it) at the first spouse’s death? Even with the current portability of the basic exclusion amount, it might be useful to use the full applicable exclusion amount (or a portion of it) at the first spouse’s death if: There are persons other than your spouse that you would like to benefit prior to the death of your spouse. There are concerns whether the exclusion will be portable between spouses in the future (and the unused exclusion of the first spouse to die could be lost). There are concerns that the applicable (or basic) exclusion amount will be lower in the future (and the total amount sheltered by both spouses could be reduced). There are concerns that tax rates may be higher in the future (including the possibility that the failure to equalize estates may result in higher graduated tax rates on the surviving spouse’s estate). The property is expected to appreciate in value after the first spouse’s death (and could outgrow any unused exclusion, which is not indexed for inflation). The spouses would like to benefit multiple generations and use both of their GST tax exemptions (the GST tax exemption is not portable). State death taxes can be saved (state exclusion amounts may be different and may not be portable between spouses). Tip: Property included in the gross estate for estate tax purposes generally receives a step-up in basis to fair market value for income tax purposes. Property that bypasses the surviving spouse’s estate will not receive a step-up in basis at the surviving spouse’s death. This could result in greater income tax, for example, when property is sold. Planning should attempt to balance estate tax and income tax considerations. This article was prepared by Broadridge. LPL Tracking #1-05112354

What is a revocable life insurance trust? A revocable life insurance trust is a trust that is funded, at least in part, by life insurance policies or proceeds. It can be an effective planning tool that provides a source of liquid funds to your estate for the payment of taxes, debts, and expenses. Moreover, it allows you the flexibility to control the trust assets or amend the trust at any time prior to your death. A revocable life insurance trust is not designed to minimize transfer taxes or income taxes. A revocable life insurance trust does not remove the future appreciation of assets in the trust from your gross estate, nor does it remove the life insurance proceeds. To minimize taxes in these ways, you need to create an irrevocable life insurance trust (ILIT). If you’re a business owner, a revocable life insurance trust can be a great way to ensure that your heirs will be able to keep the business running after you die because they will have the cash to keep paying the bills. Example(s): Adam owns a small but busy diner that he runs with his sons, Eli and Jason. The business has grown since Adam first started it, and it continues to expand and become more valuable. Although the business is thriving, it generates very little extra cash because the cash is used to pay the bills and buy the food. Adam wants Eli and Jason to continue running the diner after he dies. He is worried that when he dies, there will not be enough cash to pay his debts, taxes, and other costs, and that the boys will have to sell the diner. Also, Adam wants to transfer ownership of the diner to Eli and Jason now, but retain control of the diner during his life. Example(s): He contacts his insurance professional, and together they decide on a life insurance policy that suits Adam’s needs. Adam also contacts his attorney, who draws up a document creating a revocable life insurance trust. Adam names himself as trustee, his spouse as cotrustee, and the boys as the beneficiaries. A provision in the trust document permits the cotrustee to pay the costs of settling Adam’s estate with the life insurance proceeds. Adam purchases the life insurance policy and funds the trust with it. In addition, Adam transfers the diner’s stock to the trust. Example(s): At Adam’s death, the value of the business and the life insurance proceeds are included in Adam’s gross estate. The cotrustee collects the life insurance policy proceeds, pays the costs incurred to settle Adam’s estate, and distributes the remaining proceeds to Eli and Jason. The two sons continue to pay the bills and operate the diner with little interruption because of Adam’s death. Tip: A revocable life insurance trust is extremely useful if you lack liquidity (e.g., your assets include mainly a closely held business interest and/or real estate holdings). What types of revocable life insurance trusts are there? Funded versus unfunded A revocable life insurance trust can be either “funded” or “unfunded.” Technically, an “unfunded” trust is one that either: (1) holds only the life insurance policy and no other assets until your death, or (2) is named as the beneficiary of the life insurance policy and receives the proceeds upon your death only. After you die, the trust receives the proceeds and administers them according to the terms of the trust. In addition, other assets may be received by the trust along with the insurance proceeds, such as assets poured over from your will or death benefits paid by your employer or employer benefit plan. On the other hand, a “funded” trust holds not only the life insurance policy, but other assets too. You may want to put other assets in the trust in order to coordinate their final disposition with the insurance proceeds. The main reason for a funded trust is that property placed in the trust avoids probate. A revocable life insurance trust is typically unfunded because income that is earned by a funded trust is subject to income tax, even though the income itself is used to pay the premiums. Instead, if the trust holds the policy, you can make regular contributions to the trust to provide the funds needed to pay the premiums. Alternatively, you can simply name the trust as beneficiary and pay the premiums yourself. Why would you want a revocable life insurance trust? Provides for your family The most important benefit of the revocable life insurance trust is that it can help provide for your family. Life insurance can provide cash to help support your spouse and children after you die. This may be especially important if you are young, do not have any other significant assets, or are the primary breadwinner in the family. Life insurance can help bring some peace of mind because it can help improve the financial security of your family even though you’re no longer around to provide for them. Provides cash to your heirs so that your business can continue to operate If you’re a business owner, it is likely that your business may experience a temporary decline after you die. Your heirs may have difficulty with the day-to-day operations if there is not enough cash to keep it going during this period. A revocable life insurance trust can help provide the liquidity needed by your heirs in order to keep the business operating after you die. Provides funds for the settlement of your estate A revocable life insurance trust can help provide liquidity to your estate so that there will be funds with which to pay your final income taxes, death taxes, administration expenses, debts, and other costs associated with the settlement of your estate. These costs can sometimes be significant and may take a large bite out of your estate. If there is no cash available, your personal representative may have to sell some of your assets. This may deprive your heirs of property that you intend for them to have. Also, if you’re a business owner, this can mean that your heirs may have to sell your business. Life insurance proceeds can be used instead, saving your assets — and your business — for your heirs. Caution: A provision in the trust document that requires the trustee to make payments to your estate to pay settlement costs may expose the proceeds to your estate’s creditors. It is therefore recommended that a provision that allows the trustee to make these payments (in other words, a discretionary power) be included instead. Provides for professional management of your assets Although life insurance can be given outright to a member of your family, there are advantages to putting the policy in a trust instead. If the policy is in a trust, the trustee is the legal owner who holds it for the benefit of your heirs. The trustee is responsible for the management and distribution of the trust income and principal. You select the trustee and either determine when the beneficiaries receive the proceeds, or provide the trustee with discretion to decide the amount and timing of distributions. A professional trustee (e.g., a bank) can invest the assets in the trust in a way that earns the most income. This may be especially attractive if your beneficiaries are minors or others who do not have the capacity or judgment to manage the policy or proceeds. This may also be attractive if you are in your golden years and no longer want the bother of managing some of your assets. Avoids probate Assets in the trust are not subject to probate. This is true for any other type of asset you transfer to the trust. Therefore, trust assets can be made available to your beneficiaries more quickly than if they were to pass through your probate estate. In addition, your estate will avoid probate costs for these assets. Maintains your privacy Assets that pass through probate are a matter of public record, open to anyone who cares to look at it. Because the trust assets pass outside of probate, distribution of this property remains private (unless, of course, you choose to tell someone). Trust assets may be protected from creditor’s claims Assets you put in a revocable life insurance trust may be protected against the claims of your creditors, depending on the laws in your state. However, because you retain control over or rights to the assets in a revocable life insurance trust, they may be vulnerable. Check with your state or your attorney to find out if the assets in a revocable life insurance trust are protected. Lets you retain control over the trust and trust assets A revocable life insurance trust gives you some flexibility because you can alter, amend, and even terminate the trust if you choose. This may be attractive if the thought of losing complete control over your assets troubles you. What are the tradeoffs? Future appreciation of trust assets is not removed from your estate for estate tax purposes In order to avoid potential estate tax liability, you can’t retain any incidents of ownership. By its very nature, you will retain some incidents of ownership in a revocable life insurance trust. Therefore, the full value of the trust (including any other assets you transfer to the trust) will be includable in your estate for estate tax purposes. Since you may not be able to remove future appreciation of the assets you transfer to the trust from your estate, you should consider creating an irrevocable life insurance trust (ILIT) instead. Insurance proceeds are not removed from your estate for estate tax purposes Because you retain incidents of ownership in the insurance policy up until the date of your death, the insurance proceeds will be includable in your estate for estate tax purposes. Only proceeds on policies transferred to a properly structured irrevocable life insurance trust (ILIT) will be removed from your estate. Distributions may be subject to generation-skipping transfer (GST) tax and/or gift tax Distributions of property from the trust may be a taxable transfer for GST tax and/or gift tax purposes and may result in tax liability, subject to the application of the annual gift tax exclusion (currently $16,000), the applicable exclusion amount (in 2022, $12,060,000 plus any deceased spousal unused exclusion amount), and the GST tax exemption ($12,060,000 in 2022). A revocable life insurance trust is ignored for income tax purposes The IRS does not treat a revocable life insurance trust as a separate legal entity as it does with most forms of trusts. All trust income, deductions, and credits will flow through to you on your personal income tax return. Therefore, you will be taxed on any trust income. This may be negligible if it is an unfunded trust, or it could be significant if you transfer substantial amounts of property to the trust. May be costly You will incur more costs if you put life insurance in a trust than if you give life insurance outright. You will have to pay legal fees to draw up the trust document and perhaps accountant’s, tax preparer’s, and trustee’s fees as well. How do you implement a revocable life insurance trust? Assuming you have decided that you want to make a transfer of a life insurance policy, and that the transfer should be made in trust rather than outright, there are specific steps you should follow for effective implementation. Contact your insurance agent If you are purchasing a new policy, your insurance agent will help you decide what kind of policy is best for you. Hire an attorney There are many complex legal issues that can arise when you set up a trust. You should hire an experienced estate planning attorney to draft the trust document and advise you on these complex legal issues. Choose your beneficiaries You will have to select the beneficiaries of the trust. Spouses are a common choice, but this may not be the best. Typically, it will be either your children and/or your grandchildren. If your children or grandchildren are minors, then you should also appoint guardians for them. Select a trustee The decision of who serves as trustee and successor trustee is an important one. You will probably want to name yourself as trustee. Alternatively, you could choose an independent trustee, such as a bank, sibling, parent, or anyone else who is not a beneficiary. You may want someone who has experience administering a trust and who understands that the purpose of the trust is to hold a life insurance policy on your life. Transfer/buy the policy and fund the trust, if desired You may transfer an existing policy to the trust, buy a new policy and transfer it to the trust, or have your trustee purchase the policy. Alternatively, you may simply designate the trust as the beneficiary of the life insurance policy. In addition, you may want to transfer other assets to the trust. Your insurance professional and your attorney should assist you in transferring ownership. File GST tax and/or gift tax returns, if necessary If you make distributions from the trust during your life, then you may have to file a GST tax and/or gift tax return. If you have also exhausted the unified credit, then you may have to pay taxes too. If this is the case, you may want to consult with your accountant or tax attorney prior to making the distribution. Include trust income on your personal annual income tax return Any income earned by the trust must be included on your personal income tax return for the year in which it is earned. What are the tax implications of a revocable life insurance trust? Income tax implications Because you retain the right to revoke the trust, you are considered to be the owner of the trust. Therefore, any income earned by the trust must be included on your personal income tax return for the year in which it is earned. After your death, the trust becomes a separate taxpayer. Estate tax implications The full value of the trust will be includable in your estate for estate tax purposes. To avoid this result, you need to create an irrevocable life insurance trust (ILIT). Gift tax implications Under the gift tax laws, a gift is not taxable until it is complete. Because you retain the power to revoke the trust at any time prior to your death, any transfers of property you make to the trust are incomplete and not subject to gift taxes. However, if you make a distribution to a beneficiary during your life, that distribution makes the gift complete and subject to gift taxes (reduced by applicable deductions, the applicable exclusion amount, and the annual gift tax exclusion). This article was prepared by Broadridge. LPL Tracking #1-05113492

Introduction If you have given shares of your closely held business to your participating children during your lifetime, you can include an equalization clause in your will or trust to ensure that your nonparticipating children are treated fairly upon your death. An equalization clause directs your executor to ensure that your nonparticipating children receive equal treatment with respect to distribution of your wealth before any remainder of the estate is distributed. This can be accomplished only if you have sufficient assets to effectuate equalization. Example(s): Ted owns a business. His son, Bob, works for him. His daughter, Nellie-Mae, does not. Ted wants to ensure that both Nellie-Mae and Bob receive equal shares of his estate. In each of the last six years, Ted has given Bob shares of the business valued at $10,000, for a total of $60,000. He has made no such gifts to Nellie-Mae. If Nellie-Mae and Bob each receive half of Ted’s remaining estate upon his death, then Bob will have received significantly more of Ted’s wealth than Nellie-Mae. Example(s): Ted puts an equalization clause in his will directing his executor to equalize distributions to Nellie-Mae and Bob before distributing the remainder of the estate. Upon Ted’s death, the estate holds net assets valued at $200,000. The executor makes the following calculation to determine what each child will receive: Net Estate$200,000Value of Lifetime Gifts to Bob+ 60,000 ———-Subtotal260,000Divided by Number of Children (2) Total to Each Child130,000Distribution to Nellie-Mae130,000Distribution to Bob130,000Less Amount Received during Lifetime– 60,000 ———-Total Remaining Distribution to Bob$ 70,000 Strengths Generally inexpensive and easy to do Arranging to have an equalization clause inserted in a will or trust is fairly easy and inexpensive. It is imperative that your intentions are clear in writing and that your records properly reflect the value of gifts transferred during your lifetime. Your executor will need this information to make accurate calculations and avoid disagreements among your children. Shifts burden of equalizing distributions to your executor Use of an equalization clause allows you to avoid making an immediate decision about how to equalize distributions. It makes your intentions clear and leaves your executor to work out the details based on the circumstances that exist at the time of your demise. May allow you to minimize estate taxes Transferring shares of your business to your participating children during your lifetime will reduce the value of your business in your estate, and you may be able to minimize potential estate taxes. The equalization clause can be applied to the balance of your estate to make sure that nonparticipating children receive fair treatment. Tradeoffs Does not guarantee that sufficient funds will be available An equalization clause, by itself, does not guarantee that your estate will have sufficient funds to carry out your intentions. If you survive well beyond your life expectancy and hospital or medical expenses erode the value of your estate, there may be few remaining assets for your executor to administer. If that is the case, your nonparticipating children may receive less than your participating children, regardless of your best intentions. You can be more certain that cash will be available for nonparticipating children by equalizing estate distributions using life insurance or a buy-sell arrangement . Does not solve corporate control problems Many equalization plans seek to make assets available to nonparticipating children while allowing the participating children to maintain control over the closely held business. Equalization clauses do not provide such a mechanism. If your estate contains only business assets, your nonparticipating children may end up owning a voting share of the company. Tip: Use of an equalization clause in conjunction with a nonvoting stock arrangement or buy-sell agreement may eliminate this concern. Or, the equalization clause can tell the executor which assets to allocate to which children, assuming sufficient assets exist. Leaves executor to work out details By using an equalization clause, you leave your executor to work out details of the distribution scheme that are not otherwise made explicit in your will or trust. Circumstances as they exist upon the date of your death may differ from their original condition. You may not have been able to anticipate all possible variables. You will be leaving important decisions about your family and your family business to someone else. How to do it Transfer shares of family business to participating children during your lifetime Transferring shares of the family business to your children during your lifetime may help to minimize estate taxes by reducing the value of the business held by your estate. Transfers can be made systematically over a period of years to take advantage of the annual gift tax exclusion. Speak to an attorney about equalization issues You will want to discuss your situation and equalization issues with an attorney who is familiar with business planning and tax issues. The attorney should draft the equalization clause as part of your will or trust. Keep accurate records Your executor will need to know exactly what was transferred to whom during your lifetime. Good records can help your executor make accurate determinations and settle conflicting claims made by heirs. Periodically review the plan You should periodically review your plan. Hospital and medical expenses could diminish your estate, the value of your business assets could change dramatically after you retire, or you may decide to make additional gifts to children. You want to be certain that your estate will have enough assets to carry out your plan in a way that makes sense for your family and the family business. Otherwise, you may need to explore other planning solutions. 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 #1-595960

