Family
A Guide to Incorporating Philanthropy into Your Financial Planning
If you’re considering giving back to society or a cause as part of your financial planning, there are many ways you can do so. You can make an impact while receiving tax benefits by including philanthropic giving as part of a holistic approach to charitable giving in your financial plan. Philanthropic giving addresses the root cause of social issues and requires a more strategic, long-term strategy. Philanthropic giving often includes inviting younger generations to participate to become part of a family’s legacy. Here are actions to guide you as you work towards having philanthropy as part of your financial planning: 1. Identify your values– Determine your reason for giving and what you want to change. Since philanthropy is giving over time, determine how long you want to give and if you want it as part of your family’s legacy for the next generation to manage. 2. Define your goals- Your financial professional can help you define your goals and implement a giving plan as part of your financial plan. Each year, evaluate how much you intend to give and when. Depending on your circumstances, you may include a giving schedule, such as quarterly or a one-time contribution each year. Other things to consider when defining your philanthropic goals include: Your giving in retirement Giving through your estate plan Including giving as part of a business-exit strategy 3. Select your charities- To ensure a charity is legitimate, ask the charity for details about their mission and how they’ll use your donation. The charity should also provide proof that it’s a 501(c)(3) public charity or private foundation so that your contribution is tax-deductible. As a second fact check on the charity, visit the IRS Tax Exempt Organization Search list to ensure it is a reputable, tax-exempt charity. 4. Understand how to maximize giving- Financial and tax professionals can help you determine how to maximize the tax advantages of giving. As tax laws change, your financial plan and giving plan may need to revise so that you receive the tax benefits of your gift. Here are a few ways to maximize your giving: Qualified Charitable Distributions (QCDs)– If you’re age 70 1/2 or older, you can use a QCD to donate directly from your IRA to the charity of your choice. This strategy allows you to deduct the amount transferred to the charity from your taxable income. You can use a QCD each year versus taking the distribution and paying taxes. Bunch your donations- By making charitable contributions for several years at one time, the total of your itemized deductions may exceed the standard deduction and offer some tax benefits. Itemize your contributions- Charitable contributions can reduce your tax bill if you choose to itemize when filing your taxes. Work with your tax professional to determine how to itemize your giving if the total of your deductions plus charitable gifts equals more than the standard allowable deduction. 5. Determine which strategies to use- There are strategies that you can use or establish to help you organize your giving within your financial plan, such as: Donor-Advised Funds (DAF)- A donor-advised fund allows you to donate cash or securities, which are non-refundable, to a nonprofit organization. You may claim a tax deduction for the year you contribute to the DAF rather than the year your contribution goes to the charity. Stay in touch with your financial professional, as proposed legislative changes may impact when donors can receive the tax deduction. Charitable Trusts- A charitable trust allows you to donate assets to a chosen tax-exempt organization to help you minimize taxes. Consult your financial and legal professionals to help you understand how trusts work and if you intend to include giving securities as part of your giving plan. Private Foundations- A private foundation (PF) is a nonprofit charitable entity created by an individual or a business. An initial donation, known as an endowment, is used to generate income to make grants to charities per the foundation’s charitable purpose. Consult with your financial, legal, and tax professionals to determine if a PF is appropriate for your situation. 6. Consider giving other assets- There are other assets you can give to charity as part of your financial plan that is not associated with securities: Real Estate- If you have a property you no longer need, you can donate it to charity. Cash- With a cash gift, you may receive a tax deduction equal to the amount of money you donated minus the value of any products or services you received. Life insurance- You can name a charity as the beneficiary on your life insurance contract or choose to donate the cash value accumulation each year. Art and collectibles- Often, gifted art and collectibles are auctioned to raise money at charity events. To use either as part of your giving, have a certified appraisal completed with reporting so that you can submit the appraisal information and the donation documentation at tax time, indicating the value of your donation. Consult your tax professional regarding how to value and report these specific assets. A benefit of including philanthropy in your financial plan is that it helps to ensure that your goals are listed, that a plan implements appropriate strategies, and progress towards your goals is monitored. Contact your financial professional to start your philanthropic planning today. Important Disclosures The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. This article was prepared by Fresh Finance. LPL Tracking #1-05326016
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.
Legacy of Love: 10 Questions to Help Families Prepare for a Wealth Transfer
Wealth transfer is more than just a financial transaction; it’s an opportunity for families to pass on their values, wisdom, and a legacy of love. Navigating this process requires careful consideration, open communication, and a shared commitment to preserving family unity. Here are ten essential questions that families may ask themselves as they embark on the journey of wealth transfer. 1. What Values Define Our Family? Before diving into the specifics of transferring assets, it’s crucial to identify and articulate the values that define your family. What principles and beliefs have shaped your family’s identity—a commitment to charity or public service? Inclusion of others? Promoting animal welfare or an environmentally friendly lifestyle? Understanding what values are most important to your family may help you provide a framework to align the wealth transfer process with what matters most. 2. How Could Wealth Be a Force for Good? Consider the impact your wealth may have beyond your immediate family. Discussing philanthropy, social responsibility, and community engagement with those in your line of succession may work to ensure that wealth becomes a force for positive change. What charitable causes align with your family’s values, and how could your wealth contribute to a better world? 3. Are We Openly Communicating About Wealth? Open communication is the cornerstone of a successful wealth transfer. Are family members comfortable discussing financial matters openly? If not, it may take some practice. By working on creating a culture of transparency, you may foster trust and understanding, which could pave the way for a smoother wealth transfer process. 4. What Are Our Individual and Collective Goals? Individual values are just as important as family-defining ones. Ask your family members to share their individual goals and aspirations. By understanding these personal ambitions, you may help tailor the wealth transfer plan to accommodate others’ dreams while ensuring collective goals may still be honored. 5. How Might We Educate Future Generations? With financial literacy declining, wealth education is a powerful tool for empowering future generations. How could you encourage financial literacy, responsibility, and a sense of stewardship in your heirs? Consider establishing programs or resources to educate family members about managing wealth wisely. 