Estate
An Estate Planning Guide for Beginners
Estate planning is a comprehensive process that involves organizing your assets and making informed decisions concerning how your wealth will be handled before and after death. It is a critical phase of wealth management, essential for anyone seeking to manage their assets and efficiently pass them to heirs. In this article, we examine the crucial components of an estate plan, how to begin, who can help you develop an estate plan, mistakes to avoid, and how to mitigate them. The components of an estate plan Generally, the underlying components of estate planning are wills, trusts, and powers of attorney documents: Wills A will is the cornerstone of any estate plan. It allows you to clearly express your wishes concerning the distribution of your wealth and assets. In your will, you can appoint executors to carry out specific instructions regarding your assets, designate guardians for minor children, and establish arrangements for their financial support. Trusts Trusts, another core element in estate planning, offer a range of benefits. They can aid in reducing estate taxes, safeguarding your privacy, and ensuring that your assets are managed according to your guidelines. Trusts come in many forms, including revocable and irrevocable trusts, charitable giving trusts, and special needs trusts—each with a unique set of advantages and functions: Revocable trust – This type of trust may be altered as often as desired during a grantor’s living years. Irrevocable trust – This type of trust cannot be altered, amended, or revoked. Charitable remainder trust (CRT) – A charitable remainder trust is designed to benefit a non-profit beneficiary. Funding this trust with appreciated assets enables donors to sell the assets without incurring capital gains tax. CRTs are irrevocable and cannot be modified or terminated without the beneficiary’s permission. Special needs trust – A special needs trust enables a physically or mentally ill person or someone chronically disabled to access funding without impacting their eligibility for public assistance. There are other types of trusts; your legal professional can help you determine which type is appropriate for your situation and goals of passing assets. Powers of attorney (POA) A POA is an important legal instrument that becomes effective when incapacitated and can also be employed for your benefit during travel or absence. Through a power of attorney, you assign another individual—the attorney-in-fact—to act on your behalf in financial or healthcare matters. Depending on the specifics of the document, this designated individual can pay your bills, manage your investments, or make important healthcare decisions for you. In addition to the elemental components such as wills, trusts, and powers of attorney, estate planning can also encompass life insurance policies, retirement plans, tax planning, health care directives, financial directives, and even funeral preparations. All these elements work together to ensure that your wealth transfers seamlessly, taxes are managed, and your final wishes are respected and carried out as you intend. How to begin estate planning Although estate planning may seem complicated, the process becomes much more manageable when broken down into individual components. The more prepared you are, the more straightforward the estate planning process will be. Here are some tips to begin the estate planning process: Tip #1 – Take an inventory: The first step is inventorying your assets and liabilities, including everything from real estate to bank accounts to digital assets like cryptocurrency. Gathering investment statements, life insurance policies, information on real estate holdings, business information, if applicable, and anything else regarding your wealth is essential. Tip #2 – Consider beneficiaries: is crucial to sit down and think carefully about your beneficiaries, whom you want to distribute your assets after your death, and any special provisions you’d like to make for individuals with special needs or for charitable causes. Tip #3 – Work with professionals: You must include financial, legal, and tax professionals in estate planning. These individuals will consider your assets, wishes, tax consequences, and more so that your estate passes according to your wishes. Tip #4 – Decide on a Trustee(s): You will also need to appoint trustworthy individuals to fulfill your wishes as laid out in your estate plan. These could be a trusted friend, a family member, or a professional from a corporate trustee or executor services company. Who can help with your estate plan? It would be best to work with professionals specializing in estate planning. These professionals can help you avoid common pitfalls, address complex issues, and devise an estate plan for your needs and objectives. Here are the professionals who are vital in preparing a comprehensive and appropriate estate plan for your situation: Financial professional: A financial professional can help you prepare your assets for your estate and update beneficiary information per your estate plan. They may also help you determine which assets are for what purpose. Legal professional: A legal professional is vital to helping you draft your estate plan documents. They will help you consider the appropriate trust type for your situation, if applicable, helping you weigh the pros and cons of each so you can make an informed decision. Tax professional: Taxes are a significant consideration since taxes may apply to heirs depending on where they live and where the deceased lived. While there may not be federal taxes on the estate, state taxes may apply, or heirs may have a tax consequence. A tax professional can help prepare a plan to pay taxes from the estate, making the inheritance tax-free for heirs. Mistakes to avoid and how to mitigate them Estate planning is more than just drafting an estate document; it must consider