What is it? A charitable lead trust is a trust with both charitable and noncharitable beneficiaries. It is called a lead trust because the charity is entitled to the lead (or first) interest in the trust property, and the noncharitable beneficiary receives the remainder (or second-in-line) interest. The operation of a charitable lead trust is thus the exact opposite of a charitable remainder trust. Every year for the trust term, the charity receives a payment from the trust property. At the end of the trust term, the remaining assets pass to the noncharitable beneficiary. A charitable lead trust works like this: You transfer property to a trust. It can be almost anything: cash, securities, real property, a rare collectible item (though this would need to be sold to produce income). You choose a noncharitable beneficiary. This person can be anyone: you, your spouse, your hockey coach. You choose a charity. You determine how much money the charity will be paid each year from the trust assets. This payment can be either an annuity amount, which is a fixed amount of the initial fair market value of the trust assets, or a unitrust amount, which is a specified percentage of the value of the trust assets based on an annual revaluation of the assets. You determine how long the trust will last. It can be for a term of years or for the life of an individual who is then living. At the end of the stated period of time, all the remaining trust assets pass to the noncharitable beneficiary. Example(s): Mike decides to donate some money to his favorite charity. He transfers $200,000 to a 10-year charitable lead trust and names his wife, Carol, as the noncharitable beneficiary. Mike specifies that the payout rate to the charity will be a fixed 7% annuity amount. The result is that, every year for 10 years, the charity will receive a payment of $14,000, which is 7% of $200,000 (the initial fair market value of the trust assets). After 10 years, all the remaining property in the trust will pass to Carol. A charitable lead trust can be established to take effect either during your life (a living or inter vivos trust) or at your death (a testamentary trust). A charitable lead trust operates in an identical manner in either situation. The reasons you might choose one over the other include tax consequences and the ability to see your trust in operation. For example, in the case of a testamentary trust, your personal representative is entitled to subtract the present value of the charity’s interest from your gross estate. When can it be used? You want to donate an asset to charity for a period of time but want a noncharitable beneficiary to receive the property at a later date With a charitable lead trust, you can provide an income stream to your favorite charity for a period of years, potentially receive an income tax deduction, and, at the same time, provide for the eventual return of the trust property to a noncharitable beneficiary. The income stream to charity is in the form of an annuity payment or a unitrust payment and is paid to the charity at least once per year. When the trust term ends, the remaining trust assets pass to the noncharitable beneficiary. Strengths Provides a gift and estate tax haven for assets expected to appreciate in value When you establish a charitable lead trust, the IRS assigns an immediate value to the interest of the noncharitable beneficiary, even though this person will not receive the trust assets until the trust term is over. Yet, during these years, the trust assets might appreciate substantially in value. When the assets eventually pass to the noncharitable beneficiary, any appreciation in the property’s value is not included in your gross estate for purposes of determining estate tax liability, nor is the appreciation considered in determining the value of your gift to the noncharitable beneficiary. Tip: The value of the noncharitable beneficiary’s interest is determined by first calculating the value of the charity’s interest. This is done using special IRS tax tables. The charity’s interest is then subtracted from the total trust assets to arrive at the noncharitable beneficiary’s interest. Example(s): Tom transfers $500,000 worth of Acme stock to a 15-year charitable lead trust and names his son, Jamie, as the noncharitable beneficiary. The trust is to pay the charity a guaranteed annuity amount of 8%. Using special IRS tax tables and an interest rate of 3%, the charity’s interest is determined to be $477,516. Thus, Jamie’s interest is $22,484. The result is that Tom has made a taxable gift, and may owe federal gift tax. However, any gift tax due may be offset by Tom’s applicable exclusion amount ($12,060,000 in 2022), if it is available. Yet, the value of the gift to Jamie has been reduced substantially by the value of the charity’s interest. The advantage is that, if the stock appreciates significantly in Tom’s lifetime, Tom will not owe any federal gift tax on the appreciation amount. Similarly, the value included in determining Tom’s gross estate is fixed at $22,484. In addition, the gift tax Tom paid can be credited against any estate tax that may be owed. (Note: State gift tax may also be imposed.) Caution: Any portion of the applicable exclusion amount you use during life will effectively reduce the applicable exclusion amount that will be available at your death. Allows you to donate to charity and at the same time keep trust assets within the family If you want to donate an interest as sacred as your family compound to charity, a charitable lead trust can help you keep this asset in the family over the long haul. Even if the trust is funded with other types of property, a charitable lead trust permits the development of investment strategies that will serve family interests. Allows you to postpone the noncharitable beneficiary’s receipt of the trust assets Suppose you have a teenager who is too financially immature to successfully manage a chunk of money. Using a charitable lead trust, you can set the duration of the trust to coincide with the age at which you believe your child will best be able to manage the money. At the end of the trust term, the trust property passes to your not-so-little money manager. Provides for an orderly program of annual charitable giving A charitable lead trust is an orderly way to donate to charity on an annual basis for a predetermined period of time. The money used to fund the trust is money that might otherwise go largely for taxes. Allows you to choose the payment method to charity In a charitable lead trust, the IRS allows you to pay the charity under the annuity method or the unitrust method. The annuity method is a payment of a fixed sum or a fixed percentage of the initial fair market value of the trust assets (the trust assets are valued only once). An annuity payment remains the same from year to year. By contrast, the unitrust method is a payment of a specified percentage of the trust assets, which are revalued every year. So the amount fluctuates every year depending on the value of the trust assets. Additional contributions to the trust are allowed only under the unitrust method. Does not require any minimum percentage payout to charity Unlike charitable remainder trusts, there is no rule that says the charity must receive annual payments equal to at least 5% of the original or annual value of the trust assets. So, if you want to give the charity 4% of the trust assets, you can. Provides you with positive social, religious, and/or psychological benefits for donating to your favorite charity Yes, the tax benefits can be nice. In addition, donating to charity can be a real morale booster. Reduces potential federal estate tax liability When you create a testamentary charitable lead trust, the IRS allows the executor of your estate to deduct the entire present value of the lead interest to charity. This amount is calculated using special IRS tax tables, which take into account the duration of the trust and the payout amount to charity. Example(s): Pat establishes a 10-year charitable lead trust in his will, with the remainder to his pal, Mark. Assume that the present value of the charity’s lead interest is $1 million. The result is that Pat’s executor will be entitled to subtract $1 million from the gross estate. Tradeoffs No income tax deduction unless you are also the owner of the charitable lead trust In a typical charitable lead trust, the individual who creates the trust (the donor) is not the noncharitable beneficiary. In this case, the donor is not entitled to deduct the present value of the charity’s interest on his or her income tax form. However, if you are both the donor and the owner of the trust (as defined by the IRS), you are entitled to a one-time income tax deduction in the year of the trust’s creation for the present value of the interest to charity. Caution: If you are the owner of the trust, the IRS taxes you on the income earned by the trust each year. Requires an irrevocable commitment If you have any doubts about donating to charity, you should think twice before establishing a charitable lead trust. Once you transfer property to the trust, it’s the charity’s to keep for the duration of the trust. Requires the charitable payment to be made each year, regardless of whether there is sufficient trust income available IRS rules require that if the income earned by the trust (such as dividends and/or interest) is insufficient in any given year to meet the required payment to the charity (whether an annuity or unitrust amount), then the difference must be paid from capital gains or principal. A drastic result would be the noncharitable beneficiary ending up with nothing. Example(s): Suppose the trust asset is an apartment house and the rents are the income from which the annual payment to charity is made. If the rents collected fall below the required payment amount, the trustee would have to borrow against the property or, even worse, sell the property to make the required payment to charity. How to do it Consult a competent legal advisor to draft the trust document A legal advisor well versed in the area of charitable lead trusts is your best bet. A charitable lead trust is subject to many technical requirements and must be drafted with the utmost care in order to gain favorable tax benefits. Often, additional advisors, such as tax specialists, accountants, life insurance experts, and/or CERTIFIED FINANCIAL PLANNERS™, will be necessary to devise the best strategies and crunch the numbers. Pick a noncharitable beneficiary The noncharitable beneficiary can be anyone: you, a spouse, another family member, or friend. Caution: If you are both the donor and the noncharitable beneficiary and you die before regaining full control of the trust property (e.g., during the trust term), the value of your remainder interest is included in your gross estate. Pick a charity you wish to donate to and verify that it is a qualified charity The IRS allows you to deduct contributions only to qualified charities. Generally, qualified charities are those operated exclusively for religious purposes, educational purposes, medical or hospital care, government units, and certain types of private foundations. Every year, the IRS publishes a list of all qualified organizations in IRS Publication 78, commonly known as the Blue Book. Check to make sure your charity is listed in this publication. Tip: Once you have picked a charity, it is a good idea to contact the charity to make sure it is willing to accept such a gift. Identify the asset(s) you want to use to fund the trust You can use any type of property to fund the trust, including cash, securities, or rental property. It’s a good idea, though, to use at least some type of income-producing property. You don’t want to dump a piece of bare real estate into the trust and assume the land can be sold in time to make the required payment to charity. Tip: When hard-to-value assets are placed into the trust (like a closely held business), the annuity method is a wise choice because the assets need to be valued only once at the inception of the trust. Determine the duration of the trust The trust term can be for the life of the noncharitable beneficiary or for any period of years. The term can even be a combination of a life and a period of years (for example, the life of Mary, plus 10 years). The only prerequisite is that if the trust is measured by the life of an individual, that person must be living at the time the trust is created. Determine the payment method In a charitable lead trust, the annual payment to charity can be either an annuity amount or a unitrust amount. An annuity amount is a fixed sum or a fixed percentage of the initial value of the trust assets. A unitrust amount is a fixed percentage of the annual value of the trust assets. Once you select the method, you must then select a payout rate (for example, 8%). Select a trustee Once you transfer property to a charitable lead trust, it is the trustee’s responsibility to manage, invest, and conserve this property. The trustee has a dual fiduciary responsibility: to generate income for the charity and to preserve the trust assets for the noncharitable beneficiary. Caution: You can appoint yourself trustee. However, you are then responsible for investing the trust assets to produce sufficient income to pay the charity. If the trust income is insufficient, you must invade the principal to make up the difference. Frequent dips into principal may mean an early demise of your trust. Another pitfall is that, as trustee, you will need to keep abreast of any new IRS regulations on charitable lead trusts and comply with them in order to gain favorable tax treatment. Further, if you are the noncharitable beneficiary as well as the trustee, some states require that a cotrustee be appointed who is not also a beneficiary. Tip: Members of your family may serve as trustees. If a closely held business interest is used to fund the trust, the use of a family member as trustee can assure control of the family business. Coordinate the charitable lead trust with your existing will and/or living trust It is a good idea to make sure your charitable lead trust is coordinated with any other estate planning documents you have in order to achieve an integrated plan. A competent professional should undertake this review. File Form 5227 — Split Interest Trust Information Return You must file Form 5227 (Split Interest Trust Information Return) every year your charitable lead trust is in existence. Further, if it is your first year filing Form 5227, you must also include a copy of the trust document and a written declaration that the document is a true and complete copy. Tax considerations Income Tax Possible income tax deduction for donor of living charitable lead trust In order to receive an income tax deduction for the present value of the charity’s lead interest, you must first be considered the owner of the trust under IRS rules. As owner, the IRS allows you to take a one-time income tax deduction (in the year of the trust’s creation) for the present value of the payments the charity will receive over the life of the trust. One of the easiest ways to be considered the owner is to name yourself the noncharitable beneficiary. Caution: However, if you are the owner of the trust, the IRS taxes you on the income earned by the trust each year. If you qualify for a deduction, your deduction is limited to either 30% or 50% of your adjusted gross income, depending on the type of property donated to charity (via the trust) and the classification of the charity as a public charity or a private foundation. (For 2018 to 2025, the 50% limit is increased to 60% for certain cash gifts.) If you cannot take the full deduction in a given year, you can carry over and deduct the remaining amount the following year, for up to five years (assuming you still itemize deductions). Tip: Generally, a public charity is a publicly supported domestic organization, whereas a private foundation does not have the same base of broad public support. IRS Publication 78, published every year, notes whether your charity is public or private. Example(s): Using the tax tables and a 3% interest rate, the income tax deduction for a $100,000, five-year charitable lead trust with a 9% annuity payout rate is $41,217. The deduction for a 9% unitrust payout rate is $37,597. Income tax consequences for charitable lead trust The income tax treatment of a charitable lead trust is very different from the income tax treatment of charitable remainder trusts like CRATs and CRUTs. Unlike these trusts, a charitable lead trust is not exempt from income tax. Instead, it is treated for income tax purposes as a complex trust and taxed under the normal rules of Subchapter J of the Internal Revenue Code. Under these rules, the charitable lead trust is taxable on all of its income but is entitled to all available deductions, including a deduction for any amount paid to charity. The trust document should identify the sources of payment and the order in which these sources are to be used. Ordinarily, the trust instrument will provide that payments are to be made in the following order: ordinary income (including short-term capital gain), capital gain, unrelated business income, tax-exempt income, and principal. Unless specific provisions for the order are made, state law may determine the source of payments and the order of use. If the payment to charity is not made out of gross income, the trust’s deduction for the payment will be disallowed. Tip: If the trust is a grantor trust under IRS rules (which means you are the owner of the trust), then the trust does not owe taxes on the trust income, but you do. Gift Tax No gift tax if you and/or your spouse are sole noncharitable beneficiaries If you and/or your spouse are the only noncharitable beneficiaries of a charitable lead trust, you do not owe gift tax. The payment to your spouse falls under the unlimited marital deduction. Caution: In community property states, a husband and wife are treated as equal owners. If community property is used to fund a trust that benefits only one spouse or if separate property of one of the spouses is used to fund a trust that provides lifetime benefits to both parties, there is a recognized gift to the other spouse. This may have implications under the particular state’s gift tax law. Possible gift tax consequences if someone other than spouse is noncharitable beneficiary If the noncharitable beneficiary of a charitable lead trust is someone other than or in addition to your spouse, federal gift tax rules will come into play. The remainder interest to the noncharitable beneficiary is valued at the time the charitable lead trust is created. However, the $16,000 (in 2022) annual gift tax exclusion cannot be used to offset any of the taxable portion of the gift because the gift is of a future interest. Technical Note: The gift to the noncharitable beneficiary is included in your estate for purposes of determining your tentative estate tax. However, any gift tax paid is credited against any estate tax owed. Also, the gift tax paid is excluded from your estate unless you die within three years after the trust is created. State gift tax may also be imposed. Estate Tax Reduces size of gross estate When you create a testamentary charitable lead trust, the IRS allows the executor of your estate to deduct the present value of the lead interest to charity from your gross estate. Example(s): In his will, Frank transfers $1 million to a 20-year charitable lead trust that names the local humane society as charitable beneficiary and his best friend, Ken, as the noncharitable beneficiary. He chooses the annuity payment method and sets the rate at 6%. Assuming a 3% interest rate under the IRS tax tables, the allowable estate tax deduction is $892,650, which wipes out most of the estate tax liability on the trust property. If the annuity rate is increased to 6.5%, the resulting estate tax deduction would be $967,037. Caution: If you are both the donor and the noncharitable beneficiary and you die before regaining full control of the trust property (i.e., during the trust term), the value of your remainder interest is included in your gross estate. Caution: If you name your grandchildren as the noncharitable beneficiaries of your charitable lead trust, generation-skipping transfer tax (GSTT) issues may arise when the trust term ends. Questions & Answers Can you choose more than one noncharitable beneficiary? Yes, you can pick more than one noncharitable beneficiary. Make sure the trust document sets forth how they will split the trust assets. Can the noncharitable beneficiary also be the trustee? Yes, the noncharitable beneficiary of a charitable lead trust may also act as trustee of the trust. In this way, the beneficiary can control the property he or she will someday own. If there is more than one noncharitable beneficiary, they can all be appointed trustees. What are the strengths and tradeoffs of the annuity method and the unitrust method? In a charitable lead trust, the IRS allows you to choose whether the charity is paid by the annuity method or the unitrust method. You must identify the method in the trust document. With the annuity method, the charity is paid a fixed sum or a fixed percentage of the initial fair market value of the trust assets. The main advantage of this method is simplicity, in that the trust assets need to be valued only once at the inception of the trust. The disadvantages are that the payment remains the same every year, and no additional contributions to the trust are permitted once the trust is funded. With the unitrust method, the charity is paid a specified percentage of the trust assets, as revalued every year. The main advantage of this method is that you can make additional contributions to the trust. The disadvantage is that the trust assets need to be revalued every year and the expense comes out of the trust. Another important difference is that once a unitrust amount is set, it cannot be changed. By contrast, an annuity amount can be changed by a specified amount at a specified time, the details of which must be spelled out in the trust document. The caveat is that the new annuity amount cannot be determined by reference to any fluctuating index (such as a cost-of-living index). Tip: The annuity method is a wise choice when hard-to-value assets are put into the trust because they have to be valued only once. Do you get an income tax deduction for establishing a charitable lead trust? In order to receive an income tax deduction for the present value of the charity’s lead interest, you must be considered the owner of the trust under IRS rules. Once the IRS considers you the owner of the trust, you receive an income tax deduction for the present value of the charity’s interest. This deduction is a one-time event allowed in the year of the trust’s creation. One of the easiest ways to meet the owner test is to retain an interest in the trust assets as a noncharitable beneficiary. This interest, called a “reversionary interest” because it reverts to you, must be at least 5% of the total trust assets. This calculation is made at the inception of the trust using IRS actuarial tables. You may also be considered the owner of the trust under the 5% reversionary interest rule if your spouse has more than a 5% interest in the trust assets. However, your income tax deduction comes at a price. The cost of this deduction is that once you are considered the owner of the trust, the IRS then taxes you every year on the income earned by the trust under the grantor trust provisions of the Internal Revenue Code. This is true even though the charity receives the trust income, not you. So the bottom line is that while you receive an income tax deduction, you must also pay income tax on the trust income each year. Unfortunately, the IRS does not allow you to offset any amount of trust income paid to charity. Tip: One way to eliminate paying taxes on trust income is to have the trust hold only assets that produce tax-exempt income, such as tax-exempt municipal bonds. However, these assets may not produce enough income to make the required payment to charity. In most instances, your deduction is limited to 30% of your adjusted gross income. The 30% limitation is used because the IRS considers your gift “for the use of” and not “to” the charity. If the trust is funded with long-term capital gain property and the charity is not a public charity, then the 20% limitation applies. If you are unable to take the full deduction in the given year, you can carry over and deduct the difference for up to five succeeding years (assuming you still itemize deductions in those years). Technical Note: The amount of your deduction is calculated using special interest rate tables established by the IRS. The current rules require the value of a remainder interest to be calculated using an interest rate that is 120% of the federal midterm rate then in effect for valuing certain federal government debt instruments for the month the gift was made. In addition, the calculation uses the most recent mortality table available to determine the mortality factor. Example(s): John sets up a five-year charitable lead trust with $200,000 for a wilderness charity and names himself the noncharitable beneficiary. He selects the annuity method and sets the charity’s payment at 5%. Assume: (1) the present value of the charity’s interest (under the tax tables) is $65,000, (2) the trust earns $16,000 of income in the first year, and (3) John’s adjusted gross income for the year is $80,000. Example(s): The result is that John is considered the owner of the trust because he has retained a reversionary interest. Thus, in the first year of the trust, John is entitled to a one-time income tax deduction for the value of the charity’s interest ($65,000), limited to 30% of his adjusted gross income ($24,000). So, assuming he itemizes deductions, John can take a $24,000 charitable deduction on his tax return. The remaining $41,000 can be carried over for up to five succeeding years and deducted in a similar manner. In addition, in the same year, John must also report income of $16,000 on his tax form, which is the income earned by the trust. He is not allowed an offset for $10,000, which is the annuity amount paid out to charity in the first year. Technical Note: If you are no longer taxed on the yearly income earned by the trust (due to your death, for example), there will be a partial recapture by the IRS of your previous one-time deduction for the value of the charity’s lead interest. Example(s): Suppose you establish a charitable lead trust for a five-year term and name yourself the noncharitable beneficiary. In the first year of the trust, you are entitled to an income tax deduction for the present value of the charity’s interest. If you die in year three, however, the recapture rules will take effect. The result is that your income in year three must include a recaptured portion of the deduction that you took in year one. Can a charitable lead trust pay a noncharitable beneficiary during the same period of time it is paying a charity? Ordinarily, the noncharitable beneficiary of a charitable lead trust holds a remainder interest only, which means it is second in line to the charity’s interest. However, in certain situations, the IRS allows a noncharitable beneficiary to receive an income interest that runs concurrently with the charity’s interest. The income interest is allowed only if it is paid from trust assets that are segregated from the assets used to pay the charity. Caution: Make sure this provision is drafted correctly in the trust document and implemented according to IRS regulations. Otherwise, the IRS may rule that the entire charitable lead trust is invalid. Can you pay the charity an amount in excess of the required annuity or unitrust payment? Yes, the trust document can provide that any trust income in excess of the amount required to be paid to charity must be set aside for the charity, too. The trust assets need not be segregated for you to take advantage of this rule. However, the amount of your charitable deduction does not increase. It is based only on the amount that must be paid to charity. Example(s): Peter transfers $100,000 to a five-year charitable lead trust and sets the unitrust payment at 7%. The trust document provides that any excess trust income be paid to charity. Assume that in year one the trust earns $10,000 of income. The result is that the charity will receive all $10,000 of income, even though the required unitrust payment is only $7,000. The charitable deduction is $7,000. What are the advantages of using a charitable lead trust over other charitable remainder trusts (CRAT or CRUT) or a pooled income fund? A charitable lead trust allows you to donate to charity for a period of years and then give the remaining trust assets to your family (or other noncharitable beneficiary). The charitable remainder annuity trust (CRAT), charitable remainder unitrust (CRUT), and pooled income fund all operate in the reverse. They provide an income stream to the noncharitable beneficiary for a period of time and then pass the remaining assets to charity. One of the biggest advantages of a charitable lead trust is the potential to pass property to your family with minimal gift and estate tax liability. This is especially true when you fund the trust with an asset that is expected to appreciate substantially in value. The reason for this is that your gift and/or estate tax liability is determined by the fair market value of the property at the time of transfer to the trust, not by its appreciated value when it passes to the noncharitable beneficiary 10, 20, or 30 years in the future. Also, the IRS does not require you to give any minimum amount to charity. However, unlike a CRAT or CRUT, a charitable lead trust is not exempt from income tax. It is taxed as a complex trust. Also, the donor of a charitable lead trust is not entitled to an income tax deduction for the charitable contribution unless he or she is also considered the owner of the trust under IRS rules. However, as owner, the donor is then taxed on the trust income earned each year. This article was prepared by Broadridge. LPL Tracking #1-05109690