6. What Structures Might Preserve Our Legacy? Discussing the legal and financial structures that could support your wealth transfer plan is essential. Trusts, family foundations, or other vehicles may help preserve and distribute assets according to your wishes. To what extent do you wish to maintain control over assets after you pass away? Seeking professional advice may be invaluable in creating a robust legacy plan. 7. How Do We Handle Differences and Conflicts? No family is free from potential conflicts, especially regarding money. Proactively addressing these issues is crucial for maintaining family harmony during the wealth transfer process. By establishing a conflict resolution plan and promoting empathy, you may be better able to navigate challenging situations. 8. Are We Prioritizing Health and Well-Being? Wealth transfer should never come at the expense of your family relationships or individual well-being. Discuss how the wealth transfer process may support, rather than hinder, the health and happiness of family members, and build in safeguards and stopgaps that may prevent conflict before it occurs. 9. How Could We Embrace Change and Adaptability? Flexibility is key in any wealth transfer plan. Acknowledge that circumstances, goals, and family dynamics may change over time. It’s important to regularly revisit and update your plan to ensure it still aligns with your family’s needs. 10. What Stories Do We Want to Tell? Your family’s legacy is more than just numbers on a balance sheet. What stories, values, and traditions do you want to pass down through the generations? Reflect on the meaning you wish for your family’s wealth transfer to have and how it may inspire future heirs. Important Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. This article was prepared by WriterAccess. LPL Tracking #516318-02
Trusts for Families
There are a number of family trusts that estate planners generally no longer use, either because they have lost certain tax benefits or because they are simply no longer a favored method of gifting. These trusts include the Clifford trust, the pot trust, and the Crown trust. Tip: The Crown trust was once a popular income-shifting device used for educational funding. Today, estate planners no longer use Crown trusts. Clifford trusts A Clifford trust, also known as a short-term trust, is a trust arrangement where the grantor places income-producing property in a trust for a minimum time period of 10 years and a day. The trust agreement places all the incidents of ownership with the trustee. At the end of the trust period, the assets are then returned to the grantor of the trust. It is for this reason that a Clifford trust is sometimes called a reversionary trust. In other words, the grantor of the trust reserves the principal, and the income is paid to the trust beneficiary. Clifford trusts were used to shift ordinary income to family members who are in lower brackets for a short period (less than 10 years) without giving up ultimate ownership of the trust property. Prior to the elimination of its tax benefits, the Clifford trust was a widely used method of shifting income. Are Clifford trusts used today? The 1986 Tax Reform Act eliminated the tax benefits that were afforded to Clifford trusts. Prior to the Tax Reform Act, a transferor could retain a reversionary interest in a trust and avoid being treated as the owner of the trust, as long as the trust was to last at least 10 years or for the life of the beneficiary of the trust income. Currently, any reversionary interest that is retained by the grantor will cause the grantor to be taxed as the owner. However, this taxation is limited to situations where the interest is worth more than five percent of the value of the interest at the time the trust is created. Because of this change instituted by the 1986 Tax Reform Act, Clifford trusts are no longer being created. However, some Clifford trusts that were previously created are still in existence. Grandfathering of the Clifford trust The Tax Reform Act of 1986, which revised the grantor trust rules, does not apply to Clifford trusts that were in existence on March 1, 1986, as long as the transfers made to the trust were either on or before that date. However, if a beneficiary of a grandfathered Clifford trust is under the age at which the kiddie tax kicks in (generally, beneficiaries under the age of 19, but see tip below), only the grantor will avoid taxation; the beneficiary will be taxed at the parents’ tax rates. Tip: Children subject to the kiddie tax are generally taxed at the parents’ tax rates on any unearned income over a certain amount. This amount is $2,300 (in 2022) (the first $1,150 (in 2022) is tax free and the next $1,150 (in 2022) is taxed at the child’s rate). The kiddie tax rules apply to: (1) those under age 18, (2) those age 18 whose earned income doesn’t exceed one-half of their support, and (3) those ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support. What can you use instead of a Clifford trust? Grantor retained annuity trust (GRAT) A grantor retained annuity trust (GRAT) is the reverse of a Clifford trust. Unlike a Clifford trust, where the grantor gifts trust income, but retains the remainder, the grantor of a GRAT retains a right to annuity payments while the remainder goes to the trust beneficiary. While a GRAT does not have any immediate income tax benefits (i.e., the grantor continues to be taxed on the income), its use may result in estate tax savings. Qualified personal residence trust (QPRT) Today, many estate planners use a qualified personal residence trust (QPRT) in place of the Clifford trust. A QPRT is an irrevocable trust to which you transfer an interest in a personal residence, and then retain the right to use the property for a number of years. A QPRT can result in reduced gift and estate taxes. Pot trust A pot trust, also known as a single fund trust, is a trust in which assets are placed until the occurrence of one or more events, at which point the assets are distributed to the beneficiaries of the trust. For example, a pot trust will distribute all of the trust assets when the youngest of several children reaches a certain age, or will distribute the assets in portions when a child marries or purchases a home. Until the triggering of the distribution event, all trust assets are maintained in a single pot for the benefit of all the beneficiaries. The trustee of a pot trust has the ability to make disproportionate distributions among the beneficiaries of the trust, according to the beneficiaries’ needs. While a pot trust is extremely flexible because the trustee has broad discretion to distribute trust assets, it often leads to disputes among family members. These disputes usually result from the trustee’s tendency to favor one child over another. What can you use instead of a pot trust? Individual trusts Individual trusts for each line of descendants can avoid family disputes that might accompany pot trusts. The way an individual trust operates is that assets are divided into separate trusts for each child. This individual allocation of definite amounts to each child can result in fewer familial conflicts. Dynasty trust Another option is to use dynasty trusts in place of pot trusts. A dynasty trust passes assets in the trust down through as many generations as possible. Typically, very wealthy families who wish to maintain their wealth through multiple generations use a dynasty trust. Similar to a pot trust, a dynasty trust grants broad powers to the trustee when distributing income or principal to the beneficiaries. This article was prepared by Broadridge. LPL Tracking #1-05113984
Trust for Minors