taxes, heirs, and assets and efficiently execute your legacy. Your plan must incorporate planning for today and the future, regular updating, and attention to detail. While estate planning can be proactive, here are some mistakes to avoid and how to mitigate them so the process goes as smoothly as possible. MistakeDescriptionHow to Mitigate Failing to have an estate planWhen there is no estate plan, probate, a sometimes lengthy process, can impede the efficient passing of assets. The court system takes over the assets and determines who should inherit what assets.Begin with a simple will, update beneficiaries on your investment accounts and life insurance policies, and name an executor of your estate.Listing only some assetsWhen you fail to list all your assets in your will or estate plan, disputes among heirs or potential loss may occur. Remember, intellectual property or online accounts such as social media are considered digital personal assets.Keep an updated and comprehensive list of all assets and online accounts. It’s a good idea to review your list yearly. Note that social media accounts can only be closed with a legal directive signed before death and a death certificate. Include your social media directive as part of your estate plan’s documents.Not telling anyone you have an estate planIt’s vital to inform heirs that you have an estate plan. When you don’t tell anyone, your assets will go through probate or risk the possibility that court fees will be charged to your estate from disputes between heirs.Transparency lets you share your wishes and the reasons for your decisions. If you decide to keep the details of your plan private, ensure that you inform heirs where to locate the plan once deceased so they can proceed with executing your estate.Ignoring your legacyWhile estate planning may appear to only focus on distributing wealth, that isn’t always the case. Estate planning can also be about donating to charity and leaving a legacy to improve the world.Work with financial and legal professionals to help identify charities you want to support and determine which assets you would like to donate. You can also use strategies such as donor-advised funds or form a foundation to help ensure your legacy is carried out today and after your death. Estate planning is an integral part of financial planning. It allows you to control your wealth during your lifetime, ensure it is transferred to your heirs as you wish, and mitigate the potential stress on them after your passing. You can effectively identify these goals by understanding the different components of estate planning, how to start, and which professionals can help you work toward an estate plan.
Show Loved Ones You Care This Valentine’s Day With An Updated Estate Plan
Hopefully, you’re planning to give all of your loved ones plenty of affection this Valentine’s Day. But what if you weren’t around? To make sure everyone is fully protected when you’re gone, you need an estate plan. This year, show everyone you care by making sure your plan is fully updated. Check out these tips to do this task properly. 1. Ensure your children will be taken care of This part of your estate plan will change as your children get older. When they are young, you may need to take out life insurance and nominate a guardian for them. As they get older, you may want to set up a trust that distributes assets slowly to them. At some point, you may decide that your kids are mature enough so that you don’t need these provisions, even if you still want to make sure your assets go to them. 2. Make sure your estate plan reflects your current family Ideally, you should update your estate plan any time you have a major family event such as a marriage, divorce, birth, or death. However, often when these disruptive events happen, an already-completed estate plan is the last thing on your mind. This February, look over your estate plan and make sure that it includes – or leaves out – certain people. Keep in mind that in many cases, a will can define beneficiaries by relationship rather than a specific person’s name. For instance, you may have a will that stipulates all of your assets go to your children. It may automatically distribute assets to your grandchildren if a child passes away before you do. However, if you or your children have step-children, they are not automatically included in a will drafted this way. Although you may feel like they are family and want them to have the same rights as everyone else, you should structure your will to reflect this fact. Be aware of nuances like this when updating your estate plan. 3. Give some love to charity If you want some of your estate to go to charity, you need to ensure that the charities listed in your estate plan remain active. You may want to designate backups to be on the safe side. Consult with an estate planning professional to ensure that you maximize your contributions in a way that preserves your wealth and reduces your tax burden as much as possible. 4. Update your tax planning strategy Tax laws change all the time, and they heavily influence estate planning. When you check in with your estate plan, make sure that it works in the current tax environment. You don’t want to pay more tax than you have to. At the same time, however, you don’t want to pay for tax-shielding vehicles if your estate is below the threshold that necessitates those strategies. 5. Update the people involved in your estate plan In addition to the beneficiaries of your estate, your estate plan may also include several other roles for important people in your life. You may have a medical and financial power-of-attorney, a trustee, a substitute trustee, or even people named in your business succession plan. Review the roles you have designated for all of these people and make updates as needed. Important Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. This article was prepared by WriterAccess. LPL Tracking # 1-05351241.