What are marital and related trusts? The term “marital and related trusts” refers to the several types of trusts that married individuals can establish to maximize use of their estate tax applicable exclusion amounts (the amount that can be sheltered from federal gift and estate tax by the unified credit) which, when combined with the unlimited marital deduction, allows the surviving spouse to benefit from family wealth during his or her lifetime while providing for the couple’s beneficiaries on the death of the surviving spouse. There are six different types of trusts that can be used to accomplish these goals. The most common type of estate planning that a married couple will do is called marital deduction and bypass planning. Each person in a marriage will set up two (and sometimes three) separate trusts either during his or her lifetime or in his or her will. The first spouse to die will transfer enough of his or her assets into one trust (called a credit shelter or bypass trust) to fully utilize the applicable exclusion amount then available to that spouse. The remaining assets of the first spouse to die will then go to one or even two marital trusts. Tip: In 2011 and later years, the unused basic exclusion of a deceased spouse is portable and may allow you and your spouse to take full advantage of the estate tax applicable exclusion amount without using a credit shelter or bypass trust. The most commonly used type of marital trust is a qualified terminable interest property trust, or QTIP trust, which allows the decedent spouse to take full advantage of the unlimited marital deduction. With a QTIP trust, the surviving spouse must receive all the income from the trust assets for life and may receive distributions from principal depending on the trust’s terms. The assets in a QTIP trust are included in the estate of the surviving spouse for estate tax purposes. The surviving spouse’s applicable exclusion amount can be used to shelter some or all of these assets from potential estate taxes. The main benefit to using a QTIP trust is that the first spouse to die can designate in the trust document how the trust assets pass on the death of the surviving spouse (e.g., to the couple’s children). Another type of marital trust is a qualified domestic trust (QDOT), which is used where one spouse is not a citizen of the United States. A direct transfer from the U.S. citizen spouse to the noncitizen spouse will not qualify for the unlimited marital deduction. The transfer can qualify for this deduction, however, if the assets are put in a QDOT. The noncitizen spouse can receive all the income from the trust assets for his or her lifetime, but cannot receive principal from the QDOT without it being potentially subject to estate taxes. This is to prevent the noncitizen spouse from removing the assets from the jurisdiction of U.S. taxing authorities thereby allowing them to escape potential estate taxation altogether. Another type of trust often used by spouses is called a disclaimer trust. There are certain situations when it makes sense for one spouse to disclaim a bequest from the other spouse (i.e., refuse to accept money or assets that have been left to him or her in the other spouse’s will). Each spouse can create a disclaimer trust to hold any assets that might be disclaimed by the surviving spouse. The disclaimer trust document can be drafted to allow a QTIP election to be made if desirable and to designate to whom the assets pass on the death of the surviving spouse. What are the different types of marital and related trusts? There are six basic types of marital and related trusts. Credit shelter trust Typically, with marital deduction and bypass planning, both spouses will set up a credit shelter trust (also called a bypass trust). Assets transferred to a credit shelter trust are includable in the estate of the first spouse to die. However, the credit shelter trust is generally drafted so that just enough assets are transferred to the trust to fully utilize the deceased spouse’s applicable exclusion amount. Thus, no estate taxes are actually imposed on the credit shelter amount. If desired, the surviving spouse could be given the right to receive all the income from the trust assets, or income may also be given to the couple’s children or to anyone else or accumulated for the benefit of the remainder beneficiaries. The surviving spouse may also be given access to trust principal under certain circumstances. Because the assets are included in the estate of the first spouse to die, the assets, including any appreciation, are not included in the estate of the surviving spouse for estate tax purposes and pass to the remainder beneficiaries estate tax free. Tip: In 2011 and later years, the unused basic exclusion of a deceased spouse is portable and may allow you and your spouse to take full advantage of the estate tax applicable exclusion amount without using a credit shelter or bypass trust. Qualified terminable interest property (QTIP) trust A commonly used type of marital trust is a qualified terminable interest property trust. Assets of the first spouse to die that do not fund the credit shelter trust will be transferred to a QTIP trust. The assets in the QTIP trust qualify for the unlimited marital deduction and thus will not be subject to estate taxes in the estate of the first spouse to die. The assets will be includable in the estate of the surviving spouse. The surviving spouse can use his or her applicable exclusion amount to protect some or all of these assets from estate taxes. With a QTIP trust, the surviving spouse must receive all the income, at least annually, from the trust for as long as that spouse is alive. Furthermore, the surviving spouse must be given the power to force the trustee of the QTIP to convert the assets in the trust to income-producing assets. The main benefit to establishing a QTIP trust is that the first spouse to die can designate in the trust document who should receive the assets in the trust upon the death of the surviving spouse. Many married couples use a QTIP trust if there are children from the current or previous marriage that they would like to inherit the assets. Transferring assets to a QTIP trust prevents the surviving spouse from consuming or gifting away the assets, disinheriting certain family members of the deceased spouse, or leaving assets to a new spouse. Power of appointment trust Another commonly used type of marital trust that qualifies for the unlimited marital deduction is called a power of appointment trust. Like a QTIP trust, the surviving spouse must receive all the income, at least annually, from the trust for as long as he or she is alive. The surviving spouse must also be given a general power of appointment over the assets in the trust. A general power of appointment gives the surviving spouse the right to use the property in the trust for his or her own needs, or to transfer the property to someone else including his or her estate, his or her creditors, or the creditors of his or her estate. It is also important with a power of appointment trust that the surviving spouse be able to exercise the power of appointment alone (e.g., without the approval of the trustee of the trust or the remainder beneficiaries). Unlike a QTIP trust, the surviving spouse has control over the assets in the trust after the first spouse dies. For this reason, married couples may not want to use a power of appointment trust if they want the assets in the trust to eventually pass to specific individuals designated by the first spouse to die. The assets in a power of appointment trust will qualify for the unlimited marital deduction and will not be included in the estate of the first spouse to die. The assets will be includable in the estate of the surviving spouse, unless that spouse consumes or gives away the assets during his or her lifetime. Of course, the surviving spouse can use his or her applicable exclusion amount to protect some or all of the assets in the trust from estate taxes. Some married couples set up both a QTIP trust and a power of appointment trust. The assets of the first spouse to die that are not used to fund the credit shelter trust can be split between these two trusts. Estate trust A less commonly used type of marital trust that qualifies for the unlimited marital deduction is called an estate trust. This type of trust is less frequently used than either a QTIP trust or a power of appointment trust. With an estate trust, the surviving spouse need not receive all the income from the trust for his or her lifetime and does not have to be given the right to force the trustee to convert the assets in the trust into income-producing assets. Thus, an estate trust makes sense if the first spouse to die wants to fund the trust with non-income-producing assets, such as closely held stock or undeveloped real estate. An estate trust can also be used where the surviving spouse will not need additional income from the trust during his or her continuing life. As with the other types of marital trusts, any assets in an estate trust will not be includable in the estate of the first spouse to die because of the application of the unlimited marital deduction. However, the assets will be includable in the surviving spouse’s estate. Upon the death of the surviving spouse, the trust assets and any accumulated income pass to the surviving spouse’s estate. Qualified domestic trust (QDOT) A final type of marital trust that qualifies for the marital deduction is called a QDOT. A QDOT is used when one of the spouses is not a citizen of the United States. A transfer of assets to a noncitizen spouse will qualify for the unlimited marital deduction only if the transfer is made to a QDOT. The noncitizen spouse can receive all of the income from the trust, but any distributions of the principal will be taxed as if the assets had been included in the gross estate of the first spouse to die. It should be noted that a citizen spouse may make transfers of up to $164,000 (in 2022, $159,000 in 2021) per year directly to a noncitizen spouse during the citizen spouse’s lifetime without incurring a gift tax. Technical Note: The unlimited gift tax marital deduction is not available for a gift to a spouse who is not a United States citizen. However, the regular gift tax annual exclusion of $16,000 (in 2022) is increased for such a gift to $164,000 (in 2022) if the gift would otherwise qualify for the marital deduction if the spouse were a United States citizen. Disclaimer trust A final type of trust that married couples use is a disclaimer trust. A spouse may disclaim (or refuse to accept) assets that have been left to him or her by the deceased spouse. There are times when it may make sense, for estate tax purposes or for other reasons, not to accept the bequeathed assets, but rather to allow them to pass as if the disclaimant predeceased the decedent. A disclaimer trust may be established by will or in a separate inter vivos document. The will can specify that any disclaimed assets will pass to the disclaimer trust and then be distributed in accordance with the terms of the trust. This article was prepared by Broadridge. LPL Tracking #1-05113510

Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death. A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the grantor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the grantor, the trustee, and the beneficiary of that trust. When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns these assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away. Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process. There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B trust provision.  The purpose of an A-B trust arrangement (also called a “marital and bypass trust combination”) is to enable both spouses to use the applicable estate tax exclusion upon their deaths, which shelters more assets from federal estate taxes. Before the federal estate tax exclusion became portable in 2011, some estate planning was involved to ensure that both spouses could take full advantage of their combined estate tax exclusions. Typically, it involved creation of an A-B trust arrangement. Now that portability is permanent, it’s possible for the executor of a deceased spouse’s estate to transfer any unused exclusion to the surviving spouse without creating a trust. Even so, quite a few states still have their own estate and/or inheritance taxes, many have exemptions or exclusions of $1 million or less, and many don’t have a portability provision. By funding a bypass trust up to the state exemption amount, you could shelter the first spouse’s exemption amount from the state estate tax. Thus, A-B trusts may still be useful, not only to preserve the couple’s state estate tax exemptions but also to shelter appreciation of assets placed in the trust, protect the assets from creditors, and benefit children from a previous marriage. In most cases, however, when couples have combined estate assets of $24.12 million or less in 2022, they might be better off just leaving everything outright to each other. A living trust with an A-B trust provision can help ensure that a couple  takes full advantage of the estate tax exclusion for both spouses. When the first spouse dies, two separate trusts are created. An amount of estate assets up to the applicable exclusion amount is placed in the B trust (or bypass trust). The balance is placed in the surviving spouse’s A trust (or marital trust), which qualifies for the estate tax marital deduction. This then creates two taxable entities, each of which is entitled to use the exclusion. The B trust is included in the taxable estate when the first spouse dies. But because it doesn’t exceed the estate tax exclusion amount, no estate taxes will actually be paid. The surviving spouse retains complete control of the assets in the A trust. He or she can also receive income from the B trust and can even withdraw principal when needed for health, education, support, or maintenance. Upon the death of the second spouse, only the A trust is subject to estate taxes because the B trust bypasses the second spouse’s estate. If the assets in the A trust don’t exceed the applicable exclusion amount, no estate taxes are owed. At this point, both trusts terminate and the assets are distributed to the beneficiaries, completely avoiding probate. While trusts offer numerous advantages, they incur up-front costs and ongoing administrative fees. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies. This article was prepared by Broadridge. LPL Tracking #1-05106827

Philanthropy today is different than it was in the past. It was once common for donors to distribute their wealth through smaller grants to numerous organizations. Over time, best practices for charitable giving have evolved, and wealthy individuals are instead taking a greater interest in and even taking part in the organizations. Because of this, they are often giving more significant amounts to only a select few organizations. The idea of giving today is fueled by the desire to improve society. Different people are motivated by various charitable giving opportunities and seeking out the guidance of a financial professional could help you become better educated on which type would work for you. How it works There are numerous instruments someone can choose from, for example: A Donor-Advised Fund (DAF) – A separately identified fund or account is maintained and operated by a “sponsoring organization.” The accounts are composed of contributions made by individual donors. The organization then has control over the funds. But the donor or a representative of the donor has advisory privileges regarding the distribution of the funds or the investment of assets in the accounts. [i] Private Foundation – A private foundation is created when someone sets up a tax-exempt organization but does not file to be recognized as a public charity. To fund the foundation, you can contribute as much as you like, but you must distribute a minimum of five percent of the value of the charitable assets annually. Keeping the foundation from being a public charity will maintain that tax deductions for donations are capped at 30 percent of the taxpayer’s adjusted gross income (AGI) if the donations are made in cash. The tax deduction is lower at 20 percent of the taxpayer’s AGI if the gifts are appreciated assets or securities. [ii] Charitable Trusts – The two primary charitable trusts are charitable lead trusts (CLTs) and charitable remainder trusts (CRTs). Both involve putting assets into a trust. With a CLT, the organization you chose receives cash flow from the assets put into the trust each year for a fixed period. The remaining assets can be sent to other beneficiaries. A CRT pays annual distributions to you or particular beneficiaries for a set period of time. The remaining assets are then given to charity. A CRT may be partially tax-deductible right away. [iii] Another advantage of charitable giving, particularly assets that have appreciated significantly, is reducing the size of your overall taxable estate for estate tax planning. If your estate is subject to estate tax after you die, your wealth could take a 40 percent hit. Charitable Lead Annuity Trusts (CLAT) – The donor of a CLAT can establish a trust with one or more charities as their beneficiaries. The trust then distributes a set annuity amount to charitable organizations selected by the donor over the donor’s life or a specific amount of time. When the CLAT expires, all remaining assets get passed to the remainder beneficiaries without being subject to estate tax. Because of low-interest rates, the CLAT becomes attractive as it accumulates wealth that can be distributed to beneficiaries later. Qualified Charitable Distributions (QCDs) – If you are itemizing deductions or taking the standard deduction and are 70 ½ and older, you can direct up to $100,000 annually from your traditional IRA to charities through what is called Qualified Charitable Distributions (QCDs). These distributions can be used to satisfy all or part of the donor’s RMD for 2022 and are not considered taxable income for the donor. [iv] Strategic charitable giving may also provide tax incentives. An example would be if you have appreciated assets over time, like real estate or securities, selling them will incur a capital gains tax liability. However, donating to a qualified charitable organization can potentially avoid capital gains taxes for those assets. The charity receiving the donation will not be liable for the capital gains tax and will also benefit from the fair market value of your gift. With the proper planning, you can potentially preserve your wealth and estate. Finances are often complicated, and making smart decisions can possibly help to avoid time-consuming and costly mistakes arising from emotional decision-making or just not understanding all that is involved in creating financial strategies. There are tangible benefits to working with a financial professional, including helping you break down retirement planning strategies, assisting with portfolio diversification management, and suggesting appropriate investment approaches. Working with a financial professional who you feel has experience and knowledge is key to setting up your family for a long-term relationship on the road toward pursuing your philanthropic goals. 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. 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. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. 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 LPL Financial Marketing Solutions. LPL Tracking #1-05337832 [i] Donor-advised Funds | Internal Revenue Service (irs.gov) [ii] High-Net-Worth Clients and Charitable Giving | AccountingWEB [iii] Charitable Trusts | Internal Revenue Service (irs.gov) [iv] Publication 526 (2021), Charitable Contributions | Internal Revenue Service (irs.gov)

If you’re like many, you may associate long-term care with nursing homes and end-of-life care. But far more people will need long-term care in a crisis—an injury or illness that requires long-term care or rehab before you can live independently again. And while it’s important to make long-term plans for long-term care, crisis planning can be just as crucial when it comes to preserving your assets. Here we discuss three key differences between planning for long-term care and planning for a crisis. Crisis Planning Requires Flexibility—Long-Term Care Planning Provides It The unpredictable nature of crises can make them challenging to plan for. But in many ways, the process of planning for long-term care can also help you plan for crisis care. In other words, long-term care planning may involve Plans A, B, and C, while crisis care may require some combination of these plans and strategies. This allows you to borrow what you need and discard what you don’t. Long-Term Care Planning Can Benefit From a Trust If you’re wondering how you’ll be able to pay for long-term care for yourself and/or a spouse, you may assume Medicaid is off the table until you’ve spent down your assets. While this is generally true, there are certain types of trusts that allow you to benefit from the trust income for life without having trust assets “countable” for Medicaid purposes. Because assets belong to the trust instead of the individual, they’re excluded from the Medicaid calculation as long as they weren’t transferred within the look-back period. This period is five years in all states (including D.C.) except California, where the look-back period is two-and-a-half years.1 However, not all trusts are created equally. Before you create a trust of your own, talk to your financial professional and an experienced estate planning attorney to make sure the trust you select works well for your needs, assets, and wishes. Crisis Planning Needs a Strong Network A key part of crisis planning involves knowing who you can reach out to in times of need—including friends, loved ones, care providers, and even ombudspersons who can help you navigate the health care system. When you’re creating your crisis plan, think about who you may be able to lean on. Do you have loved ones who live near a care facility who can see you regularly?Is there anyone who can transport you to and from medical appointments?If you have pets, is there someone nearby who can take care of them or have them boarded until you’ve recovered?Do you have a medical or legal power of attorney that will allow a trusted loved one to make decisions on your behalf and pay bills if you’re incapacitated? By evaluating the strength and skills of your network, as well as the documents you have in place when an emergency occurs, you can gain a far better idea of who you should contact first and rely on in a crisis. 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.  This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. This article was prepared by WriterAccess. LPL Tracking # 1-05325540. Footnote 1 Understand Medicaid’s Look-Back Period; Penalties, Exceptions & State Variances, American Council on Aging, https://www.medicaidplanningassistance.org/medicaid-look-back-period/

Today, many individuals are finding it necessary to help elderly parents or relatives manage their personal finances. One area of particular concern is property management. This issue may arise when seniors reach their late seventies or older, and plans that may have proven satisfactory at age 65 may require a second look. If you have an aging parent or relative, the following arrangements can assist you in addressing this concern: Durable Power of Attorney—This mechanism allows elderly individuals to appoint a trusted relative or friend as a representative in legal and financial matters. The powers granted may be limited or broad in scope, and may vary from state to state. They remain in effect during disability or incompetence—although, in the event of incompetence, a guardian or conservator could revoke them. Some financial institutions are reluctant to recognize a durable power of attorney, so it is worthwhile to explore any potential problems beforehand. Revocable and Irrevocable Trusts—A revocable trust allows an aging senior to retain control of his or her property, while delegating the responsibility for daily management to others. This arrangement gives the senior the flexibility to change the trust in any way, and at any time, as needs and circumstances dictate. As added protection, a revocable trust may remain unfunded as long as a senior is legally competent. On the other hand, seniors willing to relinquish ownership of assets altogether may wish to consider establishing an irrevocable trust. o Private Annuities. With a private annuity, an elderly individual can formally transfer property to a family member in exchange for that person’s promise to make periodic payments for the rest of the senior’s life. o Informal Arrangements. A senior can also informally transfer property to his or her heirs, in many cases free of gift taxes, in exchange for being taken care of for the rest of his or her life. This arrangement, however, should be approached with caution. Even with the best of intentions, it is possible that adult children could deplete assets through poor management, divorce, or creditor claims. Once the assets are gone, an aging parent or relative could become dependent on the goodwill and financial circumstances of family members. Review Plans Periodically It may be necessary to periodically review these arrangements, as needs and circumstances change. You may also wish to consider consulting a financial professional with experience in concerns facing today’s seniors. Since arranging a loved one’s affairs may be a once-in-a-lifetime situation, professional assistance may prove invaluable. EPGSEN04-X 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. 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. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing.  Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.  Variable annuities are subject to market risk and may lose value. This article was prepared by Liberty Publishing, Inc. LPL Tracking #1-05176423

A trust is a legal vehicle that protects your assets that contains instructions for your assets when you die or become incapacitated. When you set up a trust, you transfer assets from your name into your trust’s name while you still retain control of the assets until you die. Trusts can hold many different assets, such as cash and bank accounts, real estate, securities, ownership interests in business entities, and other assets. For assets you want to preserve and transfer, it’s essential to list them in a trust so they can avoid going through probate, a court process to transfer your assets retroactively, which can be expensive and public. The end of the year is a great time to review your trust document, update information, buy or sell assets or even cancel your trust if you choose. Here is a checklist to help you complete your trust and year-end planning: Review and update your trust document- Always keep a copy of your original trust document for your records and the latest trust document. Update any changed information, including if you designate a new trustee. Your legal professional can assist you in updating your trust documents before the end of the year. Complete annual record-keeping duties- Recordkeeping may involve professionals to help ensure the trust is administered correctly, minimizing taxes, distributing capital gains to beneficiaries, and so on. Prepping for filing taxes is easier when recordkeeping duties are completed at the end of each year. Here are things to review, determine, and do before the end of the year: Payments made on behalf of beneficiaries and receiptsNet income paid to beneficiariesPayments made to third-party payeesReview the past year’s tax recordsMake tax payments due before December 31stMake interest payments due before December 31stOther payments dueDetermine capital gainsEstimate taxes due Financial, legal, and tax professionals can help you with annual-record-keeping duties, so your trust is operating compliantly. Review ownership of assets- You may have sold or purchased new assets during the year. Ensure your trust document has the correct items and that the trust is the owner, not an individual. You may need to update the titling on some of the assets in the trust, such as a home, cars, and other fixed assets. Review and update beneficiary information- Your beneficiary information must be kept up-to-date since marriages, divorces, name changes, or other life events can occur. Make sure to review beneficiary information on these specific items: Life insuranceEmployer-sponsored retirement savings accountsBank and brokerage accountsAnnuities Review disability documents- If you become disabled, your trust document directs your care through these essential disability documents: Power of attorney- lists who will manage your financial affairs if you cannot yourself.Medical directive- lists how you want to be medically cared for if you cannot make medical decisions yourself.Guardianship document-lists who will be the guardian of your children or you if you become incapacitated. Review life insurance contracts- Review your life insurance contracts to ensure the death benefit is an appropriate amount for your situation. Also, review the details of each contract, such as when it ends, if it is a term life policy, or the cash value accumulation if it is a whole life insurance contract. Also, double-check the beneficiary information to ensure it is accurate. As you complete your year-end planning, rely on your financial, legal, and tax professionals to help answer questions you may have or prepare your trust documents for next year. 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. 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. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. This article was prepared by Fresh Finance. LPL Tracking #1-05326016 Sources: https://www.estateplanning.com/understanding-living-trustshttps://www.lincoln.edu/ways-give/major-planned-gifts/year-end-estate-planning-checklist.html