IntroductionThere are many reasons why you might want to gift assets to minor children (children under the age of21). For example, you may want to help the children build a college fund, or increase the children’sfuture financial security. Or, you may have tax reasons for making gifts to minor children, such asremoving highly-appreciating assets from your gross estate to minimize estate taxes. However, giftingassets directly to minor children can be problematic because:• Minor children are generally too emotionally immature and financially inexperienced to managelarge sums of money or other assets on their own• Most people (and institutions such as brokerage firms or banks) are reluctant to deal directlywith minor children because they can renounce or make void many legal transactions involvingtheir propertyWhile a custodial account (discussed further below) could be used to solve these problems, a trust forminors (i.e., an irrevocable trust specifically set up for the benefit of someone under the age of 21) canalso be used and has other benefits as well.Assets in a trust can be held until the child is older and wiser, preventing the child from spendingfoolishly. And, a trustee can manage and control the trust assets on behalf of the minor beneficiary.Further, however, trusts can be individually designed to address your particular circumstances. Forexample, a trust can provide that a fixed amount of principal and income be distributed to the minorbeneficiaries at specific intervals or a trust can provide that such matters be in the complete discretionof the trustee. But, although trusts provide flexibility, they also require on-going administration, andunless structured properly, gifts in trust do not qualify for the annual gift tax exclusion.The federal annual gift tax exclusion problemMost donors want their gifts to qualify for the federal annual gift tax exclusion, which allows you to gifttax free $16,000 (in 2022) each year to an unlimited number of donees. Only gifts of “present interests”qualify for the exclusion. A present interest gift allows the donee to immediately use, possess, or enjoythe gifted property. Gifts to an irrevocable trust generally do not qualify for the exclusion because thedonee is unable to use, possess, or enjoy the gifted property until sometime in the future. But, gifts intrusts for minor beneficiaries will be treated as present interest gifts that qualify for the exclusion aslong as the trust is structured properly.2503(c) trust, 2503(b) trust, and Crummey trustThere are three types of trusts that are commonly used for the benefit of minors. Two of them arenamed after the Internal Revenue Code sections that authorize them: the Section 2503(c) trust and theSection 2503(b) trust. The Section 2503(c) trust may be created only for minors, while the Section2503(b) trust can be used with both minor beneficiaries and older ones. The Crummey trust (named after the case of a now-famous taxpayer) may be useful in a variety of situations for both minorbeneficiaries and older ones.Gifts can be made to any of these three types of trusts that qualify in whole or in part for the annual gifttax exclusion. This is the significant, common feature among the three. The three types of trusts forminors differ with respect to the nature of the interest the minor beneficiary has.With a 2503(c) trust, the principal in the trust must be paid out to the minor beneficiary when he or shereaches the age of 21. Until that time, there is no requirement that trust income be paid to the minorbeneficiary.With a 2503(b) trust, by contrast, all income must be paid out to the minor beneficiary each year, butthere is no requirement as to when or if (or to whom) the principal must be paid out.The defining feature of a Crummey trust is really just a single provision in the trust document that givesthe minor beneficiary at least a 30-day window of opportunity to immediately withdraw any gifts madeto the trust.Alternative to trusts: Uniform Gifts to Minors Act and Uniform Transfers toMinors ActFor smaller gifts to minor children, when the costs associated with a trusts is not justified, many peopletake advantage of a custodial account that can be created under one of two similar laws found in everystate: the Uniform Gifts to Minors Act (UGMA), or the much more common Uniform Transfers to MinorsAct (UTMA). Under either one of these two acts, you make a gift to a custodial account for the benefit ofa minor child. The custodian, who makes the decisions regarding account investments and distributions,can be any adult. These custodial accounts are much simpler and cheaper to use than a trust. You won’tneed to hire an attorney to set one up, unlike a trust, and gifts to a custodial account will qualify for theannual gift tax exclusion. However, there are also many limitations on these accounts.This article was prepared by Broadridge.LPL Tracking #1-05139777
Equalizing Distributions to Children Using a Will or Trust Equalization Clause
Introduction If you have given shares of your closely held business to your participating children during your lifetime, you can include an equalization clause in your will or trust to ensure that your nonparticipating children are treated fairly upon your death. An equalization clause directs your executor to ensure that your nonparticipating children receive equal treatment with respect to distribution of your wealth before any remainder of the estate is distributed. This can be accomplished only if you have sufficient assets to effectuate equalization. Example(s): Ted owns a business. His son, Bob, works for him. His daughter, Nellie-Mae, does not. Ted wants to ensure that both Nellie-Mae and Bob receive equal shares of his estate. In each of the last six years, Ted has given Bob shares of the business valued at $10,000, for a total of $60,000. He has made no such gifts to Nellie-Mae. If Nellie-Mae and Bob each receive half of Ted’s remaining estate upon his death, then Bob will have received significantly more of Ted’s wealth than Nellie-Mae. Example(s): Ted puts an equalization clause in his will directing his executor to equalize distributions to Nellie-Mae and Bob before distributing the remainder of the estate. Upon Ted’s death, the estate holds net assets valued at $200,000. The executor makes the following calculation to determine what each child will receive: Net Estate$200,000Value of Lifetime Gifts to Bob+ 60,000 ———-Subtotal260,000Divided by Number of Children (2) Total to Each Child130,000Distribution to Nellie-Mae130,000Distribution to Bob130,000Less Amount Received during Lifetime– 60,000 ———-Total Remaining Distribution to Bob$ 70,000 Strengths Generally inexpensive and easy to do Arranging to have an equalization clause inserted in a will or trust is fairly easy and inexpensive. It is imperative that your intentions are clear in writing and that your records properly reflect the value of gifts transferred during your lifetime. Your executor will need this information to make accurate calculations and avoid disagreements among your children. Shifts burden of equalizing distributions to your executor Use of an equalization clause allows you to avoid making an immediate decision about how to equalize distributions. It makes your intentions clear and leaves your executor to work out the details based on the circumstances that exist at the time of your demise. May allow you to minimize estate taxes Transferring shares of your business to your participating children during your lifetime will reduce the value of your business in your estate, and you may be able to minimize potential estate taxes. The equalization clause can be applied to the balance of your estate to make sure that nonparticipating children receive fair treatment. Tradeoffs Does not guarantee that sufficient funds will be available An equalization clause, by itself, does not guarantee that your estate will have sufficient funds to carry out your intentions. If you survive well beyond your life expectancy and hospital or medical expenses erode the value of your estate, there may be few remaining assets for your executor to administer. If that is the case, your nonparticipating children may receive less than your participating children, regardless of your best intentions. You can be more certain that cash will be available for