Estate Planning for Same-Sex Couples
In United States v. Windsor (2013), the U.S. Supreme Court struck down Section 3 of the federal Defense of Marriage Act (DOMA) which required that federal statutes, regulations, and rulings be interpreted as defining marriage as a “legal union between one man and one woman” and a spouse as “a person of the opposite sex who is a husband or a wife.” Then, in Obergefell v. Hodges (2015), the U.S. Supreme Court struck down every ban on same-sex marriage in the United States, including Section 2 of DOMA which provided that states have the right to deny recognition of same-sex marriages licensed in other states. As a result, same-sex marriages must now be recognized by every state and the federal government. If you’re in a same-sex marriage or about to get married, you’ll want to consider reviewing your estate planning goals, strategies, and documents with an estate planning attorney to determine whether changes are necessary. Civil unions and domestic partnerships During the period when same-sex marriages were not recognized universally throughout the country, some states created marriage equivalents such as civil unions and domestic partnerships. These laws varied, and there is now some reconsideration about the need for these laws. Other states (and the federal government) are not required to recognize these marriage equivalents as they are not legally marriages. For example, for federal tax purposes, marriage is not considered to include civil unions, domestic partnerships, and similar provisions. If you are in a civil union or domestic partnership, you might consider taking the next step to marriage. Transfer taxes When you transfer your property during your lifetime or at your death, your transfers may be subject to the federal gift tax, estate tax, and generation-skipping transfer tax (at a top tax rate of 40%). Your transfers may also be subject to state taxes. Federal gift tax You can make annual tax-free gifts of up to $16,000 per recipient. The amount can be doubled if you split gifts with your spouse. And while you can make deductible transfers to your spouse if you are married, transfers to your partner may be taxable if you are not married. However, you have a basic exclusion amount that protects up to $12,060,000 (in 2022, $11,700,000 in 2021) from gift and estate taxes. Federal estate tax As with the gift tax, you can make deductible transfers to your spouse, and you have the basic exclusion amount. When you die, your estate can elect to transfer any unused exclusion amount to your surviving spouse (a concept referred to as portability). Your surviving spouse can use your unused exclusion amount, plus his or her own basic exclusion amount, for gift and estate tax purposes. Portability is not available if you’re not married. If you’re married, you should review your estate planning documents to ensure that they properly provide for the marital deduction and applicable exclusion amount. Federal generation-skipping transfer (GST) tax The federal GST tax generally applies if you transfer property to a person two or more generations younger than you (for example, a grandchild). The GST tax may apply in addition to any gift or estate tax. Similar to the gift tax provisions above, an annual exclusion is available, and married couples can split gifts. You can protect up to $12,060,000 (in 2022, $11,700,000 in 2021) with the GST tax exemption. However, the GST tax exemption is not portable between spouses. Wills A will is quite often the cornerstone of an estate plan. It is a legal document that directs how your property is to be distributed when you die, including amounts that pass to your spouse or partner. It also allows you to name an executor to carry out your wishes as specified in the will and a guardian for your minor children. If you are married, your spouse may have rights under state law to elect to receive a portion (e.g., one-half or one-third) of your estate, even if you provide otherwise in your will. Your spouse may also be entitled to a portion of your estate even if you don’t have a will. However, if you’re not married, your partner will generally receive only what you provide for in your will (or through joint ownership or beneficiary designations). To protect your spouse and other loved ones, make sure your documents are up-to-date, including your will and beneficiary designations. Tenancy by entirety and community property In some states, married couples can use a form of joint and survivor ownership of property known as tenancy by the entirety. While both spouses are alive, a tenancy by the entirety generally provides better asset protection than other forms of property ownership. Spouses generally own property acquired while married and living in a community property state as community property. If you are married and live in a community property state, consider converting property owned separately by you and your spouse into community property. Planning for incapacity Incapacity can happen