REASONS TO CONSIDER A TRUST Should you set up a trust? Maybe you’ve been to a seminar where they scare the life out of you, convincing you to start one. Let’s demystify this murky but very important area. Trusts are legal arrangements that give control of assets to a person or an institution (the trustee) for the benefit of others, such as children. Trusts can save on taxes, ease inheritance squabbles and ensure that beneficiaries are treated fairly and according to your wishes. Let’s examine some uses of trusts: To Minimize Inheritance Taxes. Some call them “death taxes,” but that term has acquired a political tinge, so we’ll try to avoid upsetting partisan sensibilities. This year, you have to own at least $11.7 million in total assets — including your house, your cars, brokerage accounts, individual retirement accounts, 401(k)s and life insurance — before the tax kicks in. Taxes are typically due upon the second spouse’s passing, not the first to die. You should also be aware that a number of states impose their own estate taxes – and several have inheritance taxes – which kick in at lower threshold amounts than the federal estate tax. Above $11.7 million, without proper estate planning and a trust, you might pay 40% to the feds. Most people don’t have $11.7 million in assets, so they don’t have to worry about this tax, right? Maybe and maybe not. Tax legislation seems to change every year and many state governments are looking to close their deficits. So don’t assume that because you have less than $11.7 million that you’re in the clear. Congress has always had trouble dealing with this issue. Remember when the federal estate tax expired in 2010? To Avoid Probate. That’s a court that rules on inheritance questions if your wishes are not clear. If you don’t have a trust or a valid will, anything you own that doesn’t have a specific beneficiary designation goes through probate. Probate can be very time-consuming and emotionally draining. If your estate includes property held outside the state of residence, it may have to go through probate there as well. If the property is outside the U.S., the situation is even more complicated. Probate can be pretty expensive. Attorneys have the right to charge either a flat percentage rate, based on the value of your total estate, or they can charge “reasonable compensation,” which is debatable, but typically not negotiable. To Keep Your Family Finances Private. If you don’t have an estate plan properly executed by your death, your whole financial life can be public record, available to the masses. Yeah, you don’t even have to drive to the courthouse to snoop through someone’s estate. In many places, it’s available online these days. To Look After Disabled, Young or Irresponsible Children. Having a trust makes a ton of sense if you have a child with disabilities who can’t take care of himself. Or maybe we don’t want him showing assets on paper. Also, if your estate passes to a minor, when the kids turns 18, she gets a big, whopping check for the whole thing at once. If you were no longer here, would you want your child getting your entire estate at 18? You can set up anything from basic to very creative trusts in order to protect children from themselves. For instance, you could establish a trust in which your child would get a third of your estate at 28, a third at 34 and the last third at 38. This way, the trust can give financial support for what is absolutely needed. But your child still needs to go out, get an education, start a career and learn the value of a dollar. There are other, more complicated trusts you can put together too, including “incentive-based trusts.” These can be established so that the child must prove (via W-2s) that she earned say $10,000 to take 1% out of the trust, $20,000 to take 2% out, $30,000 to take 3%, and so on. To Avoid Problems Surrounding Divorced and Remarriage. Trusts are especially helpful if you and your second spouse both have kids. Trusts ensure that your estate is handled by the person you want, and that the money is given to whom you want, when you want. To Give to Charity and Help Your Family. Through proper, creative planning, you can set up a charitable trust that will: Give money to your kids, increase tax deductions, reduce taxable income while you’re living, eliminate capital gains and dividends taxation, and then give a bunch of coin to charity at your demise – all at once. A charitable trust pays no tax, so if you have any assets that have appreciated in value, and you put them into this trust, you get a tax deduction right off the top. Then, when you sell the asset inside the trust, you pay no capital gains tax. You retain control here, and you still benefit from the income in the trust. A logical next step might be to use a portion of the income from the trust to buy a second-to-die life insurance policy on you and your spouse’s life. You put that policy into a different kind of trust, called an irrevocable life insurance trust (or ILIT). When you die, the government can’t put its sticky hands on the policy. Once the policy is paid up, you can increase your income again if you want, since you won’t have to pay insurance premiums any longer. Then, when you and your spouse are gone, the money in the charitable trust goes to the charities you chose, your kids collect a tax-free death benefit from the policy in the life insurance trust, and you collected a bunch of tax-free income along the way. All of these ideas are hypothetical of course and really depend on your personal financial situation. You should talk to a financial professional to better understand if trusts are right for you and your family. Because trusts can also help you avoid one more headache: the squabbling that takes place when kids split an inheritance. SPLITTING AN INHERITANCE Nothing ignites family arguments like inheritance. If you plan to leave money to more than a few beneficiaries, for the sake of peace and your own emotional legacy, think about how to divide the proceeds fairly. First, you can divide your estate among however many heirs you want: three, seven, 11 or 13 and so on. Here are a few best practices for how to divide your wealth. Dividing an estate doesn’t need to trigger taxes. Don’t try to be the financial professional of each beneficiary when you divvy the estate. Afterward, each beneficiary can decide financial and tax moves based on individual circumstances. For example, let’s say Athos, Porthos and Aramis become heirs of a taxable account of stocks, bonds and mutual funds. The account includes: 351.362 shares of XYZ mutual fund at $36.34 per share, worth about $12,768.49 2,000 shares of ABC stock at $100 a share, worth about $200,000 (this holding comprises two trade lots of 1,000 shares each and each trade lot has a different cost basis, or original price) $85,000 face value of CorpCorp bond at $97 par value, about $82,450 (traded in $5,000 face value units) $100,000 face value of MuniMuni bond at $102 par value, about $102,000 (also traded in $5,000 face value units) $5,236.45 in cash. The total account value is $402,454.94, making each heir’s share $134,151.64 with two pennies left over. To divide the account evenly: The 351.362 shares of XYZ can be divided into three equal portions of 117.12 shares, leaving 0.002 shares left over. Athos and Porhos receive 117.121 shares and Aramis 117.12 shares, plus 0.001 times the closing valuation of XYZ on the day of transfer. This probably results in Aramis receiving about four cents in lieu of missing out on 0.001 of a share. The ABC stock comprises two trade lots: 1,000 shares purchased one year ago at $80 a share, and 1,000 shares purchased six months ago at $105 per share. Both positions divide equally into three 333-share portions, leaving just two shares to be divided, each with a face value of $100. If all three heirs are in the 15% capital gains tax bracket, the value of each share is the closing valuation on the day of transfer adjusted for 15% capital gains taxes. In large estates with many assets to distribute, divide leftover shares as evenly as possible to minimize the difference between capital gains that heirs incur. Note that taxable assets usually receive a stepped-up basis, meaning that the asset resets to its fair market value at the date of the holder’s death. Often, however, half an estate’s assets will go into a marital trust when the first spouse in an estate-holding couple dies. When the second spouse dies, the entire estate is settled. But assets in the marital trust might have received a step-up in basis years earlier. In that case, potential differences in capital gains do apply when planning. You can divide the $85,000 face value of CorpCorp equally only into 17 units each worth $5,000 in face value. In our example, each heir receives five $5,000 units, with two $5,000 units left over. Whoever doesn’t receive a unit receives the equivalent in cash instead. The $100,000 face value of MuniMuni divides equally only into 20 units each worth $5,000 in face value. Each heir therefore gets six $5,000 units with, again, two left over. Also again, whoever doesn’t receive a unit receives the equivalent in cash instead. (These examples assume no significant tax considerations on either bond and it might be wise to vary who receives the cash.) Common Questions: Why not just sell everything and split the money? Tax consequences to one or more heirs, illiquidity in one or more assets and the custodian fees to sell are all considerations to immediately selling and splitting. What if two heirs want to sell an asset before dividing the money equally? Athos and Porthos both wanting to sell the CorpCorp bonds doesn’t need to affect Aramis. Of the 17 units of CorpCorp, you can sell 12 units and agree to split the proceeds. Athos and Porthos each receive 47.22% of the proceeds and Aramis 5.56%, plus the five unsold units. Dividing your estate this way mitigates your need to decide on behalf of all beneficiaries what to sell and how and what transaction costs and taxes to incur. YOUR FINANCIAL PROFESSIONAL For most people, tax strategies can be overwhelming, especially given that the federal tax code is thousands upon thousands of pages long. Throw in the emotional toll of figuring out how to care for your kids – and when to care for them – can be paralyzing, pushing you to do nothing. So, before you go down a path that might not be in your best interest long–term, make sure you consult with your financial professional  to help you determine how your tax decisions and changes to tax law might impact you and your family. 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. 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 Financial Media Exchange, LLC. LPL Tracking #1-05180952

Trusts can help ensure that your assets are put to work according to your wishes. They can also help reduce estate taxes.A trust is a legal entity that is central to a three-part agreement in which an individual — the trust’s “grantor” — transfers the legal title to an asset to that trust for the purpose of benefiting one or more beneficiaries. The trust is managed by one or more trustees. Trusts may be revocable or irrevocable and are sometimes included as part of a will.The trust’s grantor names a trustee to handle investments and manage trust assets. The grantor can work with the trustee on major decisions, or the trustee can be assigned full authority to act on the grantor’s behalf. Trustees have a responsibility — known as “fiduciary responsibility” — to act in the grantor’s best interest. In some cases, the grantor may serve as trustee.Although trusts can be used in many ways for estate and financial planning, they are most commonly used to control assets and provide financial security for both the grantor and the beneficiaries; provide for beneficiaries who are minors or require expert assistance managing money; avoid estate or income taxes; provide expert management of estates; avoid probate expenses; maintain privacy; and protect real estate holdings or a business.Your qualified legal professional can help you evaluate if a trust may be appropriate for your situation. Contrary to what many people think, trusts are not reserved only for the wealthy. The truth is, people from all walks of life may benefit from a trust. What Is a Trust? Generally speaking, a trust is a legal entity that allows someone to transfer the legal title of an asset to one person while assigning control of the asset to another. The person who creates the trust, the original owner of the asset, is known as the grantor. The person who manages the trust is known as the trustee. And the person who receives the benefits is known as the beneficiary. The trust’s grantor names a trustee to handle investments, manage trust assets, and make decisions regarding distributions. The grantor can work with the trustee on major decisions in a revocable trust, or the trustee can be assigned full authority to act on the grantor’s behalf. A trustee may be an individual such as an attorney or accountant, or it may be an entity that offers experience in such areas as taxation, estate tax law, and money management. Trustees have a responsibility — known as “fiduciary responsibility” — to act in the beneficiaries’ best interests. Trust Categories Trusts are drafted as either revocable or irrevocable and may take effect during your lifetime or after death. Revocable trusts can be changed or revoked at any time. For this reason, the IRS considers any trust assets to still be included in the grantor’s taxable estate. This means that the grantor must pay income taxes on revenue generated by the trust and possibly estate taxes on those assets remaining after his or her death.Irrevocable trusts cannot be changed once they are executed. The assets placed into a properly drafted irrevocable trust are permanently removed from a grantor’s estate and transferred to the trust. Income and capital gains taxes on assets in the trust are paid by the trust to the extent they are not passed on to beneficiaries. Upon a grantor’s death, the assets in the trust may not be considered part of the estate and therefore may not be subject to estate taxes. Most revocable trusts become irrevocable at the death or disability of the grantor. Benefits of a Trust Although trusts can be used in many ways, they are most commonly used to: Control assets and provide security for the beneficiaries (of whom can be the grantor in a revocable trust).Provide for beneficiaries who are minors or require expert assistance managing money.Minimize the effects of estate or income taxes.Provide expert management of estates.Minimize probate expenses.Maintain privacy.Protect real estate holdings or a business. Generally speaking, most people use trusts to help maintain control of assets while they’re alive and medically competent, as well as indirectly maintain control of the disposition of assets if they’re medically unable to do so or in the event of death. Flexibility to Meet Your Needs Different kinds of trusts are designed to meet different needs and objectives. The examples that follow are some of the types that may be available to you. A living trust takes effect during your lifetime and allows you, as grantor, to be both the trustee and the beneficiary. Upon your death, a designated successor trustee manages and/or distributes the remaining assets according to the terms set in the trust, avoiding the probate process. In addition, should you become incapacitated during the term of the trust, the successor or co-trustee can take over its management. An irrevocable life insurance trust (ILIT) is often used as an estate tax funding mechanism. Under this trust, you make gifts to an irrevocable trust, which in turn uses those gifts to purchase a life insurance policy on you. Upon your death, the policy’s death benefit proceeds are payable to the trust, which in turn provides tax-free cash to help beneficiaries meet estate tax obligations. A qualified personal residence trust (QPRT) allows you to remove your residence from your estate and reduce gift taxes while you get to use the home for a predetermined number of years, after which time ownership is transferred to the trust or beneficiaries. The potential drawback is that if you die before the term of the trust ends, the home is considered part of your estate. A generation-skipping trust can help you leave bequests to your grandchildren and avoid or reduce your generation-skipping transfer tax exposure, which can be up to 40% on the federal level in 2018. A charitable lead trust (CLT) lets you pay a charity income from the trust for a designated amount of time, after which the principal goes to the beneficiaries, who receive the property free of estate taxes. However, keep in mind that you’ll need to pay gift taxes on a portion of the value of the assets you transfer to the trust. Another charitable option, the charitable remainder trust (CRT), allows you to receive income and a tax deduction at the same time and ultimately leave assets to a charity. The trustee will use donated cash or sell donated property or assets, tax free and establish an annuity payable to you, your spouse, or your heirs for a designated period of time. Upon completion of that time period, the remaining assets go directly to the charity. Highly appreciated assets are typically the funding vehicles of choice for a CRT. Consider the Costs Different types of trusts and trustees can require a variety of fees for administration and wealth management. As you develop your trust strategies, remember to consider the costs that may be involved and weigh them carefully in relation to the benefits. Is a Trust Right for You? Although not quite as popular as wills, trusts are becoming more widely used among Americans, wealthy or not. Increasing numbers of people are discovering the potential benefits of a trust — how it can help protect their assets, reduce their tax obligations, and define the management of assets according to their wishes in a private, effective way. 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. Required AttributionBecause of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content. © 2018 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. Tracking No: 1-771421

Whether you manage a trust for someone else, are the beneficiary of a trust, or are thinking of creating a trust, you probably have some questions about the “best practices” of trust management. A well-managed trust can help preserve wealth for generations, while a poorly-managed trust may provide only a quick path to insolvency. How can you ensure that your trust falls into the first category? Common Goals of a Trust Though trusts can be designed to fulfill any number of goals, there are a few that are quite common. These include:  Wealth Preservation If someone leaves their assets to heirs outside a trust, these assets are often liquidated and then distributed in a single lump sum. While most estates divided in this manner aren’t subject to estate taxes, providing heirs with a single lump sum isn’t always the best way to permanently improve their economic situation. In fact, the National Endowment for Financial Education estimates that about 7 in every 10 people who receive a sudden windfall will spend all the money within only 3 years.1  On the other hand, a trust requires each disbursement to be run by the trustee, who has discretion (in accordance with the trust documents) to grant, deny, or modify the request. This can prevent heirs from squandering money or falling victim to a financial scam. Tax Efficiency In addition to providing a limit on withdrawals, a trust can preserve wealth through tax efficiency and prudent investments. By keeping withdrawals to a sustainable amount, trustees can ensure that the principal continues to grow throughout the life of the trust. And by parceling out trust funds in smaller amounts or dividing a distribution among several tax years, trustees can ensure that the beneficiaries pay as little in taxes as possible. What to Consider When Selecting a Trustee If you’re pondering setting up a trust of your own, there are a few important things to take into account when selecting a trustee and providing guidance on the management and distribution of trust assets.  Find a Neutral It can be tempting to name a family member or close friend as a trustee. However, while there can be some benefit to a trustee who personally knows the beneficiaries, having a neutral third party serve as trustee is usually the wiser option. After all, a good trustee will need to be able to make complex and sometimes emotionally-charged financial decisions, and having a family member serve in this role can dredge up old grudges or lead to discord. Set out Clear Terms and Guidelines  One of the most helpful things any trustor can do for the trustee is to set out clear terms and guidelines for trust management and distribution. By leaving as little to the trustee’s discretion as possible, a well-drafted trust can ensure that all beneficiaries are treated equitably and that there is transparency in how distribution requests and questions of asset allocation are handled. 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. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot 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 advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. Asset allocation does not ensure a profit or protect against a loss. LPL Tracking #1-05014213 1 https://www.cleveland.com/business/2016/01/why_do_70_percent_of_lottery_w.html  

Charitable giving can play an important role in many estate plans. Philanthropy cannot only give you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die. There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a trust. You can name a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy. Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund. Making outright gifts An outright gift is one that benefits the charity immediately and exclusively. With an outright gift you get an immediate income and gift tax deduction. Make sure the charity is a qualified charity according to the IRS. Get a written receipt or keep a bank record for any cash donations, and get a written receipt for any property other than money. Will or trust bequests and beneficiary designations These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form. The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions. Charitable trusts Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust. There are expenses and fees associated with the creation of a trust. Charitable lead trust A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits. How a Charitable Lead Trust Works John, who often donates to charity, creates and funds a $2 million charitable lead trust. The trust provides for fixed annual payments of $100,000 (or 5% of the initial $2 million value) to ABC Charity for 20 years. At the end of the 20-year period, the entire trust principal will go outright to John’s children. Using IRS tables and assuming a 2.0% Section 7520 rate, the charity’s lead interest is valued at $1,635,140, and the remainder interest is valued at $364,860. Assuming the trust assets appreciate in value, John’s children will receive any amount in excess of the remainder interest ($364,860) unreduced by estate taxes. Charitable remainder trust A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with a stream of current income — a desirable feature if there won’t be enough income from other sources. How a Charitable Remainder Trust Works Jane, an 80-year-old widow, creates and funds a charitable remainder trust with real estate currently valued at $1 million, and with a cost basis of $250,000. The trust provides that fixed quarterly payments be paid to her for 20 years. At the end of that period, the entire trust principal will go outright to her husband’s alma mater. Using IRS tables and assuming a 2.0% Section 7520 rate, Jane receives $50,000 each year, avoids capital gains tax on $750,000, and receives an immediate income tax charitable deduction of $176,298, which can be carried forward for five years. Further, Jane has removed $1 million, plus any future appreciation, from her gross estate. Private family foundation A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation, then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worth it. A general guideline is that you should be able to donate enough assets to generate at least $25,000 a year for grants. Community foundation If you want your dollars to be spent on improving the quality of life in a particular community, consider giving to a community foundation. Similar to a private foundation, a community foundation accepts donations from many sources, and is overseen by individuals familiar with the community’s particular needs, and professionals skilled at running a charitable organization. Donor-advised fund Similar in some respects to a private foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time. A donor-advised fund actually refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but your account is not — it is merely a component of the charitable organization that holds the account. Once you transfer assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them. You can only advise — not direct — the charitable organization on how your contributions will be distributed to other charities. 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. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022. LPL Tracking #308272

Some may fastidiously plan the path they want their assets to take but not give their beneficiary information the attention it needs and deserves. Designating the appropriate beneficiaries is essential for proper asset planning. Investors should periodically re-visit this information to make certain it still follows their intentions. It may not be the most pleasant conversation topic, but it very well could be an important one.  Benefits of Beneficiary Reviews Manage assets. Nobody wants to spend their lifetime building wealth for it to end up paying taxes, penalties or going to the wrong person. Relationships may change. The person or people who were the beneficiaries selected before may not be the appropriate choice now. Annual beneficiary reviews may help ensure the assets do not pass to the wrong person. It helps ensure the following of your wishes. Is there a particular person or way the individual wants their assets divided? Is a specific person entitled to the house, car or a lump sum payment? One way to help ensure the assets allocations go smoothly is by having a written plan. Investors should not leave the dividing of their assets to chance or hope that everyone acts appropriately. What to Consider The main consideration of a beneficiary review is to evaluate every asset, not just the accounts that hold the bulk of the person’s wealth. This review starts with a person’s last will and testament and any trusts established for the estate. The assessment may include an individual retirement account (IRA), 401 (k) retirement funds, pensions, insurance policies, annuities, stocks, mutual funds, real estate and personal property. Ensure the beneficiary information is up-to-date, accurate and complete for every item. Things to Know Every portfolio warrants a review. Some people may think, “I don’t need to worry about my beneficiaries because I don’t have enough money to matter.” Regardless of the size of a person’s holdings, it is still wise to review beneficiary information annually. Planning the distribution takes the burden off family and friends to ensure the correct person receives their inheritance, even if the amount is modest. Ask questions. A beneficiary review is a perfect time to ask a trusted financial professional any questions on how to structure estate planning, set up trusts, distribute wealth to multiple heirs and other questions about estate planning. Educating yourself helps when managing your assets. Each year, conducting a beneficiary review is a good habit to adopt. Doing so may help preserve a person’s assets, help make sure the person or people the investor designates receive their inheritance and may help with the burden of managing assets by the individual’s loved ones. Take the time at least once per year, or any time when there are material changes in circumstances, to talk with a financial professional and decide the appropriate beneficiaries for every asset. 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. 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 #1-05235129