nonparticipating children by equalizing estate distributions using life insurance or a buy-sell arrangement . Does not solve corporate control problems Many equalization plans seek to make assets available to nonparticipating children while allowing the participating children to maintain control over the closely held business. Equalization clauses do not provide such a mechanism. If your estate contains only business assets, your nonparticipating children may end up owning a voting share of the company. Tip: Use of an equalization clause in conjunction with a nonvoting stock arrangement or buy-sell agreement may eliminate this concern. Or, the equalization clause can tell the executor which assets to allocate to which children, assuming sufficient assets exist. Leaves executor to work out details By using an equalization clause, you leave your executor to work out details of the distribution scheme that are not otherwise made explicit in your will or trust. Circumstances as they exist upon the date of your death may differ from their original condition. You may not have been able to anticipate all possible variables. You will be leaving important decisions about your family and your family business to someone else. How to do it Transfer shares of family business to participating children during your lifetime Transferring shares of the family business to your children during your lifetime may help to minimize estate taxes by reducing the value of the business held by your estate. Transfers can be made systematically over a period of years to take advantage of the annual gift tax exclusion. Speak to an attorney about equalization issues You will want to discuss your situation and equalization issues with an attorney who is familiar with business planning and tax issues. The attorney should draft the equalization clause as part of your will or trust. Keep accurate records Your executor will need to know exactly what was transferred to whom during your lifetime. Good records can help your executor make accurate determinations and settle conflicting claims made by heirs. Periodically review the plan You should periodically review your plan. Hospital and medical expenses could diminish your estate, the value of your business assets could change dramatically after you retire, or you may decide to make additional gifts to children. You want to be certain that your estate will have enough assets to carry out your plan in a way that makes sense for your family and the family business. Otherwise, you may need to explore other planning solutions. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. This article was prepared by Broadridge. LPL Tracking #1-595960
Marital and Related Trusts
What are marital and related trusts? The term “marital and related trusts” refers to the several types of trusts that married individuals can establish to maximize use of their estate tax applicable exclusion amounts (the amount that can be sheltered from federal gift and estate tax by the unified credit) which, when combined with the unlimited marital deduction, allows the surviving spouse to benefit from family wealth during his or her lifetime while providing for the couple’s beneficiaries on the death of the surviving spouse. There are six different types of trusts that can be used to accomplish these goals. The most common type of estate planning that a married couple will do is called marital deduction and bypass planning. Each person in a marriage will set up two (and sometimes three) separate trusts either during his or her lifetime or in his or her will. The first spouse to die will transfer enough of his or her assets into one trust (called a credit shelter or bypass trust) to fully utilize the applicable exclusion amount then available to that spouse. The remaining assets of the first spouse to die will then go to one or even two marital trusts. Tip: In 2011 and later years, the unused basic exclusion of a deceased spouse is portable and may allow you and your spouse to take full advantage of the estate tax applicable exclusion amount without using a credit shelter or bypass trust. The most commonly used type of marital trust is a qualified terminable interest property trust, or QTIP trust, which allows the decedent spouse to take full advantage of the unlimited marital deduction. With a QTIP trust, the surviving spouse must receive all the income from the trust assets for life and may receive distributions from principal depending on the trust’s terms. The assets in a QTIP trust are included in the estate of the surviving spouse for estate tax purposes. The surviving spouse’s applicable exclusion amount can be used to shelter some or all of these assets from potential estate taxes. The main benefit to using a QTIP trust is that the first spouse to die can designate in the trust document how the trust assets pass on the death of the surviving spouse (e.g., to the couple’s children). Another type of marital trust is a qualified domestic trust (QDOT), which is used where one spouse is not a citizen of the United States. A direct transfer from the U.S. citizen spouse to the noncitizen spouse will not qualify for the unlimited marital deduction. The transfer can qualify for this deduction, however, if the assets are put in a QDOT. The noncitizen spouse can receive all the income from the trust assets for his or her lifetime, but cannot receive principal from the QDOT without it being potentially subject to estate taxes. This is to prevent the noncitizen spouse from removing the assets from the jurisdiction of U.S. taxing authorities thereby allowing them to escape potential estate taxation altogether. Another type of trust often used by spouses is called a disclaimer trust. There are certain situations when it makes sense for one spouse to disclaim a bequest from the other spouse (i.e., refuse to accept money or assets that have been left to him or her in the other spouse’s will). Each spouse can create a disclaimer trust to hold any assets that might be disclaimed by the surviving spouse. The disclaimer trust document can be drafted to allow a QTIP election to be made if desirable and to designate to whom the assets pass on the death of the surviving spouse. What are the different types of marital and related trusts? There are six basic types of marital and related trusts. Credit shelter trust Typically, with marital deduction and bypass planning, both spouses will set up a credit shelter trust (also called a bypass trust). Assets transferred to a credit shelter trust are includable in the estate of the first spouse to die. However, the credit shelter trust is generally drafted so that just enough assets are transferred to the trust to fully utilize the deceased spouse’s applicable exclusion amount. Thus, no estate taxes are actually imposed on the credit shelter amount. If desired, the surviving spouse could be given the right to receive all the income from the trust assets, or income may also be given to the couple’s children or to anyone else or accumulated for the benefit of the remainder beneficiaries. The surviving spouse may also be given access to trust principal under certain circumstances. Because the assets are included in the estate of the first spouse to die, the assets, including any appreciation, are not included in the estate of the surviving spouse for estate tax purposes and pass to the remainder beneficiaries estate tax free. Tip: In 2011 and later years, the unused basic exclusion of a deceased spouse is portable and may allow you and your spouse to take full advantage of the estate tax applicable exclusion amount without using a credit shelter or bypass trust. Qualified terminable interest property (QTIP) trust A commonly used type of marital trust is a qualified terminable interest property trust. Assets of the first spouse to die that do not fund the credit shelter trust will be transferred to a QTIP trust. The assets in the QTIP trust qualify for the unlimited marital deduction and thus will not be subject to estate taxes in the estate of