to anyone at any time, but your risk generally increases as you grow older. You have to consider what would happen if, for example, you were unable to make decisions or conduct your own affairs. Failing to plan may mean a court would have to appoint a guardian, and the guardian might make decisions that would be different from what you would have wanted. Health-care directives, such as a living will, a durable power of attorney for health care, or a do-not-resuscitate order, can help others make sound decisions about your health when you are unable to do so yourself. There are also tools, such as joint ownership, a durable power of attorney, or a living trust, that can help others manage your property when you are unable to do so. These tools may be useful whether you are married or not. But if you’re not married, they may be critical in giving your partner (who is not related to you) some authority to make decisions for you. Life insurance Life insurance plays a part in many estate plans. In a small estate, life insurance may actually create the estate and be the primary financial resource for your surviving family members. Life insurance can also be used to provide liquidity for your estate, for example, by providing the cash to pay final expenses, outstanding debts, and taxes so that other assets don’t have to be liquidated to pay these expenses. Life insurance proceeds can generally be received free of income tax. Reconsider your insurance needs to make sure that you have the right types and amounts of coverage, and check your beneficiary designations. For instance, if you are married with children, you might consider a second-to-die policy that pays benefits only upon the death of the surviving spouse. Retroactivity If you were denied some right or benefit because your same-sex marriage was not recognized in the past, you might still be entitled to some corrective action. At a minimum, for example, you can still file an amended federal tax return as married for any year in which the time for filing is still open. You generally have three years from the date you filed your federal tax return or two years after the date you paid the tax due (whichever is later) to amend your return. In general, this means that you may be able to amend 2014 returns until as late as October 15, 2018, depending on when you filed your 2014 return. A word of caution The decision to marry can involve many complex factors. Whether you view certain state laws as favorable may depend on your own situation. For example, depending on whether you bring significant assets into the marriage, you may have a different viewpoint of a state law that allows a surviving spouse to elect a share of the estate regardless of what is provided in a will. Many tax provisions are favorable to married taxpayers. Marital deductions, split gifts, and portability of the applicable exclusion amount are just a few examples. However, many tax provisions are designed to restrict tax benefits if the parties to a transaction are related. You might want to consult a tax professional. 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 #1-05093278 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022
Your Year-End Estate Planning Guide: An 8-Step Checklist
When it comes to your estate plan, you don’t just have it drafted and put away until it is time for your loved ones to manage your lifetime of affairs. As your world changes year by year, it is critical that you review your estate plan and update it to stay aligned with your long-term financial goals. Here is an eight-step year-end estate planning checklist to help you organize and prioritize your estate planning strategy. 1. Have you reviewed your will? Reviewing your will as part of your year-end estate planning checkup is essential. As each year comes to a close, our life changes. These changes may impact your future financial plans and goals regarding your estate management should you die or become incapacitated. There are generally four types of wills that people choose from: Attested Written Will – This is the most common type of will. It is typed, printed, and signed by the testator and two witnesses. Holographic (Handwritten) Will – This will is handwritten and signed by the testator, and witnesses are recommended. Nuncupative (Oral) Will – Typically, these are instructions by someone too sick to create a written will on how they want their personal property distributed. Nuncupative wills are not legal in most jurisdictions. However, in those which they are legal, a set number of witnesses must write down the wishes of the incapacitated individual as soon as possible. Joint Will – A type of the last will and testament where two (or more) people, generally a married couple, transfer the entire estate to a surviving spouse when the first spouse dies. Upon the death of the second spouse, the children inherit everything. 