Because you’ve worked hard to create a secure and comfortable lifestyle for your family and loved ones, you’ll want to ensure that you have a sound financial plan that includes trust and estate planning. With some forethought, you may be able to minimize gift and estate taxes and preserve more of your assets for those you care about. An Estate Plan Needs Evaluation One of the first steps you’ll take in the estate planning process is determining how much planning you’ll need to undertake. No two situations are alike. And even individuals who don’t have a great deal of wealth require some degree of planning. On the flip side, those with substantial assets often require highly complex estate plans. Two key components of your initial needs evaluation are an estate analysis and a settlement cost analysis. The estate analysis includes an in-depth review of your present estate-settlement arrangements. This estate analysis will also disclose potential problems in your present plan and provide facts upon which to base decisions concerning alterations in your estate plan. For example, you may believe that your current arrangements are all taken care of in a will that leaves everything to your spouse. However, if you’ve named anyone else as a beneficiary on other documents — life insurance policies, retirement or pension plans, joint property deeds — those instructions, not your will, are going to govern the disposition of those assets. You want to ensure that all your instructions work harmoniously to follow your exact wishes. In addition, you may want to consider alternative asset ownership arrangements under certain circumstances. An estate plan that leaves everything to a surviving spouse enjoys the unlimited marital deduction against all estate taxes but fails to take advantage of the decedent spouse’s applicable exclusion amounts against estate taxes under federal and state law. This may result in a larger estate tax burden at the death of the second spouse. Yet these are taxes that can potentially be minimized with careful estate planning. While your spouse will receive your estate free of estate taxes if he or she is a U.S. citizen, anything your spouse receives above his or her federal applicable exclusion amount may eventually be subject to estate taxes upon his or her death.1 Many states also have their own estate tax regimes and apply different (lower) estate tax applicable exclusion amounts, which you will need to consider with your estate planning professional. An estate settlement cost analysis summarizes the costs of various estate distribution arrangements. In estimating these costs, the analysis tests the effectiveness of any proposed estate plan arrangement by varying the estate arrangement, the inflation and date of distribution assumptions, as well as specific personal and charitable bequests. Estate planning is very complex. And while a simple will may adequately serve the estate planning needs of some people, you should meet with a qualified legal advisor to be sure you are developing a plan that is consistent with your objectives. Finally, be sure to recognize that estate planning is also an ongoing process that may require periodic review to ensure that plans are in concert with your changing goals. In addition, because estate planning often entails many facets of your personal finances, it often involves the coordinated efforts of qualified legal, tax, insurance, and financial professionals. Estate Planning Checklist Bring this checklist to a qualified legal professional to discuss how to make your plan comprehensive and up to date. Part 1 — Communicating Your Wishes Do you have a will? Are you comfortable with the executor(s) and trustee(s) you have selected? Have you executed a living will or health care proxy in the event of catastrophic illness or disability? Have you considered a living trust to avoid probate? If you have a living trust, have you titled your assets in the name of the trust? Part 2 — Protecting Your Family Does your will name a guardian for your children if both you and your spouse are deceased? If you want to limit your spouse’s flexibility regarding the inheritance, have you created a qualified terminable interest property (QTIP) trust? Are you sure you have the right amount and type of life insurance for survivor income, loan repayment, capital needs, and all estate settlement expenses? Have you considered an irrevocable life insurance trust to exclude the insurance proceeds from being taxed as part of your estate? Have you considered creating trusts for family gift giving? Part 3 — Reducing Your Taxes If you are married, are you taking full advantage of the marital deduction? Is your estate plan designed to take advantage of your applicable exclusion amount?1 Are you making gifts to family members that take advantage of the $14,000 annual gift tax exclusion? Have you gifted assets with a strong probability of future appreciation in order to maximize future estate tax savings? Have you considered charitable trusts that could provide you with both estate and income tax benefits? Part 4 — Protecting Your Business If you own a business, do you have a management succession plan? Do you have a buy/sell agreement for your family business interests? Have you considered a gift program that involves your family-owned business, especially in light of “estate freeze” rules? (These rules were enacted by Congress to prevent people from artificially freezing their estate values for tax purposes.) Source/Disclaimer: 1The estate tax exemption is $11.4 million for 2017, with a top tax rate of 37%. Required AttributionBecause of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content. © 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

Set up trusts to minimize estate taxes, avoid probate, and seamlessly transfer your assets to your heirs. Simply put: A trust is a legal arrangement in which a certain amount of property or assets is held by a person or entity (e.g. a bank) for the benefit of one or more other people. Why Would You Create One? To maintain control of assets in the event of incompetence (if you become unable to manage your assets due to a decline in health or mental fitness)To save on estate taxesTo avoid probateWhen significant amounts of assets are involved, trusts may also be established to maintain control over assets even after the original owner has died. For example, a trust may be set up with the sole purpose of paying college tuition for a grandchild. In this scenario, the money in the trust cannot be used for any purpose other than paying college tuition and cannot be used on behalf of anyone other than the grandchild. Determine the Type of Trust That You Need Trusts can accomplish a range of goals, including avoiding probate, minimizing estate taxes, and making sure your heirs receive as much of your money as possible as quickly as possible. The type of trust you set up depends on what your goals are. Do It Online or with an Attorney There are many online legal services that can help you create a trust. Since trusts are incredibly complicated, you may want to consider working with a trust and estate attorney. In addition, there are online services that offer personalized online legal advice from an attorney, which can be a more affordable option. Online: Factors to take into consideration when choosing an online legal service include cost, completion and delivery time, and the services offered by the site. For example, some online legal services will submit your documents to review by a paralegal after completion, while others will not. Attorney: Unless your estate planning needs are simple and straightforward, engaging with good, local legal counsel may be the best option.  The right trust and estate attorney will be someone with significant experience in handling the issues you’re dealing with. Their practice should be focused primarily on trusts and estates. Meet with the attorney you’re considering before hiring him or her to assure they are a good fit for your needs. The Four Main Participants in a Trust Grantor: the person who creates the trust (also known as “donor,” “settlor,” or “trustor”) Trustee: the person, people, or entity (such as a bank) that agrees to hold the property or assets (the grantor may be the trustee) Principal: the property or assets themselves, including money, which is held in the trust and managed by the trustee Beneficiary: the person or people who ultimately receive the property or assets in the trust The Main Types of Trusts There are many different types of trust, and depending on the type of assets you’re trying to protect or your goals in setting up a trust, there may be some trusts that will better meet your needs than others. Living Trusts When a trust is created and then immediately become effective, it is known as a “living trust.” Testamentary Trusts When a trust is created and then does not become effective until after your death, it is known as a “testamentary trusts.” In the case of testamentary trust, you, as the person creating the trust, are called the “testator.” Testamentary trusts are often created within wills. How Do You Fund It? Testamentary trusts are generally funded only after your death, and are often funded with the assets of your estate. In order to fund a testamentary trust, language in the Will must explicitly state that all estate assets should be moved into the trust upon your death. The estate assets can then be distributed and managed according to the terms of the trust. Living Trusts vs. Testamentary Trusts All trusts are set up by you, the grantor, during your life. However, not all trusts immediately go into effect. Depending on when the trust becomes effective, it is either a living trust or a testamentary trust. Revocable Trusts You retain ownership and control of the property in the Trust and can change the terms of the trust, including the trustees and beneficiaries. How Do You Fund It? If you are setting up a revocable trust, you will likely be the sole trustee of your trust. As the sole trustee, you can move assets into the trust and out of the trust at will, without too much hassle.Because of this, many people with revocable living trusts put a large portion of their assets to be held in trust, including real estate, financial accounts (stocks, bonds, etc.), and even bank accounts, such as a savings account. Irrevocable Trusts You give ownership and control of the property in the trust to others (trustees) and therefore no longer own or control the property, thus making you unable to enact changes to the trust. How Do You Fund It? By putting assets into an irrevocable trust, you are essentially giving up ownership and control of those assets, so choose these assets carefully. Which assets will be used to fund an Irrevocable trust are generally determined by the goals of the trust. Choosing a funding method that supports the goals of the Trust is something that you should decide with the help of a trust and estates attorney. Transferring property to an Irrevocable trust also requires that a formal transfer of property be completed, meaning that the property must be re-titled in the trustee’s name. An attorney can help you complete and manage a re-titling of property. Fun Fact (that’s not really all that fun): All trusts are either revocable or irrevocable. An Even Funner Tip: Living trusts must be funded during your lifetime; testamentary trusts are funded after your death. Reasons for Choosing a Revocable Trustvs. an Irrevocable Trust If the primary goal of the trust is to avoid excessive estate taxes, you’ll likely want to set up an irrevocable trust, since you don’t have to pay taxes on it. If the primary goal of the trust is to maintain control of assets in the event of incompetence, you’ll likely want to set up a revocable trust, since you’ll want to retain control over the assets in the trust and the beneficiaries. In addition, the rules of the particular trust you’re establishing may dictate whether a trust must be revocable or irrevocable. If you’re unsure whether you want to establish a revocable or irrevocable trust, you should consult a licensed trusts and estates attorney in your state. How Do You Create One? It can be done online or with the help of a trust and estate attorney. Understanding the Laws There are many state and federal laws that must be carefully followed when setting up a trust. While some states will allow you to set up a trust on your own or set up a trust using an online legal service, other states require that an attorney work with you to establish a trust. Even in states where residents are able to establish trusts on their own or online, it’s always a good idea to consult with an attorney before finalizing the documents. Setting Up Trusts Online Many legal websites offer tools for setting up trusts online. The trusts you can set up online are generally simple trusts that achieve the basic goals of naming trustees and beneficiaries. If you choose to set up a trust online, you should consult a trust and estate attorney before finalizing any documents. Whether you go directly to an attorney or use an online service that offers the ability to get advice from real attorneys, having a lawyer look over your documents can help you make sure that they’re legally binding, and that they achieve all your legal goals. Trust Cost The cost of establishing a trust can vary based on the type and complexity of the trust, and the method of establishment. Online legal services can charge anywhere from $30-$300 to set up a trust, while consulting with a lawyer can cost anywhere from $1000 and up, depending on your needs and planning complexity. While the cost of consulting with a lawyer may seem very high, a lawyer can make sure that the trust you’re setting up is completely valid and legally sound, which can potentially save you or your heirs money later. Tax Implications During Your Life With a revocable trust you are still treated as the owner of the property in the trust, and can therefore be taxed on that property during your life. With an irrevocable trust, you give up ownership of the property in the trust and are therefore no longer liable for that property and cannot be taxed on that property. All You Need to Know About Trustees Trustees are responsible for managing, investing, and distributing the property in the trust. This includes administration and accounting, paying any taxes on behalf of the trust, working with beneficiaries to determine their goals for the trust, and working fairly and with transparency around issues of management, investments, and distributions. Managing Trust Assets The trustee is responsible for the accounting and administration of the trust. This includes preparing and filing income tax returns for the trust, paying those income taxes from the trust, and adhering to any and all applicable state and federal laws around trust administration. The trustee must also keep accurate records of all transactions. Investing Trust Assets The trustee is responsible for investing the trust assets so that those assets earn income for the beneficiaries. Depending on the needs of the beneficiaries, the trustee is responsible for determining whether to invest the principal to earn income, to grow the principal in the trust, or other goals that the beneficiaries might have. Distributing Trust Assets The trustee must follow the instructions of the trust in distributing income or property to the trust’s beneficiaries. The trustee must make these distributions in a timely and responsible manner. Who Can Serve as a Trustee? The trustees of your trust can be yourself, your family members or friends, professionals (accountants, attorneys, etc.), a bank or a trust company, or any combination of these people. Successor Trustees If you are naming only a single trustee, you will want to be sure to name at least one successor trustee. In case the primary trustee that you name is not able to serve, the successor trustee can serve. If you are the sole trustee, you’ll also want to name a successor trustee so that the trust can continue to be managed after your death. If you’re establishing a revocable trust, you will likely name yourself as the sole trustee. How to Choose Trustees These are the qualities you want in your trustee… Attention to detailAn understanding of his or her duties, and a commitment to taking those duties seriouslyAn understanding of finances and perhaps investing, accounting, or lawGood communication skillsAligned with your morals and values When choosing trustees, it’s important to think about the structure and goals of the trust and the specific requirements of the trustees of that trust. While some trusts may require trustees with extensive experience in investing or accounting, other trusts may benefit from trustees who have close personal relationships with the beneficiaries or the grantor. In some cases, the person best suited to be a trustee may not be your closest friend or family member, but instead may be a friend or colleague who you believe to be competent, honest, and intelligent. You may also appoint someone close to you to act as a trustee and specify to that person that you would like him or her to hire professionals to advise on certain aspects of the process. Appointing a Professional as a Trustee If you don’t feel like you have anyone in your personal life who you would like to entrust with the role of Trustee, you may appoint a professional that you have a relationship with, such as an attorney or an accountant. These people may require a fee for their services as a trustee. The End Result: Beneficiaries Beneficiaries of a trust are the people or organization(s) who are named as the recipients of any benefits of the trust. The beneficiaries can be anyone you like, but will usually depend on the goals of the trust. Choosing Beneficiaries of a Trust If you’re setting up a trust that is intended to avoid Probate and seamlessly transfer assets to your family, you’ll likely want to name your family members as the beneficiaries. If you’re setting up a trust that is intended to hold assets for your grandchildren, you will likely name those grandchildren as the beneficiaries. A trust that is intended to provide support for a charitable organization will likely name the charity as the beneficiary. Beneficiary Distributions Based on the goals of your trust and the number of beneficiaries you name; you can decide how you would like those beneficiaries to receive distributions. For example, if you have three children you may name all three of your children as equal beneficiaries or you may name them as unequal beneficiaries, with each child receiving different distributions from the trust. Descendants You may also decide whether or not the beneficiary designation applies to linear descendants—that is, whether or not your children’s children would become beneficiaries in the event that one of your children should die before the assets in the trust are fully depleted. 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. 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. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. 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 Beyondly, Inc. LPL Tracking #1-05304561

What are charitable remainder and charitable lead trusts?   Charitable remainder and charitable lead trusts are special types of trusts into which you transfer assets, retain either a present or future economic benefit for yourself or your family, and provide for a present or future transfer to a charitable entity. The transfer into either one of these types of trusts will qualify for income, estate, and gift tax charitable deductions. A charitable remainder or a charitable lead trust can be an excellent vehicle into which to transfer the closely held stock of your business. Charitable remainder trust There are two broad types of charitable trusts: the charitable remainder trust and the charitable lead trust. With a charitable remainder trust, you transfer your closely held stock in your business into a charitable remainder trust, retain the right to receive payments from the trust for a period of years (usually your life span), and then have the assets pass to a named charitable entity at the end of the payment period (usually at your death). You can take an income tax deduction in the year of the transfer into the charitable remainder trust, and the assets in the trust will not be included in your taxable estate (or will generally qualify for an estate tax charitable deduction if they are included in your estate). The income tax deduction is equal to the remainder interest of the trust. There are three types of charitable remainder trusts: a charitable remainder annuity trust (CRAT), a charitable remainder unitrust (CRUT), and a pooled income trust. Charitable lead trust A charitable lead trust works almost the opposite of a charitable remainder trust. You transfer your closely held stock into a charitable lead trust, the charitable entity receives the right to receive payments for a period of years, and then the assets in the trust pass to you or to your designated beneficiaries at the end of the payment period. Typically, there is no income tax deduction for a charitable lead trust, but there may be substantial estate tax savings at your death. A charitable lead trust can be set up as a charitable lead annuity trust (CLAT) or a charitable lead unitrust (CLUT). Charitable trusts not frequently used with closely held businesses It is not that common that an individual will transfer stock of a closely held business into a charitable remainder or charitable lead trust. One of the problems is that if the business does not pay a dividend on the closely held stock (and it often will not), then the charity will not have the income to pay the annuity or unitrust interest. Furthermore, the charity may not be able to sell the stock in the closely held business on the open market. There simply may not be a buyer for this type of stock (and you may not want a stranger owning your company anyway). One sophisticated technique that some estate planners use, though, is to have the charity sell the stock back to the company and then invest the proceeds in income-producing assets. Why use a charitable remainder trust? Can provide you with income for life and give you income and estate tax deductions A charitable remainder trust (whether a CRAT, CRUT, or pooled income trust) can give you a substantial income for the rest of your life, allow you to make an income tax deduction in the year of the transfer, and remove those assets from your taxable estate. There is a complicated formula to determine the amount of the income tax deduction. Your attorney or accountant can calculate it for you. Example(s): You transfer stock (worth $1 million) in your closely held business to a charitable remainder annuity trust. The charity sells the stock and reinvests the proceeds in income-producing assets. You retain an income stream of $50,000 per year until you die. Based on these numbers, your accountant determines that you can take a $425,000 income tax deduction in the year of the transfer. When you die, the assets in the CRAT will not be included in your taxable estate. By transferring your closely held stock into a charitable trust, you have given yourself a substantial income for the rest of your life, received a large income tax deduction, and effectively removed all the assets from your taxable estate. (Of course, you will not have these assets to leave to your beneficiaries.) CRUT may be advantageous for individuals who need an increase in income A charitable remainder unitrust (as opposed to a charitable remainder annuity trust) has the potential to provide you with a boost in income over the period of your income interest. With a CRUT, the income interest is a percentage of the assets in the charitable remainder trust. The assets have to be revalued each year. If the assets increase in value over time, then your income will increase over that same period. (However, if the assets decrease in value, then your income will decrease.) With a charitable remainder annuity trust, you receive a set amount of income each year from the trust. This figure will not increase or decrease. Therefore, if you are concerned about maintaining your standard of living during an inflationary period (and you are confident that the assets in the trust will increase in value), you should set up the charitable remainder trust as a unitrust. Example(s): You transfer your closely held stock (worth $500,000) to a CRUT and retain a 7 percent unitrust interest. The first year, the trust pays you $35,000, which is taxed as ordinary income. By the third year, the assets in the CRUT have increased in value to $700,000. Now, the trust will pay you $49,000. Of course, there will also be a substantial income tax deduction in the first year of the trust, and the assets will effectively be removed from your taxable estate. Why use a charitable lead trust? Charitable lead trust allows you to transfer assets to heirs at very low estate tax costs You may want to use a charitable lead trust when you would like to make a series of gifts to a charitable entity and you would then like to leave a large amount of assets to your heirs at a reduced estate or gift tax cost. With a charitable lead trust, you transfer your stock in your closely held business into the trust. The charity then retains either an annuity or unitrust interest in the trust for a period of years. At the end of the term, the assets in the trust revert to you or pass to one of your designated beneficiaries. There is a gift or estate tax deduction available for the value of the charity’s interest. A charitable lead trust can therefore be a very effective way to pass assets to the next generation for a reduced gift or estate tax cost. Of course, you must be willing to give up the income from those assets in the meantime. Example(s): You transfer $1 million in closely held stock into a charitable lead trust. Your designated charity receives a $50,000 per year annuity payment from the trust. The income period is scheduled to last 20 years. At the end of the 20-year period, you designate that the assets in the trust should pass to your three children. Your accountant calculates that the present value of the charitable interest at the time of the gift is $900,000, and that the taxable gift of the remainder interest for your children is $100,000. Thus, assuming that the trust assets appreciate in value, you can pass almost the entire amount of the assets in the trust to your children for a very small gift tax cost. This article was prepared by Broadridge. LPL Tracking #1-520780