the first spouse to die. The assets will be includable in the estate of the surviving spouse. The surviving spouse can use his or her applicable exclusion amount to protect some or all of these assets from estate taxes. With a QTIP trust, the surviving spouse must receive all the income, at least annually, from the trust for as long as that spouse is alive. Furthermore, the surviving spouse must be given the power to force the trustee of the QTIP to convert the assets in the trust to income-producing assets. The main benefit to establishing a QTIP trust is that the first spouse to die can designate in the trust document who should receive the assets in the trust upon the death of the surviving spouse. Many married couples use a QTIP trust if there are children from the current or previous marriage that they would like to inherit the assets. Transferring assets to a QTIP trust prevents the surviving spouse from consuming or gifting away the assets, disinheriting certain family members of the deceased spouse, or leaving assets to a new spouse. Power of appointment trust Another commonly used type of marital trust that qualifies for the unlimited marital deduction is called a power of appointment trust. Like a QTIP trust, the surviving spouse must receive all the income, at least annually, from the trust for as long as he or she is alive. The surviving spouse must also be given a general power of appointment over the assets in the trust. A general power of appointment gives the surviving spouse the right to use the property in the trust for his or her own needs, or to transfer the property to someone else including his or her estate, his or her creditors, or the creditors of his or her estate. It is also important with a power of appointment trust that the surviving spouse be able to exercise the power of appointment alone (e.g., without the approval of the trustee of the trust or the remainder beneficiaries). Unlike a QTIP trust, the surviving spouse has control over the assets in the trust after the first spouse dies. For this reason, married couples may not want to use a power of appointment trust if they want the assets in the trust to eventually pass to specific individuals designated by the first spouse to die. The assets in a power of appointment trust will qualify for the unlimited marital deduction and will not be included in the estate of the first spouse to die. The assets will be includable in the estate of the surviving spouse, unless that spouse consumes or gives away the assets during his or her lifetime. Of course, the surviving spouse can use his or her applicable exclusion amount to protect some or all of the assets in the trust from estate taxes. Some married couples set up both a QTIP trust and a power of appointment trust. The assets of the first spouse to die that are not used to fund the credit shelter trust can be split between these two trusts. Estate trust A less commonly used type of marital trust that qualifies for the unlimited marital deduction is called an estate trust. This type of trust is less frequently used than either a QTIP trust or a power of appointment trust. With an estate trust, the surviving spouse need not receive all the income from the trust for his or her lifetime and does not have to be given the right to force the trustee to convert the assets in the trust into income-producing assets. Thus, an estate trust makes sense if the first spouse to die wants to fund the trust with non-income-producing assets, such as closely held stock or undeveloped real estate. An estate trust can also be used where the surviving spouse will not need additional income from the trust during his or her continuing life. As with the other types of marital trusts, any assets in an estate trust will not be includable in the estate of the first spouse to die because of the application of the unlimited marital deduction. However, the assets will be includable in the surviving spouse’s estate. Upon the death of the surviving spouse, the trust assets and any accumulated income pass to the surviving spouse’s estate. Qualified domestic trust (QDOT) A final type of marital trust that qualifies for the marital deduction is called a QDOT. A QDOT is used when one of the spouses is not a citizen of the United States. A transfer of assets to a noncitizen spouse will qualify for the unlimited marital deduction only if the transfer is made to a QDOT. The noncitizen spouse can receive all of the income from the trust, but any distributions of the principal will be taxed as if the assets had been included in the gross estate of the first spouse to die. It should be noted that a citizen spouse may make transfers of up to $164,000 (in 2022, $159,000 in 2021) per year directly to a noncitizen spouse during the citizen spouse’s lifetime without incurring a gift tax. Technical Note: The unlimited gift tax marital deduction is not available for a gift to a spouse who is not a United States citizen. However, the regular gift tax annual exclusion of $16,000 (in 2022) is increased for such a gift to $164,000 (in 2022) if the gift would otherwise qualify for the marital deduction if the spouse were a United States citizen. Disclaimer trust A final type of trust that married couples use is a disclaimer trust. A spouse may disclaim (or refuse to accept) assets that have been left to him or her by the deceased spouse. There are times when it may make sense, for estate tax purposes or for other reasons, not to accept the bequeathed assets, but rather to allow them to pass as if the disclaimant predeceased the decedent. A disclaimer trust may be established by will or in a separate inter vivos document. The will can specify that any disclaimed assets will pass to the disclaimer trust and then be distributed in accordance with the terms of the trust. This article was prepared by Broadridge. LPL Tracking #1-05113510
Creating a Legacy of Change through Charitable Giving
Philanthropy today is different than it was in the past. It was once common for donors to distribute their wealth through smaller grants to numerous organizations. Over time, best practices for charitable giving have evolved, and wealthy individuals are instead taking a greater interest in and even taking part in the organizations. Because of this, they are often giving more significant amounts to only a select few organizations. The idea of giving today is fueled by the desire to improve society. Different people are motivated by various charitable giving opportunities and seeking out the guidance of a financial professional could help you become better educated on which type would work for you. How it works There are numerous instruments someone can choose from, for example: A Donor-Advised Fund (DAF) – A separately identified fund or account is maintained and operated by a “sponsoring organization.” The accounts are composed of contributions made by individual donors. The organization then has control over the funds. But the donor or a representative of the donor has advisory privileges regarding the distribution of the funds or the investment of assets in the accounts. [i] Private Foundation – A private foundation is created when someone sets up a tax-exempt organization but does not file to be recognized as a public charity. To fund the foundation, you can contribute as much as you like, but you must distribute a minimum of five percent of the value of the charitable assets annually. Keeping the foundation from being a public charity will maintain that tax deductions for donations are capped at 30 percent of the taxpayer’s adjusted gross income (AGI) if the donations are made in cash. The tax deduction is lower at 20 percent of the taxpayer’s AGI if the gifts are appreciated assets or securities. [ii] Charitable Trusts – The two primary charitable trusts are charitable lead trusts (CLTs) and charitable remainder trusts (CRTs). Both involve putting assets into a trust. With a CLT, the organization you chose receives cash flow from the assets put into the trust each year for a fixed