2. Have you met your financial gift limit? In 2023, the annual gift tax exclusion (or gift tax limit) is $17,000 per recipient without having to pay taxes on those gifts. Any gifts above that amount must be reported to the IRS on your 2024 tax return (form 709). There are exceptions to this rule, and a financial professional can help you learn how it could impact your financial strategy. 3. Have you reviewed your retirement and life insurance beneficiaries? Reviewing your retirement and life insurance beneficiaries is important as people may get married or divorced, they may die, or a child or sibling may suddenly become a risk through addiction or an inability to manage money properly. In these or other relevant circumstances, you may want to modify the beneficiaries in your accounts. Beneficiaries typically don’t need to pay taxes on the life insurance death benefit they receive, especially if they receive it as a lump sum. If the beneficiary chooses to receive their payout as an annuity instead, any interest accrued may be subject to taxes. 4. Are your HCP and POA documents up-to-date and in a safe place? A health care proxy (HCP) is a document that names someone to express your desires and make health care decisions should you become incapacitated. Examples include medical directives, living wills, or advance health care directives. Some states provide a statutory or standardized form, while others allow you to draft your own. A durable power of attorney (POA) for your finances names an individual who can make financial decisions should you become incapacitated. If you don’t have one it may be necessary for the court to appoint one. Only about one-third of adults 55 and older have a power of attorney. 5. Have you reviewed and revised (if necessary) an inventory of your assets? It’s essential to keep an up-to-date inventory list, for example, the value of your home, other real estate interests, cars, jewelry, and other physical assets. You should also consider reviewing your recent financial statements, including your bank, retirement and brokerage accounts, and any safety deposit boxes. 6. If you own any trusts, are they accurate and up-to-date? The creation of trusts helps to preserve wealth, alleviate some of the tax burden, avoid probate, and provide your family and beneficiaries a less stressful way to access your estate after you are gone. 7. Have you talked with your family about changes to your estate plan? Establishing lines of communication regarding your estate plan and financial goals is an often overlooked strategy that can help preserve your wealth. According to NASDAQ, 70% of families lose their wealth by the 2nd generation and 90% by the third. These are overwhelming statistics driven in part by a lack of communication. 8. Have you reviewed your estate plan with your financial professional? The details of your estate plan and any modifications can fundamentally impact your financial strategy and end-of-life goals. As the year is winding to a close, schedule an appointment with your financial professional to review all the numbers, beneficiaries, potential tax consequences, and any needed updates. 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. This article was prepared by LPL Marketing Solutions Sources: Generational Wealth: Why do 70% of Families Lose Their Wealth in the 2nd Generation? | Nasdaq The Ultimate Guide to Financial Power of Attorney | Take Care (getcarefull.com) Living Wills, Health Care Proxies, & Advance Health Care Directives (americanbar.org) Is Life Insurance Taxable? | Progressive LPL Tracking # 492091
Gift and Estate Taxes
If you give away money or property during your life, those transfers may be subject to federal gift and estate tax and perhaps state gift tax. The money and property you own when you die (i.e., your estate) may also be subject to federal gift and estate tax and some form of state death tax. These property transfers may also be subject to generation-skipping transfer taxes. You should understand all of these taxes, especially since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act), the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act), the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), and the Tax Cuts and Jobs Act. The recent Tax Acts contain several changes that make estate planning much easier. Federal gift and estate tax — background Under pre-2001 Tax Act law, no federal gift and estate tax was imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one — that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift). The 2001 Tax Act, the 2010 Tax Act, the 2012 Tax Act, and the Tax Cuts and Jobs Act substantially changed this tax regime. Federal gift and estate tax — current The 2001 Tax Act increased the applicable exclusion amount for gift tax purposes to $1 million through 2010. The applicable exclusion amount for estate tax purposes gradually increased over the years until it reached $3.5 million in 2009. The 2010 Tax Act repealed the estate tax for 2010 (and taxpayers received a carryover income tax basis in the property transferred at death), or taxpayers could elect to