What is customizing trusts? A trust is created when you (the grantor, settler, or donor) transfer property to another person or persons (a trustee or trustees, which could also be you) for the benefit of a third person or persons (the beneficiary, which could also be you). The trustee manages the property for the beneficiary and distributes income and principal according to terms of the trust agreement. There are many types of trusts, and they are used for many different purposes (e.g., to provide for management of property, to provide income to beneficiaries, to avoid probate, or to obtain favorable tax treatment). Trusts are extremely popular because they are flexible and can be customized to meet your particular goals and objectives. Trusts are customized by including particular provisions that are intended to accomplish the purpose(s) of creating the trust in the first place. There are many types of trust provisions. The four common customization provisions being discussed here are (1) Crummey provisions, (2) spendthrift provisions, (3) discretionary provisions, and (4) sprinkle/spray provisions. Caution: These provisions must be carefully drafted. The wrong wording can nullify the provision and derail your intentions, so be sure to have an experienced attorney draft your trust agreement. What is a Crummey provision? First of all, to understand what the Crummey provision is, you must understand what the annual gift tax exclusion and the present interest rule are. The annual gift tax exclusion allows you to give a certain amount free of gift tax to each donee (persons you give to), each year. The annual exclusion amount is $16,000 (in 2022). The present interest rule says that in order to qualify for the annual gift tax exclusion, the gift must be a present interest. This means that the donee must be able to immediately possess, use, or enjoy the gift. In the case of gifts made to a trust, it means that the beneficiaries must be able to immediately withdraw the funds from the trust. Second, a Crummey provision is not a provision that stinks, or is lacking in some way. Crummey is the name of a party to a lawsuit that brought this provision into being. A Crummey provision qualifies gifts made to a trust for the annual gift tax exclusion. This Crummey power (as it is called) gives the beneficiary of the trust the right, for a limited amount of time each year (usually 30 days), to withdraw his or her share of the money from the trust. This temporary ability to withdraw magically turns the gift into a present interest gift. If the beneficiary does not exercise the right to withdraw the money, it stays in the trust. But that’s OK. As long as the beneficiary has the right, the gift qualifies for the exclusion. The right need not actually be exercised. Each beneficiary may hold Crummey powers, resulting in multiple annual gift tax exclusions. As you can now see, a Crummey provision is a pretty important little estate planning device because it allows you to transfer large amounts of wealth, tax-free in any year, or in every year, to a trust. However, the provision must be carefully drafted, and there are certain rules and procedures that must be followed to the letter. The IRS actually hates the Crummey loophole and is ever vigilant when it is used. By all means, take advantage of Crummey provisions, but be sure to satisfy all of the following requirements. Beneficiary must have unrestricted right to withdraw Carefully draft the trust document to clearly state that Crummey withdrawal rights are given. This withdrawal right must be unrestricted except as to the time (e.g., the beneficiary has 30 days to withdraw it after the property is transferred to the trust) and as to an amount no greater than the annual transfer to the trust. Of course, you may make it clear to your beneficiary that you are only including Crummey powers in the trust to obtain the annual gift tax exclusion, and that you do not want him or her to actually exercise this withdrawal right. But make this a verbal agreement. Do not put it in the trust document or in any other written form. Any legal restriction, beyond those noted, on the beneficiary’s right to withdraw results in the loss of the exclusion. Beneficiary must be given a reasonable period of time in which to exercise that right It is necessary for the beneficiary to have a reasonable opportunity to exercise the power of withdrawal prior to its lapse. A power that is exercisable for an unreasonably short period of time will be disregarded by the IRS as illusory. You may permit the beneficiary to exercise the power either: (1) for a specified number of days following notice of transfer of funds into the trust or (2) at any time during the year in which the transfer is made, allowing a certain minimum period for withdrawals made near the end of the year. Specified number of days following notice — This is the safer of the two allowance methods. Unfortunately, the specified number of days needed is not set in concrete. Here is some guidance, though. Annual gift tax exclusions have been upheld by the tax court where the period of withdrawal allowed was only 15 days. The IRS has privately ruled that 30 days is sufficient.At any time during the taxable year — Care must be taken with this allowance method. For example, where the beneficiary is allowed to withdraw in December, gifts you make in September will probably qualify. However, if your beneficiary is allowed to withdraw in March, and you make a gift in September, it is unlikely that the IRS will see this as passing the present interest rule, and the exclusion will probably be denied. Again, there is no hard-and-fast rule here. Beneficiary must have reasonable notification of the existence of the right The basic requirement is that actual written notice must be made in a timely manner. It is best to give written notice to each beneficiary at least 30 to 60 days before the expiration of the withdrawal period. Example(s): A typical Crummey provision might read “The beneficiary shall have the right to withdraw from the trust an amount of the property originally transferred to the trust, not to exceed the annual gift tax exclusion amount, by giving written notice within 30 days of his or her receipt of a copy of this document, to the trustee, of the exercise of such right. The trustee shall promptly give written notice to each beneficiary of the receipt of any property that is transferred into the trust. The beneficiary may withdraw additions to the trust by giving written request to the trustee.” Caution: A Crummey withdrawal power is treated as a general power of appointment. Its exercise, release, or lapse is treated as a gift by the beneficiary holding the power, and may be subject to gift tax. Tip: Crummey withdrawal rights can be given to minor children and incompetent individuals (who are legally incapable of making a withdrawal) as long as there is nothing in the trust instrument preventing a guardian from exercising the right on the beneficiary’s behalf. What is a spendthrift provision? A spendthrift clause is a provision that protects a trust beneficiary from creditors or other parties (e.g., a divorcing spouse). Generally, in the absence of a spendthrift provision, a beneficiary is able to transfer his or her interest in the trust. That being so, creditors of the beneficiary can attach that interest. A spendthrift clause specifically prevents the beneficiary from transferring his or her interest and eliminates the ability of a creditor to obtain the interest. A spendthrift provision may be desirable if you want to restrict your beneficiary’s ability to sell or give away his or her interest in the trust. This may be the case if you believe your beneficiary is immature or may make unwise financial decisions (e.g., you are afraid Johnny might give away his interest in the trust to that religious cult he’s been following lately). A spendthrift provision can be drafted to be all-purpose or it can include specific exclusion language. Example(s): A typical all-purpose provision might read “No interest under this trust shall be assignable by any beneficiary. Cash or other property distributable hereunder shall not be subject to claims of any creditors, or any beneficiary, nor to the claims for alimony or maintenance.” Caution: Spendthrift clauses are not valid in a few states. What are discretionary provisions? A discretionary provision gives the trustee authority to decide when, how much, and to whom to distribute income and/or principal to the beneficiaries. This discretionary authority allows the trustee the flexibility to accumulate or distribute income according to the overall circumstances of the beneficiaries. In contrast, a trust that provides for a rigid scheme of mandatory distributions is inflexible and may not meet the needs of the beneficiaries. Additionally, some income tax savings may be possible if the trustee is given discretion to distribute income among several beneficiaries (for example, more to a beneficiary in a lower tax bracket and less to a beneficiary in a higher tax bracket). Although giving the trustee discretion over distributions may sound good to you, it probably won’t go over so well with the beneficiaries. Looking at it from the beneficiaries’ point of view, the trustee’s ability to say “no, you don’t get any” is something less than satisfactory. This situation may cause conflict between the trustee and the beneficiaries. It may be a good idea to leave directions to the trustee in a letter of instruction that encourages the trustee to communicate often with the beneficiaries regarding the status of the trust, the needs of the beneficiaries, and the plans for distribution. The provision that authorizes discretionary distributions can be drafted in a variety of ways. It can be expressed so as to limit the discretion the trustee is given, or, conversely, it can be expressed to provide “absolute,” “unlimited,” or “uncontrolled” discretion to the trustee. Be advised that giving the trustee broad and unfettered discretion may not be in the best interest of the beneficiaries. Such a provision severely limits the court’s supervisory role because the only inquiry it can make is whether the trustee acted arbitrarily, capriciously or dishonestly. Thus, the trustee is not allowed to act “beyond the bounds of reasonable judgment,” but will be protected by a court if he has not abused his discretion. Example(s): A typical limiting discretionary provision might read: “The trustee shall distribute so much of the income and principal of the trust to or for the benefit of my surviving spouse as the trustee believes is desirable to provide for his or her support, maintenance, education, and general welfare. The trustee is authorized to make distributions to one or more of my issue in unequal amounts and to exclude one or more of them from such distributions. In making decisions regarding distributions, I direct the trustee to give primary consideration to the needs of my surviving spouse and secondary consideration to the needs of my issue, and to give appropriate consideration to the resources and income of each beneficiary apart from the beneficiary’s interest in this trust.” Example(s): A typical absolute discretionary provision might read: “The trustee is given the power, in his absolute and uncontrolled discretion, to pay out net income to the income beneficiaries of the trust or to accumulate such income.” Caution: A trust will not qualify for the unlimited marital deduction if the trustee is given discretion to distribute income to your surviving spouse or is given authority to distribute income or principal to someone other than your surviving spouse during his or her lifetime. What are sprinkle/spray provisions? A sprinkle/spray provision allows the trustee to make distributions of income, and/or principal in shares that are not equal. The advantage of a sprinkle/spray provision is that the trustee may use the funds as the needs of the various beneficiaries are determined. A sprinkle/spray provision can provide flexibility to a single trust fund, with more than one beneficiary. This is particularly helpful if the trust fund is not large enough to meet all the needs of all the beneficiaries. The trustee can evaluate the current circumstances and “sprinkle” or “spray” distributions of income to the beneficiaries, according to the relative needs of each beneficiary, and the overall best interest of the beneficiaries as a group. Sprinkle/spray provisions may relate to either trust income, trust principal, or both. Therefore, there are several variations of provisions from which you may choose. Here are some examples of common sprinkle/spray designs: Trustee may distribute both income and principal on a sprinkle basis.Trustee is directed to pay income in equal shares, but distribute principal on a sprinkle basis.Trustee may distribute income on a sprinkle basis, but is directed to distribute principal in equal shares.During the term of the trust, the trustee may distribute both income and principal on a sprinkle basis. Upon termination of the trust, trustee is directed to distribute the remainder in equal shares.Trustee may distribute both income and principal on a sprinkle basis. As each beneficiary reaches age 25, that beneficiary receives 25 percent of whatever principal remains until the youngest, whose share represents the final distribution of principal, reaches age 25. This article was prepared by Broadridge. LPL Tracking #1-05139513

What is it? Marital trust used in conjunction with bypass trust to minimize estate taxes and provide for children A marital trust (also known as an A trust) is a type of trust that is used by married couples, usually in conjunction with a bypass trust, to minimize federal estate tax, allow the surviving spouse to benefit from family wealth during his or her continuing life and to ensure assets ultimately pass to individuals specified by the deceased spouse. Typically, a marital trust and a bypass trust will be used by married couples who expect to have assets in excess of the federal applicable exclusion amount (the amount that can be sheltered from federal gift and estate tax by the unified credit) at the death of the first spouse. A married couple who set up both the marital and bypass trusts increase the likelihood that the applicable exclusion amounts of both spouses can be fully utilized, thus maximizing the amount that can pass to heirs and other beneficiaries free from federal estate tax. Caution: This may not be the proper strategy for some married couples. A tax law passed in 2001 replaced the state death credit with a deduction starting in 2005. As a result, many of the states that imposed a death tax equal to the credit, decoupled their tax systems, imposing a stand-alone death tax. Many of these states allow an exemption that is less than the federal exemption. This may leave some couples vulnerable to higher state death taxation. See your financial professional for more information. Tip: In 2011 and later years, the unused basic exclusion of a deceased spouse is portable and may allow you and your spouse to take full advantage of the estate tax applicable exclusion amount without using a bypass trust. Ownership of marital assets should be divided between husband and wife Typically, a married couple who wish to set up marital and bypass trusts should first divide their assets so that each spouse owns an equal amount of assets in his or her own name. If one spouse owns all of the assets or if the married couple owns all of their assets jointly, the couple may not be able to utilize the applicable exclusion amounts of both spouses. Once the assets are split, the couple will set up both bypass and marital trusts. Enough assets from the estate of the first spouse to die can be transferred to the bypass trust to fully use his or her applicable exclusion amount. The surviving spouse may be given certain rights and limited control over the assets in the bypass trust. He or she may receive income from the trust or be given the power to invade the trust principal for his or her health, education, support, and maintenance purposes. The surviving spouse may also be given a limited power of appointment over the bypass trust, meaning he or she can be given the right to direct the assets in the trust to a limited class of beneficiaries excluding him or herself, his or her estate, his or her creditors, or the creditors of his or her estate. Assets not transferred to bypass trust will fund marital trust The assets that are not transferred to the bypass trust may be used to fund the marital trust, and the assets in the marital trust will be included in the gross estate of the second spouse to die. However, because of the unlimited marital deduction, the assets that are transferred to the marital trust will not be taxed at the death of the first spouse. The estate taxes due on these assets will be postponed until the surviving spouse dies. The surviving spouse may also utilize his or her applicable exclusion amount to protect some or all of the assets in the marital trust from the estate tax. Many marital trusts will be set up as qualified terminable interest property (QTIP) trusts In many cases, the marital trust will be set up as a QTIP trust. With a QTIP, the surviving spouse must receive all income from the trust for his or her lifetime. However, the first spouse to die can then designate in the trust instrument to whom the assets will go when the surviving spouse dies. This type of trust is often used if the spouses are concerned that the surviving spouse will remarry or if one or both spouses have children from a previous marriage to whom they would like some or all the assets to pass. Thus, by using both marital and bypass trusts, a married couple can utilize each of their applicable exclusion amounts, thereby sheltering up to $24,120,000 (in 2022) from estate taxes. Caution: In other cases, however (as with the power of appointment trust), a marital trust will allow the surviving spouse to withdraw the principal in the trust at any time so that he or she has the option of either leaving the assets in the trust or taking them out. With a power of appointment trust, the surviving spouse can also designate to whom the trust assets will pass upon his or her death. In such cases, the husband and wife generally use the trust to provide creditor protection or professional management of assets while minimizing estate taxes. When can it be used? Married couple should expect to have assets in excess of applicable exclusion amount at death of first spouse before setting up marital trust Typically, only married couples who expect to have assets in excess of the applicable exclusion amount should incur the expense and time to set up marital and bypass trusts. Married couples who have assets below the applicable exclusion amount will generally have joint wills in which all of their assets are left to one another outright or will own all assets jointly. Either way, the surviving spouse will own all of the assets upon the death of the first spouse. If the total value of the assets in the surviving spouse’s estate is below the applicable exclusion amount, the surviving spouse’s estate will not incur estate taxes upon his or her death. Example(s): For instance, you and your spouse have assets in excess of your combined applicable exclusion amounts. Both you and your spouse would like to minimize estate taxes that will be due at your respective deaths. You would also like your three children to inherit all of your assets. Your estate planner suggests setting up bypass and marital trusts. Example(s): When the first spouse dies, sufficient assets will be transferred to the bypass trust to completely utilize his or her applicable exclusion amount. Providing that it is properly drafted, the bypass trust will not be included in the estate of the surviving spouse. The remaining assets will then go to the marital trust (usually set up as a qualified terminable interest property (QTIP) trust). Because of the unlimited marital deduction, these assets passing to the surviving spouse in the QTIP trust will not be taxed at the death of the first spouse. The assets in the QTIP trust will, however, be included in the gross estate of the surviving spouse upon his or her death. The surviving spouse can use his or her applicable exclusion amount to shelter some or all of these assets from estate tax. The first spouse to die can specify in the trust instrument that the assets in the QTIP trust will pass to the couple’s three children at the death of the surviving spouse. By utilizing the two trusts, you may be able to utilize the applicable exclusion amounts of both you and your spouse. Tip: In 2011 and later years, the unused basic exclusion of a deceased spouse is portable and may allow you and your spouse to take full advantage of the estate tax applicable exclusion amount without using a bypass trust. Ownership of assets of husband and wife should be equalized before setting up marital and bypass trusts If a married couple expects that their combined assets will be above the applicable exclusion amount when the first spouse dies, they should plan to divide ownership of their assets so that each spouse owns approximately one-half of the assets in his or her own name. You do not want to own the assets jointly with your spouse. If you do, then upon the death of the first spouse, the surviving spouse will own all of the assets. This may result in the surviving spouse’s estate being overqualified (exceeding the applicable exclusion amount), and the applicable exclusion amount of the first spouse to die will be wasted because there will be no assets in his or her estate to which the exclusion can be applied. If one spouse owns all of the assets by himself or herself and the other spouse dies first, then again the surviving spouse’s estate may be overqualified and the applicable exclusion amount of the first spouse to die will be wasted. Example(s): For instance, you expect that you and your spouse would have assets of $24,120,000 if one spouse dies in 2022. You currently own all of the assets jointly. Your estate planner suggests setting up a bypass and marital trust to minimize estate taxes and also suggests splitting up ownership of the assets. If the assets are split evenly ($12,060,000 owned by each spouse), then an amount equal to the applicable exclusion amount can be transferred to the bypass trust at the death of the first spouse to die. The remaining assets can then be transferred to the marital trust. The assets in the marital trust will be included in your surviving spouse’s gross estate. However, the surviving spouse can use his or her applicable exclusion amount to offset (partially or fully) estate taxes assessed against the amount in the marital trust. By splitting your assets and setting up the two trusts, you may be able to utilize the applicable exclusion amounts of both you and your spouse. Marital trust is not necessary to minimize federal estate taxes It is not necessary to use a marital trust to minimize federal estate taxes. Instead of using a marital trust, one spouse could simply leave the assets directly to the surviving spouse. Those assets would pass to the surviving spouse’s estate tax free due to application of the unlimited marital deduction and will be included in the gross estate of the surviving spouse. A marital trust can be useful where one or both of the spouses is concerned that the surviving spouse will remarry. The first spouse to die may not want his or her assets to go to the new spouse, especially if there are children from the first marriage. The first spouse to die may also be concerned that the surviving spouse will squander the assets and nothing will be left for the children. If you set up a QTIP trust, the surviving spouse can receive all income for life from the trust and you can specify that your children will receive the assets remaining in the trust upon your surviving spouse’s death. Example(s): For instance, you and your spouse have been married for 10 years and have three children. You have approximately $24,120,000 in assets, the ownership of which is equally divided between you and your spouse. Both you and your spouse would like your assets to eventually go to your children, so you should set up both a bypass trust and a marital trust. Example(s): At the death of the first spouse, enough assets could be transferred to the bypass trust to fully utilize the applicable exclusion amount of the deceased spouse. The remaining assets could then be transferred to the marital trust (usually set up as a QTIP). The surviving spouse would receive all income from the trust for his or her lifetime. At the death of the surviving spouse, all assets in the marital trust would pass to the three children. If you and your spouse were not concerned about the assets eventually going to your children, then it might not be necessary to set up a marital trust. Instead, any assets remaining after funding the bypass trust could simply be left outright to the surviving spouse. Marital trust can be one of three different trusts There are three types of marital trusts that will qualify for the unlimited marital deduction. A popular type of marital trust is the QTIP trust. In a QTIP, the surviving spouse must receive all income from the trust at least annually, and he or she must have the power to force the trustee to make the assets in the trust income-producing. However, the surviving spouse need not be given the power to direct the ultimate disposition of the assets in the trust, which is why this type of trust is so popular. A second type of trust that will qualify for the unlimited marital deduction is the power of appointment trust. With this type of trust, the surviving spouse is given the right to appoint the assets in the trust during his or her lifetime or at death to anyone including himself or herself, his or her creditors, his or her estate, or the creditors of his or her estate. As with the QTIP trust, the surviving spouse must be given all income annually from the trust and must have the right to force the trustee to make the assets in the trust income-producing. A third type of trust that qualifies for the marital deduction is the estate trust. With an estate trust, the trustee is not required to pay income to the surviving spouse so he or she does not have to be given the right to force the trustee to make the trust assets income-producing. However, the assets remaining in the trust along with any accumulated income must be paid to the surviving spouse’s estate upon his or her death. Because there is no requirement that the surviving spouse be given the power to force the trustee to make the trust assets income-producing, the estate trust is a good choice if you want to put non-income-producing assets in a marital trust, or if you want the trustee to invest the assets for the primary benefit of the remainderpersons. Executor must make QTIP election on federal estate tax return If you want to transfer assets to a QTIP trust at the time of your death, the executor of your will must make an affirmative QTIP election on your federal estate tax return to qualify the trust for the marital deduction. Once the QTIP election has been made, it is irrevocable. If the executor lists the QTIP property on schedule M on your federal estate tax return, this will be considered making an affirmative QTIP election on the return. Strengths Use of qualified terminable interest property (QTIP) trust important if you want assets to pass to specific individuals The use of a QTIP allows the first spouse to die to specify in the trust instrument to whom the assets in the QTIP will pass at the death of the surviving spouse. If the first spouse to die simply left all of his or her assets outright to the other spouse, the surviving spouse may leave those assets to a new spouse or new children. The surviving spouse may also spend or squander all the assets. Leaving assets in a QTIP trust for the surviving spouse allows him or her to benefit from the assets in the form of a lifetime right to income while ensuring that the assets ultimately pass to the individuals specified by the decedent spouse. Use of marital and bypass trusts allows a married couple to benefit from family wealth while minimizing estate taxes Another reason for using a marital and a bypass trust is to allow both spouses to benefit from the family wealth while minimizing federal estate taxes on their combined estates. By allocating some of the assets to the marital trust and some of the assets to the bypass trust, the applicable exclusion amounts of both spouses can be used to leave more to their heirs free from federal estate taxes. Example(s): For instance, you and your spouse expect to have a gross estate of $24,120,000 at the death of the first spouse. You have three minor children, whom you would like to inherit all of your assets upon the death of the surviving spouse. On the advice of your estate planning attorney, you have equally divided the ownership of the assets between you and your spouse. Your attorney has drafted both a QTIP and a bypass trust. At the death of the first spouse, sufficient assets are transferred to the bypass trust to fully use that spouse’s applicable exclusion amount. The rest of the assets are transferred to the QTIP. The surviving spouse receives all income for life from the QTIP and your children are named as the beneficiaries of this trust. At the death of the surviving spouse, all of the assets in the QTIP pass to your children. The value of the QTIP trust will be included in the estate of the surviving spouse. However, he or she can use his or her applicable exclusion amount to partially or fully offset federal estate taxes due on those assets. By using the two trusts, you have allowed the surviving spouse to benefit from the family wealth (through lifetime income), minimized federal estate taxes to be paid at the death of each of you and your spouse, and ensured that your children will inherit the bulk of your assets. Tip: In 2011 and later years, the unused basic exclusion of a deceased spouse is portable and may allow you and your spouse to take full advantage of the estate tax applicable exclusion amount without using a bypass trust. Marital trust may be used to maximize use of generation-skipping transfer (GST) tax exemption of both spouses In recent years, bypass and QTIP trusts have been designed to maximize the couple’s ability to use the generation-skipping transfer tax exemption of both spouses. The GST tax applies to a transfer from one individual to another who is two or more generations below the transferor. The GST tax rate is 40 percent (in 2022), and this tax is in addition to any other gift or estate taxes that may be due on the transfer. Each individual has a lifetime exemption from the GST tax ($12,060,000 in 2022, $11,700,000 in 2021). The exemption is often allocated between the bypass trust and the QTIP trust so that the bypass trust is fully exempt from GST tax. By making the allocation this way, it becomes more likely that both the husband and wife can fully utilize their GST tax exemptions to leave up to $24,120,000 to skip persons in 2022 without incurring the GST tax. Caution: Unlike the gift and estate tax basic exclusion amount in 2011 and later years, the GST tax exemption is not portable for spouses. Tradeoffs Attorney should be hired to draft marital trust documents You should seek the advice of a competent, experienced estate planning attorney regarding the estate planning and tax implications of setting up a marital trust and a bypass trust. An estate planning attorney should also be hired to draft the documents necessary to create and fund the trusts. Trustee will be needed You will need to appoint a trustee for the marital trust. A trustee will be needed to manage assets of a trust from the time it is funded (either during your lifetime or upon your death) until it terminates. Many people appoint a professional trustee (a bank trust department or professional fiduciary) who will have to be compensated for the services provided. Typically, a professional trustee receives an annual management fee of 1 percent or more of the assets under management. Surviving spouse may not have full control over assets in marital trust A surviving spouse may not have full control over the assets that are transferred to a marital trust. If the marital trust is set up as a qualified terminable interest property trust (QTIP), for example, then although the surviving spouse must receive all the income from the trust for his or her remaining lifetime, he or she cannot be given the right to direct the disposition of the trust assets upon his or her death. For many surviving spouses, not having full control over assets that the couple have spent their lifetimes accumulating is a very unpalatable result. Tip: There are exceptions. For example, if the trust is set up as a power of appointment trust, the surviving spouse retains control over the assets in the marital trust and may dispose of them as he or she wishes, both during his or her life and at death. Grantor cannot require qualified terminable interest property trust (QTIP) (or power of appointment trust) to hold non-income-producing assets Another tradeoff to setting up a marital trust is that with certain types of marital trusts, the creator of the trust cannot dictate what types of assets can be held in the trust. With a QTIP, for example, the surviving spouse has to be given the right to require the trustee of the trust to invest in income-producing property. The surviving spouse is entitled to all income from the trust for his or her lifetime. Example(s): Your estate planning attorney recommends that you and your spouse set up both a QTIP and a bypass trust to minimize estate taxes due upon your deaths. Your children are the remainderpersons of the QTIP trust. You would like your trustee to invest the QTIP so as to maximize the remainder that will pass to your children upon the death of your surviving spouse. To accomplish this goal, you would like the QTIP document to contain a provision that allows the trustee to invest only in growth stocks that pay no dividends. Unfortunately, with a QTIP, you are not allowed to dictate the types of investments that will be held by the trust. The surviving spouse must have the right to require the trustee to invest in income-producing assets. Grantor loses power over disposition of assets with power of appointment If you decide to set up the marital trust as a power of appointment trust, you lose the power to dictate where the assets will ultimately go when the surviving spouse dies. If you have children or other beneficiaries that you would like to receive your assets upon the death of the surviving spouse, you should consider alternatives to the power of appointment trust. In order to qualify for the unlimited marital deduction, a power of appointment trust must grant the surviving spouse a general power of appointment over the trust assets. With this power, the surviving spouse can use the trust assets for his or her own benefit while he or she is alive and may transfer them to creditors or others upon his or her death. Tip: Some couples may prefer the power of appointment trust over a QTIP because of the control it gives the surviving spouse over the assets in the trust. With a power of appointment trust, the surviving spouse can use the trust assets as he or she sees fit during his or her lifetime and can dispose of them as he or she wishes at death. For many couples, this flexibility outweighs the advantages of a QTIP, which gives the surviving spouse little or no control over the disposition of the trust assets. How to do it Attorney should be hired to draft marital trust and to transfer assets to trust You should hire an experienced and competent estate planning attorney to draft the marital trust document. There can be some fairly complicated tax and estate planning issues that need to be decided before setting up a marital trust, so you should consult with your estate planning attorney about these issues. Furthermore, if you fund the trust during your lifetime, you may also need an attorney to transfer title of the assets to the marital trust. Individual or institution should be trustee If your estate is large, you should consider hiring a professional trustee, either a corporate trustee (such as a bank trust department or a private trust company) or an individual who is a professional fiduciary. Your estate planning attorney should be able to recommend several competent trustees to you. The trustee of the trust has two primary responsibilities. First, the trustee must manage and invest the trust assets to generate income for the income beneficiary. Second, the trustee must attempt to preserve the principal for the remainder beneficiaries (i.e., the individuals who will ultimately receive the trust assets). If you have substantial assets, you should hire an individual or institution that has experience in managing these types of trusts. Beneficiary and remainder beneficiary must be chosen You must choose the income beneficiary and remainder beneficiaries (those individuals who will receive the assets upon the death of the income beneficiary) for the marital trust. If the marital trust is set up as a qualified terminable interest property (QTIP) trust or as a power of appointment trust, then the surviving spouse must receive all the income from the trust for the remainder of his or her life. Typically, the remainder beneficiaries will be the children from either your current marriage or a previous marriage. Example(s): Your estate planning attorney has recommended that you set up both a marital trust and a bypass trust to utilize the applicable exclusion amounts (the amount that can be sheltered from federal gift and estate tax by the unified credit) of both you and your spouse. He or she recommends that the marital trust be set up as a QTIP. Upon your death, enough assets will be transferred to the bypass trust to fully use your applicable exclusion amount available at your death. The remainder of your assets will then fund the QTIP. Your spouse will have to receive all income from the trust for the remainder of his or her lifetime and your children can be named as the remainder beneficiaries to receive the assets in the trust upon the death of your spouse. In this manner, you have prevented your assets from ultimately passing to someone else if your spouse remarries. Executor must make affirmative QTIP election on estate tax return If you plan to transfer assets at your death to a QTIP trust, your executor must make an affirmative, irrevocable QTIP election on the federal estate tax return in order to qualify the assets in the trust for the unlimited marital deduction. Your executor can make either a full or partial QTIP election with respect to those assets. Typically, your estate planning attorney will insert language in your will directing your executor as to what portion of your estate should be transferred to the QTIP trust. Your attorney may insert language in your will stating that the executor should make a QTIP election for that portion of your estate that will reduce federal estate taxes to zero. In other words, sufficient assets will be transferred to your bypass trust so that your applicable exclusion amount available at your death will be completely utilized. The remainder of your assets will then be transferred to the QTIP, zeroing out your estate tax liability. One alternative that some estate planning attorneys recommend is to give the executor the discretion to include enough assets in the estate of the first spouse to die so that some estate taxes will be paid in that estate. It may make sense for the estate of the first person to die to actually pay some estate taxes at a relatively low marginal estate tax rate rather than overload the surviving spouse’s estate where the marginal estate tax rate may be much higher. Tip: In 2013 and later years, a federal gift and estate tax rate of 40 percent generally applies to taxable amounts in excess of the applicable exclusion amount. In those years, there may be no advantage to equalizing estates in order to avoid graduated tax rates. Tax considerations Income Tax Income from assets transferred to revocable living trust will be taxed to grantor of trust If you transfer assets to a marital revocable living trust (one that is set up while you are alive), then you will be subject to income tax on any income generated from those assets. Because the transfers are not irrevocable transfers to the trust, you are still considered the owner of the assets for income tax purposes. After your death, the income from the trust will be taxed either to the trust or to the beneficiaries, depending on whether the income is paid out to the beneficiaries or retained by the trust. Example(s): You set up a revocable living trust and transfer $500,000 to the trust. The trust generates $30,000 per year in income. You must include this amount in your adjusted gross income each year. After you die, the beneficiaries will be taxed on the trust income if it is distributed to them. If the trust retains the income, then the trust will be taxed on the income. Gift and Estate Tax No gift taxes are due for transfers to revocable living trust Because you retain the right to terminate a revocable living trust, no gift taxes are due at the time of the transfer to the trust. The assets in the revocable living trust will be included in your gross estate for estate tax purposes when you die. Gift taxes may be due on transfers to irrevocable trust Gift taxes may be due if you make transfers to an irrevocable trust during your lifetime. Any gift tax due may be offset by your applicable exclusion amount ($12,060,000 in 2022, $11,700,000 in 2021), to the extent it is available. Caution: Any portion of your applicable exclusion amount you use during your lifetime reduces the amount that will be available at your death. After death, assets going to marital trust will qualify for unlimited marital deduction After your death, assets transferred by your executor to a qualified terminable interest property (QTIP) marital trust will qualify for the unlimited marital deduction as long as a proper election is made to treat the assets as QTIP property. Assets transferred to a power of appointment trust or an estate trust for the benefit of the surviving spouse automatically qualify for the unlimited marital deduction. You can leave an unlimited amount of assets to your spouse in one of these marital trusts and not incur estate taxes at your death. However, the assets remaining in the marital trust on your surviving spouse’s death will be included in his or her taxable estate. Your spouse can then use his or her estate tax applicable exclusion amount to shelter either a portion or all of the assets from estate taxes. Questions & Answers What size estate should a married couple have before they consider using a marital trust? Usually, a married couple should have assets in excess of the applicable exclusion amount before considering the use of a marital trust. One of the main purposes of a marital trust (or a marital trust used in conjunction with a bypass trust) is to permit utilization of each spouse’s applicable exclusion amount in order to maximize the amount that can be left free from federal estate taxes at the death of both spouses. If you expect that your combined estate will be below the applicable exclusion amount, then there may be no need to use a marital trust. Should spouses who expect to have an estate in excess of the applicable exclusion amount have joint ownership of their assets? No. In general, a married couple with assets in excess of the applicable exclusion amount should not own their assets jointly. If they do, the surviving spouse will automatically be the owner of all the assets upon the death of the other spouse. The surviving spouse’s estate may be overloaded and the applicable exclusion amount of the first spouse to die will have been wasted as there would be no assets in his or her estate to which the exclusion could be applied. Rather, the married couple should split up ownership of their assets and then use both a marital and a bypass trust. Are there different types of trusts that can be set up as a marital trust? Yes. There are three types of trusts that can be set up as a marital trust. One of the most commonly used trusts is a qualified terminable interest property (QTIP) trust, where the surviving spouse must be given all income from the trust for his or her lifetime. However, the creator of the trust can designate in the trust instrument who will receive the trust assets when the surviving spouse dies. The surviving spouse must be given the right to all of the income for his or her lifetime and the power to force the trustee to make the assets in the QTIP trust income producing. All of the assets in the QTIP trust will be included in the surviving spouse’s gross estate for estate tax purposes. A second type of marital trust is the power of appointment trust. Here, the surviving spouse must be given all income from the trust for life and must also have a general power of appointment over the trust assets. Like a QTIP, the surviving spouse must have the right to force the trustee to make the assets income producing. All trust assets will be included in the surviving spouse’s gross estate. The final type of marital trust is the estate trust, where the surviving spouse need not receive all income from the trust during his or her lifetime. However, the trust assets, including any accumulated income, must be payable to the surviving spouse’s estate upon his or her death. The assets in an estate trust do not have to be income producing. Thus, trust assets could be undeveloped land or growth stocks. Does it ever make sense for a married couple to pay estate taxes at the death of the first spouse? Yes. There may be situations where a married couple will actually be better off to pay some estate taxes at the death of the first spouse. The top marginal federal estate tax rate is 40 percent in 2021. If the marginal rate in the estate of the first spouse is low, it may be advisable to include enough assets in his or her gross estate so that some federal estate taxes are assessed at the lower marginal rate. These assets will then not be included in the surviving spouse’s gross estate where they might be subject to tax at the higher rate. If the surviving spouse is likely to have substantial assets pushing his or her estate into a higher marginal estate tax bracket, the couple may be better off paying taxes at the lower tax rate at the death of the first spouse rather than overloading the surviving spouse’s estate. Tip: In 2013 and later years, a federal gift and estate tax rate of 40 percent generally applies to taxable amounts in excess of the applicable exclusion amount. In those years, there may be no advantage to equalizing estates in order to avoid graduated tax rates. ______________________________________________ This article was prepared by Broadridge. LPL Tracking #1-05113516