period. The remaining assets can be sent to other beneficiaries. A CRT pays annual distributions to you or particular beneficiaries for a set period of time. The remaining assets are then given to charity. A CRT may be partially tax-deductible right away. [iii] Another advantage of charitable giving, particularly assets that have appreciated significantly, is reducing the size of your overall taxable estate for estate tax planning. If your estate is subject to estate tax after you die, your wealth could take a 40 percent hit. Charitable Lead Annuity Trusts (CLAT) – The donor of a CLAT can establish a trust with one or more charities as their beneficiaries. The trust then distributes a set annuity amount to charitable organizations selected by the donor over the donor’s life or a specific amount of time. When the CLAT expires, all remaining assets get passed to the remainder beneficiaries without being subject to estate tax. Because of low-interest rates, the CLAT becomes attractive as it accumulates wealth that can be distributed to beneficiaries later. Qualified Charitable Distributions (QCDs) – If you are itemizing deductions or taking the standard deduction and are 70 ½ and older, you can direct up to $100,000 annually from your traditional IRA to charities through what is called Qualified Charitable Distributions (QCDs). These distributions can be used to satisfy all or part of the donor’s RMD for 2022 and are not considered taxable income for the donor. [iv] Strategic charitable giving may also provide tax incentives. An example would be if you have appreciated assets over time, like real estate or securities, selling them will incur a capital gains tax liability. However, donating to a qualified charitable organization can potentially avoid capital gains taxes for those assets. The charity receiving the donation will not be liable for the capital gains tax and will also benefit from the fair market value of your gift. With the proper planning, you can potentially preserve your wealth and estate. Finances are often complicated, and making smart decisions can possibly help to avoid time-consuming and costly mistakes arising from emotional decision-making or just not understanding all that is involved in creating financial strategies. There are tangible benefits to working with a financial professional, including helping you break down retirement planning strategies, assisting with portfolio diversification management, and suggesting appropriate investment approaches. Working with a financial professional who you feel has experience and knowledge is key to setting up your family for a long-term relationship on the road toward pursuing your philanthropic goals. Important Disclosures The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. This article was prepared by LPL Financial Marketing Solutions. LPL Tracking #1-05337832 [i] Donor-advised Funds | Internal Revenue Service (irs.gov) [ii] High-Net-Worth Clients and Charitable Giving | AccountingWEB [iii] Charitable Trusts | Internal Revenue Service (irs.gov) [iv] Publication 526 (2021), Charitable Contributions | Internal Revenue Service (irs.gov)
5 Differences Between Planning for Long-Term Care and Crisis Planning
If you’re like many, you may associate long-term care with nursing homes and end-of-life care. But far more people will need long-term care in a crisis—an injury or illness that requires long-term care or rehab before you can live independently again. And while it’s important to make long-term plans for long-term care, crisis planning can be just as crucial when it comes to preserving your assets. Here we discuss three key differences between planning for long-term care and planning for a crisis. Crisis Planning Requires Flexibility—Long-Term Care Planning Provides It The unpredictable nature of crises can make them challenging to plan for. But in many ways, the process of planning for long-term care can also help you plan for crisis care. In other words, long-term care planning may involve Plans A, B, and C, while crisis care may require some combination of these plans and strategies. This allows you to borrow what you need and discard what you don’t. Long-Term Care Planning Can Benefit From a Trust If you’re wondering how you’ll be able to pay for long-term care for yourself and/or a spouse, you may assume Medicaid is off the table until you’ve spent down your assets. While this is generally true, there are certain types of trusts that allow you to benefit from the trust income for life without having trust assets “countable” for Medicaid purposes. Because assets belong to the trust instead of the individual, they’re excluded from the Medicaid calculation as long as they weren’t transferred within the look-back period. This period is five years in all states (including D.C.) except California, where the look-back period is two-and-a-half years.1 However, not all trusts are created equally. Before you create a trust of your own, talk to your financial professional and an experienced estate planning attorney to make sure the trust you select works well for your needs, assets, and wishes. Crisis Planning Needs a Strong Network A key part of crisis planning involves knowing who you can reach out to in times of need—including friends, loved ones, care providers, and even ombudspersons who can help you navigate the health care system. When you’re creating your crisis plan, think about who you may be able to lean on. Do you have loved ones who live near a care facility who can see you regularly?Is there anyone who can transport you to and from medical appointments?If you have pets, is there someone nearby who can take care of them or have them boarded until you’ve recovered?Do you have a medical or legal power of attorney that will allow a trusted loved one to make decisions on your behalf and pay bills if you’re incapacitated? By evaluating the strength and skills of your network, as well as the documents you have in place when an emergency occurs, you can gain a far better idea of who you should contact first and rely on in a crisis. Important Disclosures: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy. This article was prepared by WriterAccess. LPL Tracking # 1-05325540. Footnote 1 Understand Medicaid’s Look-Back Period; Penalties, Exceptions & State Variances, American Council on Aging, https://www.medicaidplanningassistance.org/medicaid-look-back-period/
Helping Elders Manage Their Assets
Today, many individuals are finding it necessary to help elderly parents or relatives manage their personal finances. One area of particular concern is property management. This issue may arise when seniors reach their late seventies or older, and plans that may have proven satisfactory at age 65 may require a second look. If you have an aging parent or relative, the following arrangements can assist you in addressing this concern: Durable Power of Attorney—This mechanism allows elderly individuals to appoint a trusted relative or friend as a representative in legal and financial matters. The powers granted may be limited or broad in scope, and may vary from state to state. They remain in effect during disability or incompetence—although, in the event of incompetence, a guardian or conservator could revoke them. Some financial institutions are reluctant to recognize a durable power of attorney, so it is worthwhile to explore any potential problems beforehand. Revocable and Irrevocable Trusts—A revocable trust allows an aging senior to retain control of his or her property, while delegating the responsibility for daily management to others. This arrangement gives the senior the flexibility to change the trust in any way, and at any time, as needs and circumstances dictate. As added protection, a revocable trust may remain unfunded as long as a senior is legally competent. On the other hand, seniors willing to relinquish ownership of assets altogether may wish to consider establishing an irrevocable trust. o Private Annuities. With a private annuity, an elderly individual can formally