pay the estate tax (and get the step-up in basis). The 2010 Tax Act also re-unified the gift and estate tax and increased the applicable exclusion amount to $5,120,000 in 2012. The top gift and estate tax rate was 35 percent in 2012. The 2012 Tax Act increased the applicable exclusion amount to $5,490,000 (in 2017) and the top gift and estate tax rate to 40 percent (in 2013 and later years). The Tax Cuts and Jobs Act, signed into law in December 2017, doubled the gift and estate tax exclusion amount and the GST tax exemption (see below) to $11,180,000 in 2018. The amount is $12,060,000 in 2022 ($11,700,000 in 2021). After 2025, they are scheduled to revert to their pre-2018 levels and cut by about one-half. However, many transfers can still be made tax free, including: Gifts to your U.S. citizen spouse; you may give up to $164,000 in 2022 ($159,000 in 2021) tax free to your noncitizen spouse Gifts to qualified charities Gifts totaling up to $16,000 (in 2022, $15,000 in 2021) to any one person or entity during the tax year, or $32,000 (in 2022, $30,000 in 2021) if the gift is made by both you and your spouse (and you are both U.S. citizens) Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual Federal generation-skipping transfer tax The federal generation-skipping transfer (GST) tax imposes tax on transfers of property you make, either during life or at death, to someone who is two or more generations below you, such as a grandchild. The GST tax is imposed in addition to, not instead of, federal gift and estate tax. You need to be aware of the GST tax if you make cumulative generation-skipping transfers in excess of the GST tax exemption ($12,060,000 in 2022, $11,700,000 in 2021). A flat tax equal to the highest estate tax bracket in effect in the year you make the transfer (40 percent in 2021 and 2022) is imposed on every transfer you make after your exemption has been exhausted. State transfer taxes Currently, a few states impose a gift tax, and a few states impose a generation-skipping transfer tax. Some states also impose a death tax, which could be in the form of estate tax, inheritance tax, or credit estate tax (also known as a sponge or pickup tax). Contact an attorney or your state’s department of revenue or taxation to find out more information Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. This article was prepared by Broadridge. LPL Tracking #1-05104689
Qualified Personal Residence Trust (QPRT)
A qualified personal residence trust (QPRT) offers an excellent opportunity for homeowners with taxable estates to help reduce federal gift tax and avoid federal estate tax. What is a QPRT? A QPRT (pronounced “Q-Pert,” and sometimes referred to as a house GRIT) lets you give away your house, but still keep possession for a while. More specifically, a QPRT is an irrevocable trust into which you transfer your home while retaining the right to live there rent-free for a specified number (term) of years. At the end of the term of years, the property passes outright to your children or whomever you’ve named as the remainder beneficiaries. What are the potential tax savings? When you transfer a home into a QPRT, you’re considered to have made a gift to the remainder beneficiaries that is subject to gift tax. However, the value of the taxable gift isn’t the full fair market value of the home, as it would be with an outright transfer. Rather, the gift can be discounted to reflect the fact that you have retained an interest (the right to live in the home). IRS tables and current interest rates are used to determine the amount of the discount. Moreover, provided you outlive the term of years, the value of the home, plus any appreciation, will completely avoid estate tax because the home will have been removed from your estate. Tip: Each taxpayer has an applicable exclusion amount that, to the extent it has not already been used, can shelter transfers from federal gift or estate tax. The applicable exclusion amount is equal to the basic exclusion amount of $12,920,000 (in 2023, $12,060,000 in 2022) plus any applicable deceased spousal unused exclusion amount. Caution: The transfer of a home to a QPRT does not qualify for the $17,000 (in 2023, $16,000 in 2022) annual gift tax exclusion. What happens if I die during the term of years? If you die before the term of years expires, the home will be included in your estate for estate tax purposes (just as it would have been had you not created the QPRT). How long should the term be? Because you must survive the term of years to benefit from the QPRT, you might conclude that a shorter term would be best. However, there’s a tradeoff — the shorter the term of years, the larger the gift to the remainder beneficiaries and the smaller the tax savings. You must find the right balance, taking your age and health into consideration. What are the income tax consequences? For income tax purposes, a QPRT is typically set up as a grantor trust, which means that income and deductions, such as mortgage interest and real