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

Whether you’re seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility — many types of trusts exist, each designed for a specific purpose. Although trust law is complex and establishing a trust requires the services of an experienced attorney, mastering the basics isn’t hard. What is a trust? A trust is a legal entity that holds assets for the benefit of another. Basically, it’s like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust depend largely on your goals. For example, if you want the trust to generate income, you may want to put income-producing securities, such as bonds, in your trust. Or, if you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy. When you create and fund a trust, you are known as the grantor (or sometimes, the settlor or trustor). The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries are usually your family and loved ones but can be anyone, even a charity. Beneficiaries may receive income from the trust or may have access to the principal of the trust either during your lifetime or after you die. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose of the trust, you can name yourself, another person, or an institution, such as a bank, to be the trustee. You can even name more than one trustee if you like. Why create a trust? Since trusts can be used for many purposes, they are popular estate planning tools. Trusts are often used to: Minimize estate taxesShield assets from potential creditorsAvoid the expense and delay of probating your willPreserve assets for your children until they are grown (in case you should die while they are still minors)Create a pool of investments that can be managed by professional money managersSet up a fund for your own support in the event of incapacityShift part of your income tax burden to beneficiaries in lower tax bracketsProvide benefits for charity The type of trust used, and the mechanics of its creation, will differ depending on what you are trying to accomplish. In fact, you may need more than one type of trust to accomplish all of your goals. And since some of the following disadvantages may affect you, discuss the pros and cons of setting up any trust with your attorney and financial professional before you proceed: A trust can be expensive to set up and maintain — trustee fees, professional fees, and filing fees must be paidDepending on the type of trust you choose, you may give up some control over the assets in the trustMaintaining the trust and complying with recording and notice requirements can take up considerable timeIncome generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate The duties of the trustee The trustee of the trust is a fiduciary, someone who owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries at all times. For example, the trustee must preserve, protect, and invest the trust assets for the benefit of the beneficiaries. The trustee must also keep complete and accurate records, exercise reasonable care and skill when managing the trust, prudently invest the trust assets, and avoid mixing trust assets with any other assets, especially his or her own. A trustee lacking specialized knowledge can hire professionals such as attorneys, accountants, brokers, and bankers if it is wise to do so. However, the trustee can’t merely delegate responsibilities to someone else. Although many of the trustee’s duties are established by state law, others are defined by the trust document. If you are the trust grantor, you can help determine some of these duties when you set up the trust. Living (revocable) trust A living trust is a special type of trust. It’s a legal entity that you create while you’re alive to own property such as your house, a boat, or investments. Property that passes through a living trust is not subject to probate — it doesn’t get treated like the property in your will. This means that the transfer of property through a living trust is not held up while the probate process is pending (sometimes up to two years or more). Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate, or if you want to delay the transfer, you can direct that the trustee hold the assets until some specific time, such as the marriage of the beneficiary or the attainment of a certain age. Living trusts are attractive because they are revocable. You maintain control — you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it. Living trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in and manages your property. Your trustee has a duty to administer the trust according to its terms, and must always act with your best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your property. Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust. Irrevocable trusts Unlike a living trust, an irrevocable trust can’t be changed or dissolved once it has been created. You generally can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. First, you transfer assets into the trust — assets you don’t mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer. Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As a bonus, property in an irrevocable trust may be protected from your creditors. There are many different kinds of irrevocable trusts. Many have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you. Testamentary trusts Trusts can also be established by your will. These trusts don’t come into existence until your will is probated. At that point, selected assets passing through your will can “pour over” into the trust. From that point on, these trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs. Since you have a say in how the trust terms are written, these types of trusts give you a certain amount of control over how the assets are used, even after your death. _________________________________________________ This article was prepared by Broadridge. LPL Tracking #1-192643