transfer property to a family member in exchange for that person’s promise to make periodic payments for the rest of the senior’s life. o Informal Arrangements. A senior can also informally transfer property to his or her heirs, in many cases free of gift taxes, in exchange for being taken care of for the rest of his or her life. This arrangement, however, should be approached with caution. Even with the best of intentions, it is possible that adult children could deplete assets through poor management, divorce, or creditor claims. Once the assets are gone, an aging parent or relative could become dependent on the goodwill and financial circumstances of family members. Review Plans Periodically It may be necessary to periodically review these arrangements, as needs and circumstances change. You may also wish to consider consulting a financial professional with experience in concerns facing today’s seniors. Since arranging a loved one’s affairs may be a once-in-a-lifetime situation, professional assistance may prove invaluable. EPGSEN04-X Important Disclosures The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value. This article was prepared by Liberty Publishing, Inc. LPL Tracking #1-05176423
THOUGHTS ON ESTABLISHING A TRUST AND TIPS FOR AVOIDING INHERITANCE SQUABBLES
REASONS TO CONSIDER A TRUST Should you set up a trust? Maybe you’ve been to a seminar where they scare the life out of you, convincing you to start one. Let’s demystify this murky but very important area. Trusts are legal arrangements that give control of assets to a person or an institution (the trustee) for the benefit of others, such as children. Trusts can save on taxes, ease inheritance squabbles and ensure that beneficiaries are treated fairly and according to your wishes. Let’s examine some uses of trusts: To Minimize Inheritance Taxes. Some call them “death taxes,” but that term has acquired a political tinge, so we’ll try to avoid upsetting partisan sensibilities. This year, you have to own at least $11.7 million in total assets — including your house, your cars, brokerage accounts, individual retirement accounts, 401(k)s and life insurance — before the tax kicks in. Taxes are typically due upon the second spouse’s passing, not the first to die. You should also be aware that a number of states impose their own estate taxes – and several have inheritance taxes – which kick in at lower threshold amounts than the federal estate tax. Above $11.7 million, without proper estate planning and a trust, you might pay 40% to the feds. Most people don’t have $11.7 million in assets, so they don’t have to worry about this tax, right? Maybe and maybe not. Tax legislation seems to change every year and many state governments are looking to close their deficits. So don’t assume that because you have less than $11.7 million that you’re in the clear. Congress has always had trouble dealing with this issue. Remember when the federal estate tax expired in 2010? To Avoid Probate. That’s a court that rules on inheritance questions if your wishes are not clear. If you don’t have a trust or a valid will, anything you own that doesn’t have a specific beneficiary designation goes through probate. Probate can be very time-consuming and emotionally draining. If your estate includes property held outside the state of residence, it may have to go through probate there as well. If the property is outside the U.S., the situation is even more complicated. Probate can be pretty expensive. Attorneys have the right to charge either a flat percentage rate, based on the value of your total estate, or they can charge “reasonable compensation,” which is debatable, but typically not negotiable. To Keep Your Family Finances Private. If you don’t have an estate plan properly executed by your death, your whole financial life can be public record, available to the masses. Yeah, you don’t even have to drive to the courthouse to snoop through someone’s estate. In many places, it’s available online these days. To Look After Disabled, Young or Irresponsible Children. Having a trust makes a ton of sense if you have a child with disabilities who can’t take care of himself. Or maybe we don’t want him showing assets on paper. Also, if your estate passes to a minor, when the kids turns 18, she gets a big, whopping check for the whole thing at once. If you were no longer here, would you want your child getting your entire estate at 18? You can set up anything from basic to very creative trusts in order to protect children from themselves. For instance, you could establish a trust in which your child would get a third of your estate at 28, a third at 34 and the last third at 38. This way, the trust can give financial support for what is absolutely needed. But your child still needs to go out, get an education, start a career and learn the value of a dollar. There are other, more complicated trusts you can put together too, including “incentive-based trusts.” These can be established so that the child must prove (via W-2s) that she earned say $10,000 to take 1% out of the trust, $20,000 to take 2% out, $30,000 to take 3%, and so on. To Avoid Problems Surrounding Divorced and Remarriage. Trusts are especially helpful if you and your second spouse both have kids. Trusts ensure that your estate is handled by the person you want, and that the money is given to whom you want, when you want. To Give to Charity and Help Your Family. Through proper, creative planning, you can set up a charitable trust that will: Give money to your kids, increase tax deductions, reduce taxable income while you’re living, eliminate capital gains and dividends taxation, and then give a bunch of coin to charity at your demise – all at once. A charitable trust pays no tax, so if you have any assets that have appreciated in value, and you put them into this trust, you get a tax deduction right off the top. Then, when you sell the asset inside the trust, you pay no capital gains tax. You retain control here, and you still benefit from the income in the trust. A logical next step might be to use a portion of the income from the trust to buy a second-to-die life insurance policy on you and your spouse’s life. You put that policy into a different kind of trust, called an irrevocable life insurance trust (or ILIT). When you die, the government can’t put its sticky hands on the policy. Once the policy is paid up, you can increase your income again if you want, since you won’t have to pay insurance premiums any longer. Then, when you and your spouse are gone, the money in the charitable trust goes to the charities you chose, your kids collect a tax-free death benefit from the policy in the life insurance trust, and you collected a bunch of tax-free income along the way. All of these ideas are hypothetical of course and really depend on your personal financial situation. You should talk to a financial professional to better understand if trusts are right for you and your family. Because trusts can also help you avoid one more headache: the squabbling that takes place when kids split an inheritance. SPLITTING AN INHERITANCE Nothing ignites family arguments like inheritance. If you plan to leave money to more than a few beneficiaries, for the sake of peace and your own emotional legacy, think about how to divide the proceeds fairly. First, you can divide your estate among however many heirs you want: three, seven, 11 or 13 and so on. Here are a few best practices for how to divide your wealth. Dividing an estate doesn’t need to trigger taxes. Don’t try to be the financial professional of each beneficiary when you divvy the estate. Afterward, each beneficiary can decide financial and tax moves based on individual circumstances. For example, let’s say Athos, Porthos and Aramis become heirs of a taxable account of stocks, bonds and mutual funds. The account includes: 351.362 shares of XYZ mutual fund at $36.34 per share, worth about $12,768.49 2,000 shares of ABC stock at $100 a share, worth about $200,000 (this holding comprises two trade lots of 1,000 