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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 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

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 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 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

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

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.