What is it? A charitable remainder unitrust, or CRUT, is a trust with both charitable and noncharitable beneficiaries. When the trust is created, the charity’s interest in the trust assets is a “remainder interest,” which means it is second in line to someone else’s interest. For this reason, this trust is characterized as a remainder trust. A CRUT works like this: You transfer property to a trust. It can be most anything (cash, securities, real property, an original painting). You choose a qualified charity (a charity must be a “qualified” one in order for your contributions to be tax deductible). You designate a noncharitable beneficiary. This person can be anyone — you, your spouse, your mail carrier. You determine, within set guidelines, how much money the noncharitable beneficiary is to be paid each year out of the trust assets. IRS rules require this payment to be at least 5%, but no more than 50%, of the fair market value of the trust assets, which are revalued every year. You determine how long the trust will last. It can be for the life of the noncharitable beneficiary (or joint lives for multiple beneficiaries) or for a fixed period of years up to 20 years. At the end of the stated period of time, all the remaining trust assets pass to charity. Example(s): Rob decides to donate some money to his favorite crime-fighting charity. He transfers $200,000 to a CRUT and names his partner, Chet, the noncharitable beneficiary. Rob sets the payment rate at 10% and the life of the trust at 15 years. The result is that every year for 15 years, Chet will receive an annual payment equal to 10% of the value of the trust assets for that year. In the first year, Chet will receive $20,000, which is 10% of the fair market value of the trust assets for that year. In the second year, if the trust assets increase in value to $230,000, Chet will receive 10% of this amount, or $23,000. After 15 years, all the remaining money in the trust will pass to charity. The distinguishing feature of a CRUT is that the annual payment to the income beneficiary is directly linked to the value of the trust assets and thus fluctuates from year to year. When the trust assets increase in value, so does the annual payment to the income beneficiary. Also, new contributions to a CRUT are allowed. A CRUT can be established to take effect either during your life (a living or inter vivos trust) or at your death (a testamentary trust). A CRUT operates in an identical manner in either situation. The reasons you might choose one over the other include tax consequences and the ability to see your trust in operation. For example, in the living trust situation, you are entitled to an immediate income tax deduction for the present value of the remainder interest that will pass to charity. There are several variations in the world of CRUTs. In addition to the standard CRUT, there is the net income only charitable remainder unitrust (NI-CRUT), the net income with makeup charitable remainder unitrust (NIMCRUT), and the “flip” unitrust (Flip-CRUT). Unless otherwise noted, this discussion pertains to the standard CRUT. Caution: On March 30, 2005, the Treasury and the IRS announced that for CRUTs created on or after June 28, 2005, a donor’s spouse may be required to sign an irrevocable waiver of his or her right to elect a statutory share of the donor’s estate, and that failure to do so may result in the CRUT failing to qualify for tax exempt status, and the donor may be unable to take the initial income tax deduction. The Treasury and the IRS have since extended the safe harbor date of June 28, 2005, pending further guidance from the IRS. See IRS Rev. Proc. 2005-24 and Notice 2006-15 for more information, and consult a tax professional. When can it be used? You want to donate to charity but want a noncharitable beneficiary to receive an income stream for life or a period of years By establishing a CRUT, you can donate to your favorite qualified charity and reap some tax benefits while simultaneously retaining an income stream provided by the donated assets. The income stream is in the form of an annual payment that is a fixed percentage of the value of the trust assets for that year. The payment is made to your designated beneficiary at least once per year. Strengths Provides income tax deduction When you establish a charitable remainder unitrust (CRUT) during your lifetime, you receive an immediate income tax deduction for the present value of the remainder interest that will pass to charity (assuming you itemize deductions). This deduction is available even though the charity may not benefit from your gift for many years. Your deduction is limited to 20%, 30%, or 50% of your adjusted gross income, depending on the type of charity and the type of property donated to charity (via the trust). (For 2018 to 2025, the 50% limit is increased to 60% for certain cash gifts.) However, any deduction that cannot be used because of the adjusted gross income limitations may be carried forward for up to five years. Provides an income tax haven for assets that have appreciated substantially There is no IRS rule that says you must be 100% charitably motivated to establish a CRUT. Thus, it’s perfectly acceptable, and even preferable, to set up a CRUT and fund it with an asset that has appreciated substantially in value (for example, stock, a closely held small business, or real property). When the trust sells the asset, it pays no capital gain or income taxes on the sale. The trust can then invest the proceeds and provide you or your designated beneficiary with an income stream from a much larger principal than if you had sold the asset yourself and paid capital gain tax. The income beneficiary of the CRUT must include annual distributions in gross income. Example(s): Steve, a bachelor, owns $200,000 of stock in an apparel company that he purchased 20 years ago for $10,000. If he were to sell the stock now, he would owe capital gain tax of nearly $28,500 (assuming a capital gains tax rate of 15% and no other variables), leaving him only $171,500 to invest. Instead, Steve can set up a CRUT and use his stock to fund it. The trust can then sell the stock and reinvest the entire $200,000, which is exempt from capital gain tax. Caution: At one time, creative individuals established CRUTs that sought to convert highly appreciated assets into cash while at the same time avoiding a substantial portion of tax on the gain. These CRUTs, called “accelerated CRUTs,” had a short life (two or three years) and paid out a high percentage of the trust assets each year. With creative accounting practices, the income beneficiary received nearly the entire amount of the asset donated to the trust with only minimal capital gain tax. Accelerated CRUTs are no longer allowed under current law. Allows for the additional contribution of assets The IRS allows you to contribute to a CRUT as often as you wish. So, if you fund your CRUT with a large amount of cash and then later decide you want to add your stamp collection, you can. The advantage is you can increase the annual payment to the income beneficiary by donating more assets to the trust, because the beneficiary’s payment is based on the value of the trust assets. You can even “pour over” future bequests from your will into the CRUT. Example(s): Melissa establishes a CRUT with three prized paintings. Two years later, she writes her will and, among other provisions, specifies that her three prized paintings are to be added to the CRUT. The result is that on her death, the paintings will be added to the trust. Allows annual payment to increase when value of trust property increases Because the annual payment is linked to the value of the trust assets, it can increase when the value of the trust property increases. The trust assets are revalued every year on the same date (the revaluation date), at which time the new payment for the year is determined. So an income beneficiary can benefit from a skilled trustee who, through wise investments, increases the value of the trust assets. Provides you with positive social, religious, and/or psychological benefits for donating to your favorite charity Yes, the tax benefits can be great. In addition, donating to charity can be a real morale booster. Reduces potential federal estate tax liability If all the requirements of a CRUT are met, the IRS allows the executor of your estate to deduct the present value of the remainder interest that will pass to charity from your gross estate. This will reduce the size of your gross estate. Essentially, once the value of the charity’s interest is determined (using special IRS tax tables), the entire amount may be deducted from your gross estate. Example(s): In his will, Matt establishes a CRUT for the life of his friend Jill, with the remainder to go to an animal humane society. Assuming that the present value of the remainder interest to charity is $75,000, Matt’s estate executor Dick will be entitled to subtract $75,000 from Matt’s gross estate. However, the value of the income stream to be paid to Jill will be included in Matt’s gross estate. Tradeoffs Requires an irrevocable commitment If you have any doubts about donating to charity, you should think twice before establishing a CRUT. Once you fund it, there’s no turning back. You can’t even amend a CRUT once the ink is dry and it’s properly executed (though you can change the charity). Assets donated to charity are assets lost to your family Once you decide to donate a portion of your estate to charity with a CRUT, these assets are forever removed from your inheritable estate. Tip: This reality has prompted the creation of “wealth replacement trusts,” so called because their purpose is to replace the wealth lost to your family. A wealth replacement trust is often an irrevocable life insurance trust (ILIT). The idea is that the donor uses part of the income stream generated by the CRUT to pay premiums on a life insurance policy in an amount roughly equal to the amount to be passed to charity. The policy is then held in trust and distributed to the family on the donor’s death (free of income tax), thus “replacing the wealth.” Involves more complicated administration The administration of a CRUT is more complicated than the administration of its sister, CRAT (charitable remainder annuity trust). For one thing, the IRS requires the trust assets to be revalued annually. Also, the trustee must account for and value any new property that is contributed to the trust. Annual payment may decrease when value of trust property decreases Because the annual payment is linked to the value of the trust property, it can decrease in amount when the trust property decreases in value due to poor investment performance. Tip: However, the IRS permits, but does not require, the invasion of principal (or capital gains) if the actual income earned by a CRUT in a given year is insufficient to meet the required payment. So, if the income beneficiary is your mother-in-law and she could use the money, the trustee has the ability to invade the principal. Value of charity’s remainder interest at time of creation of CRUT must be at least 10% of trust assets The present value of the remainder interest to charity must be at least 10% of the value of the property contributed to the trust as of the date of each contribution. This figure is determined by using special IRS tax tables, which take into account the age of the income beneficiary, the amount of trust assets, and the specified percentage rate. This rule prevents you from setting up a CRUT with payments over the life of a very young income beneficiary. In such a scenario, it is possible that by the time the income beneficiary died, there would be nothing remaining for the charity. Example(s): A 48-year-old donor would be prohibited from setting up a 9% CRUT for the donor’s lifetime (assuming a 3% interest rate) because the remainder value for charity, using the IRS tax tables, would be only 9.933%. How to do it Consult a competent legal advisor A legal professional well versed in the area of charitable remainder unitrusts (CRUTs) should be consulted. A CRUT is subject to many technical requirements and must be drafted with the utmost care in order to gain favorable tax benefits. Often, additional advisors (such as tax professionals, accountants, and/or CERTIFIED FINANCIAL PLANNERS™) will be necessary to devise the best strategies and analyze the numbers. Pick a noncharitable beneficiary The noncharitable beneficiary can be you, a spouse, another family member, or a friend. You can pick more than one noncharitable beneficiary. Tip: If you and your spouse, or your spouse, are the only noncharitable beneficiaries, the interest transferred to your spouse qualifies for a gift tax or estate tax marital deduction. Caution: If you set up a lifetime CRUT with a very young income beneficiary, make sure you satisfy the rule that the value of the charity’s remainder interest at the time of the creation of the CRUT is at least 10% of the trust assets. Caution: For a lifetime CRUT, if the noncharitable beneficiary is other than you or your spouse, you have made a gift for federal gift tax purposes, part of which may qualify for the annual gift tax exclusion. If you are the grantor and a beneficiary of the CRUT and die during the trust term, the CRUT will be included in your gross estate for federal estate tax purposes, but will generally qualify for a charitable deduction and, if your spouse is the only other noncharitable beneficiary, a marital deduction. Pick a charity you wish to donate to and verify that it is a “qualified charity” The IRS allows you to deduct contributions only to qualified charities. Generally, qualified charities are those operated exclusively for religious purposes, educational purposes, medical or hospital care, government units, and certain types of private foundations. Every year, the IRS publishes a list of all qualified organizations in IRS Publication 78, commonly known as the ” Blue Book. ” Check to make sure your charity is listed in this publication. Tip: Once you have picked a charity, IRS regulations require you to choose an alternate charity in case the one you picked is not in existence when the trustee is to deliver the trust assets. Tip: Once you have picked a charity, it is a good idea to contact the charity to make sure it is willing to accept such a gift. Tip: Alternatively, the IRS does not require you to pick a charity when the CRUT is established. You can thus set up a fully operational CRUT and reserve the choice of charity for a future date. However, the trust must set forth the specifics of when and how the charity will be identified. Be sure the charity you ultimately pick is a qualified one. Identify the asset(s) you want to use to fund the trust You can use any type of property to fund the trust (e.g., cash, securities, real property, life insurance, a rare collectible in excellent condition). Caution: While you can use any type of property to fund the trust, restrictions associated with certain types of property may effectively prevent their use. For example, stock in a closely-held business is often subject to a buy-sell or other agreement that restricts to whom the stock can be transferred. As another example, certain types of trusts are not able to  be S corporation shareholders; effectively, this means you would not be able to fund a CRUT directly with S corporation shares. Tip: It is preferable to transfer an asset that has appreciated substantially in value because the trust is exempt from capital gain tax on the sale of any property. Tip: Most CRUTs pay the income beneficiary on a quarterly basis, in which case the beneficiary will begin receiving income a few months after the CRUT’s inception. This arrangement can pose problems for the trustee. If the asset you use to fund the trust takes some time to sell, the trustee will not have the cash available to pay the beneficiary. So, it is a good idea to fund the CRUT, at least in part, with marketable securities and/or cash. You don’t want to place a parcel of real estate in the trust and assume a quarterly payment will be forthcoming to the beneficiary. Tip: If you name yourself trustee of your CRUT, or if the noncharitable beneficiary or a related party (as defined by the IRS) is the trustee, the IRS requires you to obtain a “qualified appraisal” for all “unmarketable assets.” Unmarketable assets are those that are not cash, cash equivalents, or marketable securities (e.g., a closely held business or real property). This rule is to prevent self-dealing in the appraising of hard-to-value assets. Set the annual valuation date for the trust assets The trust assets are revalued once every year on the same date. This is called the “valuation date,” and it is set in the trust document. IRS regulations allow the unitrust amount to be paid within a reasonable time after the close of the year. Consequently, you can pick December 31 as your annual valuation date. Determine how long the trust will be in existence and set the payment rate You control the duration of the trust. The trust can be in existence for the life of the noncharitable beneficiary (or joint lives for multiple beneficiaries) or for a fixed period of years up to 20 years. The payment rate is set as a specified percentage of trust assets, which are revalued every year. Once the percentage amount is set, it remains the same over the life of the trust. It must be at least 5%, and no more than 50%, of the fair market value of the trust assets for that year. Caution: Once you establish the duration of the CRUT and the payment rate, you must analyze the numbers to make sure you comply with the rule that the present value of the charity’s remainder interest be at least 10% of the trust assets. Select a trustee Once an asset has been transferred to a CRUT, it is the trustee’s responsibility to manage, invest, and conserve this property. The trustee has a dual fiduciary responsibility: to generate income for the noncharitable beneficiary and to preserve the trust assets for the charity. It helps to choose a trustee who is experienced and well versed in the area of CRUTs. Tip: If you want to appoint the charity as trustee, it is a good idea to contact the charity to make sure it is willing to serve in this capacity. Caution: You can appoint yourself trustee. However, you are then responsible for investing the assets to produce income sufficient to make the required payment to the income beneficiary. In addition, as trustee, you are required to keep abreast of and comply with new IRS regulations on CRUTs in order to gain favorable tax benefits. You are also responsible for valuing all new property donated to the trust. Tip: If you are both trustee and income beneficiary, some states require that a cotrustee be appointed who is not a beneficiary. Coordinate the CRUT with your existing will and/or living trust It is a good idea to make sure your CRUT is coordinated with any other estate planning documents to achieve an integrated plan. A competent professional should undertake this review. File Form 5227 — Split Interest Trust Information Return Even though a CRUT is exempt from federal income tax, you must still file Form 5227 (Split Interest Trust Information Return) every year the CRUT is in existence. Further, if it is your first year filing Form 5227, you must also include a copy of the trust instrument and a written declaration that the document is a true and complete copy. Tax considerations Income Tax Income tax deduction for donor of charitable remainder unitrust (CRUT) established during donor’s lifetime If you itemize deductions, the IRS allows you to take an immediate income tax deduction for the present value of the remainder interest that will pass to charity. You are entitled to receive the deduction in the year that you establish the CRUT, even though the charity may not benefit from your gift for several years. Your allowable deduction for the given year is limited to either 50%, 30%, or 20% of your adjusted gross income (AGI), depending on the type of property donated to charity (via the trust) and the classification of the charity as either a public charity or a private foundation. (For 2018 to 2025, the 50% limit is increased to 60% for certain cash gifts.) If you cannot take the full deduction in the given year, you may carry over the difference for up to five succeeding years (assuming you still itemize deductions in those years). Tip: Generally, a “public charity” is a publicly supported domestic organization, whereas a “private foundation” does not have the same broad base of public support. IRS Publication 78 notes whether a charity is a public or private one. Technical Note: The amount of your deduction is calculated using special interest rate tables established by the IRS. The current rules require the value of a remainder interest to be calculated in a certain fashion. It is calculated by using an interest rate that is 120% of the federal midterm rate then in effect for valuing certain federal government debt instruments for the month the gift was made. In addition, the calculation uses the most recent mortality table available to determine the mortality factor. Special computer programs now exist to make this calculation easier. Example(s): Tammy, a 67-year-old woman, places $250,000 in a CRUT. She designates herself income beneficiary for life and sets an annual payment of 9% of the trust assets, with payments to be made quarterly (at the end of each period). Assuming a 3% interest rate (using the IRS tax table described above), her allowable income tax deduction using the tax tables is $73,390. If Tammy’s AGI for the year is $80,000 and her charity was a public charity (allowing for a 50% deduction), Tammy will have an allowable income tax deduction of $40,000 for the current year. The remaining $33,390 (the difference between her authorized deduction and her allowed deduction) is then carried over to subsequent years. In the second year, Tammy can deduct $33,390 (assuming her AGI remains the same and she still itemizes deductions). Income tax consequences for income beneficiary of CRUT If you are the income beneficiary of a CRUT, you will owe income tax on any income payments you receive. So, although a CRUT can escape capital gain tax on the sale of an asset, this benefit does not pass on to you. You must pay income tax on any part of this income that is distributed to you. The IRS uses a special accounting procedure to determine the tax on the income distributed to you. Gift Tax No gift tax if you and/or your spouse are sole beneficiaries If you and/or your spouse are the only income beneficiaries of a CRUT, you do not owe gift tax. The income stream to your spouse falls under the unlimited marital deduction. Caution: In community property states, husband and wife are treated as equal owners. If community property is used to fund a trust that benefits only one spouse or if separate property of one of the spouses is used to fund a trust that provides lifetime benefits to both parties, there is a recognized gift to the other spouse. This may have implications under the particular state’s gift tax law. Possible gift tax if someone other than spouse is beneficiary If the income beneficiary of a CRUT is someone other than you or your spouse or in addition to you or your spouse, gift tax rules come into play. The present value of the income stream to the beneficiary is determined at the time the gift is established. If the value is more than the $16,000 (in 2022) annual gift tax exclusion, a gift tax must be paid, unless a portion of your applicable exclusion amount ($12,060,000 in 2022) is available to offset the tax due. Caution: Any portion of the gift tax applicable exclusion amount you use during life will effectively reduce your estate tax applicable exclusion amount that will be available at your death. Estate Tax Reduces size of gross estate One of the best features of a CRUT is its ability to reduce the size of your gross estate. When you establish a testamentary CRUT, the executor of your estate can deduct the present value of the remainder interest being left to charity from your gross estate. The smaller your gross estate, the less chance you have of owing estate tax. Example(s): Gary establishes a testamentary CRUT. Assume that at his death, the present value of the charity’s remainder interest is determined to be $150,000 (using special IRS tax tables). Consequently, the executor of Gary’s estate will be entitled to deduct $150,000 from his gross estate. Caution: If you are the grantor and a beneficiary of the CRUT and die during the trust term, the CRUT will be included in your gross estate for federal estate tax purposes, but will generally qualify for a charitable deduction and, if your spouse is the only other noncharitable beneficiary, a marital deduction. Questions & Answers Can you establish a charitable remainder unitrust (CRUT) and name yourself the sole income beneficiary? Yes, you can be both the donor and the sole income beneficiary. However, once you establish a CRUT, it must still be irrevocable, even if you are the income beneficiary. Can you name more than one income beneficiary? Yes, you can name more than one income beneficiary. However, if you create a CRUT with a life term for each beneficiary, you may run afoul of the rule requiring the present value of the remainder interest to charity to be at least 10% of the trust assets. For example, a husband and wife, each 50 years old, would be disqualified from establishing a CRUT for their lives if the annual payment amount were more than about 6.6% of the trust assets. Can you choose more than one charity as the charitable beneficiary? Yes, you can choose more than one charity as the remainder beneficiary, as long as the trust document sets forth your right to do so and specifies how the trust assets will be distributed. Of course, you must make sure that the second (or third or fourth) charity constitutes a “qualified organization” under IRS rules. Otherwise, you risk losing favorable tax treatment. Can you replace the trustee during the life of the CRUT? Yes. As long as the trust agreement provides for it, you can replace the trustee. You are the income recipient of a CRUT. How does the IRS determine the income tax you will pay on this distribution? The extent to which the payment is taxable depends on the character of the payment, which in turn is determined under a special income tax calculation formula unique to charitable remainder trusts. Charitable remainder trusts include charitable remainder annuity trusts (CRATs) and CRUTs. Technical Note: The IRS uses a four-tier accounting procedure, also called the “ordering rules,” to determine the tax character of the income distribution to the beneficiary. The acronym used to describe this accounting rule is WIFO, which stands for “worst in, first out.” The amounts distributed by a CRUT are classified as follows: Ordinary income, to the extent of ordinary income earned by the trust in the current year, along with any undistributed ordinary income from prior years (ordinary income includes dividends) Capital gain (including qualified dividends), to the extent of the capital gains earned by the trust in the current year, along with any undistributed capital gain from prior years Nontaxable income, to the extent of the nontaxable income earned by the trust in the current year, along with any undistributed nontaxable income from prior years Principal The highest tax the IRS imposes is on ordinary income. If the required annual payment cannot be paid out of ordinary income, it is then paid from capital gains. If the payment still cannot be met after exhausting capital gains, it is paid from tax-exempt income and finally, if necessary, from the principal of the trust. Tip: The trustee must keep track of all sales and gains by the trust in order to make these calculations. This is a daunting task often completed by a computer tracking system. This is one more reason to question whether you really want to appoint yourself trustee. Also, the IRS cares about the type of property you use to fund the CRUT. If you contribute nonappreciated property (like cash), the payment to the income beneficiary constitutes a return of principal, and no income tax is due. By contrast, if you contribute appreciated property (like stock), the payment from principal has income tax consequences for the income beneficiary. The income tax will be in the form of a capital gain tax to the extent that any part of the payment is attributable to gains that were untaxed prior to the asset being transferred to the trust. In other words, the donated asset carries with it the tax characteristics that existed prior to the asset being transferred to the CRUT. What is an “accelerated CRUT?” An accelerated CRUT is no longer permitted under current law. Under prior law, an accelerated CRUT was a standard CRUT with an extremely short term (two or three years) and an “accelerated” payout. It was funded with an asset that had appreciated substantially in value. Using creative accounting practices, the donor got back as much value of the asset as possible, free of capital gain tax. Example(s): Ron sets up a CRUT in January of year one with $500,000 of stock he purchased 20 years ago for $50,000. Ron designates himself income beneficiary, sets the life of the trust for two years, and sets the annual payout rate at 80%. Suppose that in year one, the trustee does not sell the stock. Thus, the trust has no income for year one. Ron, however, is still owed a payment of $400,000 (80% of $500,000). Under old IRS rules, the trustee was allowed to pay the income beneficiary “within a reasonable period of time after the close of the taxable year.” So here’s where the creative accounting comes into play. In January of year two, the trustee sells the stock and receives $500,000. Shortly thereafter, the trustee pays Ron $400,000 to satisfy the year one payout requirement. The trustee also makes a separate payment to Ron of $80,000, which is the required payout for year two (80% of the remaining $100,000). At the end of year two, the remaining $20,000 passes to charity. Example(s): Here is the result based on a literal reading of the ordering rules the IRS uses to characterize income paid out to an income beneficiary. The $400,000 payout in year one is classified as a return of principal because the trust did not have any current or prior undistributed ordinary income, capital gain, or tax-exempt income in year one (because the trustee had not yet sold the stock). So Ron enjoys the entire $400,000 free and clear of all taxes. The $80,000 payout in year two is treated as capital gains income (because the trust had capital gains income in year two from the sale of stock), so Ron must pay a capital gain tax of $12,000 (15% x $80,000, assuming no other variables). The end result is that through the trust, Ron has sold a $500,000 asset with a $50,000 cost basis and ended up with $468,000 in cash (as well as a charitable contribution deduction in year one). By contrast, if Ron had sold the stock himself, he would have owed higher capital gain taxes. Recently, the IRS implemented a new regulation that has effectively shut down this accelerated CRUT technique. Specifically, the IRS now requires all CRUTs and CRATs (charitable remainder annuity trusts) to distribute the annual payment to the income beneficiary in the taxable year when the payment is due. So, in the above example, the trustee would have had to pay out $400,000 in year one. To do so, the trustee would have had to sell the stock, thus generating capital gain income in the same year as the distribution. So the $400,000 would be subject to capital gain tax. Only standard CRUTs and CRATs are affected by this rule. Thus, NI-CRUTs (net income charitable remainder unitrusts) and NIMCRUTs (net income with makeup charitable remainder unitrusts) will still be allowed to make any required payment to the income beneficiary within a reasonable time after the close of the taxable year. What are the advantages of using a CRUT over a CRAT (charitable remainder annuity trust)? Although a CRAT and CRUT are both charitable remainder trusts, there are differences between them. A CRAT pays out to the income beneficiary a fixed amount every year for the life of the trust. The amount is set as a percentage of the trust assets, which are valued only once at the inception of the CRAT. If the amount cannot be paid from the current income earned by the trust, the principal must be invaded. By contrast, a CRUT pays out a fixed percentage of the value of the trust assets every year, which is determined on an annual basis. So the payment fluctuates with the value of the assets. A CRUT will often provide that if the payment cannot be paid from the current income earned by the trust, the principal may, but need not be, invaded. If the trust assets appreciate substantially, the noncharitable beneficiary will receive a greater payout. Second, once a CRAT is funded, additional contributions of property are prohibited. By contrast, new property can be added to a CRUT. These differences make the CRUT more complicated and more difficult to administer. This article was prepared by Broadridge. LPL Tracking #1-05109703