shares each and each trade lot has a different cost basis, or original price) $85,000 face value of CorpCorp bond at $97 par value, about $82,450 (traded in $5,000 face value units) $100,000 face value of MuniMuni bond at $102 par value, about $102,000 (also traded in $5,000 face value units) $5,236.45 in cash. The total account value is $402,454.94, making each heir’s share $134,151.64 with two pennies left over. To divide the account evenly: The 351.362 shares of XYZ can be divided into three equal portions of 117.12 shares, leaving 0.002 shares left over. Athos and Porhos receive 117.121 shares and Aramis 117.12 shares, plus 0.001 times the closing valuation of XYZ on the day of transfer. This probably results in Aramis receiving about four cents in lieu of missing out on 0.001 of a share. The ABC stock comprises two trade lots: 1,000 shares purchased one year ago at $80 a share, and 1,000 shares purchased six months ago at $105 per share. Both positions divide equally into three 333-share portions, leaving just two shares to be divided, each with a face value of $100. If all three heirs are in the 15% capital gains tax bracket, the value of each share is the closing valuation on the day of transfer adjusted for 15% capital gains taxes. In large estates with many assets to distribute, divide leftover shares as evenly as possible to minimize the difference between capital gains that heirs incur. Note that taxable assets usually receive a stepped-up basis, meaning that the asset resets to its fair market value at the date of the holder’s death. Often, however, half an estate’s assets will go into a marital trust when the first spouse in an estate-holding couple dies. When the second spouse dies, the entire estate is settled. But assets in the marital trust might have received a step-up in basis years earlier. In that case, potential differences in capital gains do apply when planning. You can divide the $85,000 face value of CorpCorp equally only into 17 units each worth $5,000 in face value. In our example, each heir receives five $5,000 units, with two $5,000 units left over. Whoever doesn’t receive a unit receives the equivalent in cash instead. The $100,000 face value of MuniMuni divides equally only into 20 units each worth $5,000 in face value. Each heir therefore gets six $5,000 units with, again, two left over. Also again, whoever doesn’t receive a unit receives the equivalent in cash instead. (These examples assume no significant tax considerations on either bond and it might be wise to vary who receives the cash.) Common Questions: Why not just sell everything and split the money? Tax consequences to one or more heirs, illiquidity in one or more assets and the custodian fees to sell are all considerations to immediately selling and splitting. What if two heirs want to sell an asset before dividing the money equally? Athos and Porthos both wanting to sell the CorpCorp bonds doesn’t need to affect Aramis. Of the 17 units of CorpCorp, you can sell 12 units and agree to split the proceeds. Athos and Porthos each receive 47.22% of the proceeds and Aramis 5.56%, plus the five unsold units. Dividing your estate this way mitigates your need to decide on behalf of all beneficiaries what to sell and how and what transaction costs and taxes to incur. YOUR FINANCIAL PROFESSIONAL For most people, tax strategies can be overwhelming, especially given that the federal tax code is thousands upon thousands of pages long. Throw in the emotional toll of figuring out how to care for your kids – and when to care for them – can be paralyzing, pushing you to do nothing. So, before you go down a path that might not be in your best interest long–term, make sure you consult with your financial professional to help you determine how your tax decisions and changes to tax law might impact you and your family. Important Disclosures The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. This article was prepared by Financial Media Exchange, LLC. LPL Tracking #1-05180952
Charitable Giving
Charitable giving can play an important role in many estate plans. Philanthropy cannot only give you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die. There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a trust. You can name a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy. Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund. Making outright gifts An outright gift is one that benefits the charity immediately and exclusively. With an outright gift you get an immediate income and gift tax deduction. Make sure the charity is a qualified charity according to the IRS. Get a written receipt or keep a bank record for any cash donations, and get a written receipt for any property other than money. Will or trust bequests and beneficiary designations These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form. The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions. Charitable trusts Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust. There are expenses and fees associated with the creation of a trust. Charitable lead trust A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits. How a Charitable Lead Trust Works John, who often donates to charity, creates and funds a $2 million charitable lead trust. The trust provides for fixed annual payments of $100,000 (or 5% of the initial $2 million value) to ABC Charity for 20 years. At the end of the 20-year period, the entire trust principal will go outright to John’s children. Using IRS tables and assuming a 2.0% Section 7520 rate, the charity’s lead interest is valued at $1,635,140, and the remainder interest is valued at $364,860. Assuming the trust assets appreciate in value, John’s children will receive any amount in excess of the remainder interest ($364,860) unreduced by estate taxes. Charitable remainder trust A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with a stream of current income — a desirable feature if there won’t be enough income from other sources. How a Charitable Remainder Trust Works Jane, an 80-year-old widow, creates and funds a charitable remainder trust with real estate currently valued at $1 million, and with a cost basis of $250,000. The trust provides that fixed quarterly payments be paid to her for 20 years. At the end of that period, the entire trust principal will go outright to her husband’s alma mater. Using IRS tables and assuming a 2.0% Section 7520 rate, Jane receives $50,000 each year, avoids capital gains tax on $750,000, and receives an immediate income tax charitable deduction of $176,298, which can be carried forward for five years. Further, Jane has removed $1 million, plus any future appreciation, from her gross estate. Private family foundation A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation, then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worth it. A general guideline is that you should be able to donate enough assets to generate at least $25,000 a year for grants. Community foundation If you want your dollars to be spent on improving the quality of life in a particular community, consider giving to a community foundation. Similar to a private foundation, a community foundation accepts donations from many sources, and is overseen by individuals familiar with the community’s particular needs, and professionals skilled at running a charitable organization. Donor-advised fund Similar in some respects to a private foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time. A donor-advised fund actually refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but your account is not — it is merely a component of the charitable organization that holds the account. Once you transfer assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them. You can only advise — not direct — the charitable organization on how your contributions will be distributed to other charities. Important Disclosures: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2022. LPL Tracking #308272
Marital Trusts
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