estate taxes, are accounted for on your personal income tax return. You also continue to pay for all expenses related to the home, such as repairs and insurance. Additionally, this arrangement preserves your ability to take the home sale capital gain exclusion ($250,000; $500,000 if married filing jointly) in case the home is sold before the term of years expires. There is also a significant drawback. When beneficiaries receive property at someone’s death, they generally receive an income tax cost basis that is stepped up to fair market value. However, because your beneficiaries will get the home as a gift, they’ll receive a carryover basis (your basis) instead. If your home has appreciated substantially in value, the increased capital gains tax that the remainder beneficiaries could owe upon the sale of the home may offset any gift and estate tax savings you’ll enjoy. Page 1 of 2, see disclaimer on final page How do you create a QPRT? Although the rules that govern QPRTs are many and complex, creating one is relatively easy: Consult an experienced Can I transfer more than one home to a QPRT? No. You can’t transfer more than one home to a single QPRT. However, you are allowed to set up two QPRTs and transfer one home into each trust. A married couple can actually transfer up to three A QPRT can also hold cash for the initial purchase of a home, but the purchase must take place within three months of the cash transfer. Additionally, a QPRT can hold cash for up to six months for the payment of certain trust expenses, such as mortgage payments and improvements to the home. And there are special rules in the event the home is sold or estate planning attorney homes to QPRTs — one home that is jointly owned and destroyed by fire. Have the home professionally appraised Execute a written trust agreement Transfer the home’s title to the QPRT File a gift tax return; pay gift tax, if any Reside in the home for the entire term of years Execute a written lease and pay fair market rent if you continue living in the home beyond the term of years two homes owned separately by each spouse. The home may be either a principal residence or a vacation house. Can mortgaged property be placed in a QPRT? Yes. You can transfer mortgaged property to a QPRT. However, it’s generally not recommended because any mortgage payments that you make will be considered gifts to the remainder beneficiaries. Must I live in the home during the term of years? You, your spouse, or your dependents must occupy the residence for the entire term of years. The home must be used as a residence at all times and generally can’t be sold unless a replacement home is purchased. Although the primary use must be as a residence, you are allowed to have a home office or some other secondary use of the home. What if I want to keep living in the home after the term of years expires? If you wish to continue occupying the home once the term of years expires, you must pay fair market rent to the remainder beneficiaries. You must also enter into a written lease with the remainder beneficiaries and should do so only at the end of the term of years. The lease should contain all the standard residential lease terms, which should be strictly enforced by the remainder beneficiaries. Can other property be transferred to a QPRT? Property that is transferred to a QPRT may include not only the actual home but also other structures that are on the property, such as a separate garage. You may also include a reasonable amount of the surrounding land, but you may not transfer personal property, such as furniture. A QPRT example: Jill, age 50, transfers her vacation home, worth $1,000,000, to a QPRT. She retains the right to occupy the home for 10 years and a right of reversion, after which the home will pass to her son. Assuming a discount rate of 3.0%, Jill’s gift can be discounted by $303,580. The gift is valued at $696,420 but Jill owes no gift tax because it’s offset by her available gift and estate tax exclusion. If Jill outlives the QPRT’s 10-year term and dies several years later when the home is worth $2,000,000, Jill’s estate will owe no estate tax on the $2,000,000 because the home is no longer part of her estate. The use of trusts involves a complex web of tax rules and regulations and usually involves upfront costs and ongoing administrative fees. You should consider the counsel of an experienced estate conservation professional before implementing a trust strategy. 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 #1-05347926
Spotlight: Ted Massaro, ChFC, CLU, AEP
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.
Estate, Gift, and GST Taxation and Trusts
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
How can a living trust help me control my estate?
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
An Estate Planning Checklist
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.
Living Trust- Protecting Your Property Against Incapacity
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