Trusts

The landscape of retirement finance is often complex, and the latest revisions to the rules governing Required Minimum Distributions (RMDs) underscore this point. With the introduction of the Secure 2.0 Act, investors must adapt to new timelines for withdrawing from their retirement nest eggs. The Evolution of RMDs: Understanding the Changes For many retirees, RMDs represent a critical junction in financial planning. After years of accumulation, these withdrawals mark a pivot to decumulation, turning savings into income. The age at which retirees must commence these withdrawals has been historically set at 70½. However, the Secure 1.0 Act raised the bar to 72, and more recently, Secure 2.0 has adjusted it to 73 for individuals born from 1951 through 1959. As we look to the future, individuals born in 1960 or later will need to begin RMDs at age 75. The first takeaway for investors is to reevaluate your retirement timeline. An understanding of these age thresholds is vital to ensure compliance and to optimize your retirement income strategy. It’s also essential to familiarize yourself with the penalties associated with RMDs—now at 25% of the amount that should have been withdrawn, down from the previous 50%. This penalty underscores the importance of meeting RMD requirements timely, although the penalty may be reduced to 10% if the missed distribution is taken promptly. Charitable Strategies and Tax Planning For investors who do not rely on RMDs for their living expenses, the new rules offer an attractive option: Qualified Charitable Distributions (QCDs). These allow individuals aged 70½ and above to donate up to $100,000 tax-free from their IRAs directly to charity—$200,000 for married couples filing jointly. These distributions count towards satisfying RMDs but do not increase taxable income. This provision can be particularly beneficial for those in higher tax brackets or those seeking to mitigate increased Medicare premiums. It’s important to note that the age for initiating QCDs has not shifted with the RMD age—it remains steadfastly at 70½. This gap between QCD eligibility and the RMD start age provides a unique planning window for tax-efficient giving strategies. Investor Action Plan To effectively navigate the new RMD requirements, here are a few steps for investors to consider: Review Your Birth Year: Align your birth year with the new RMD starting ages to pinpoint when you’ll be required to take distributions. Stay Informed: Keep abreast of legislative changes that may affect your retirement planning, as these rules have evolved over time and may change again. Evaluate Charitable Intentions: If you’re philanthropically inclined and over 70 ½, consider using QCDs to meet RMD requirements while reducing your taxable income. Consult with Professionals: Work with financial and tax advisors to help you develop a strategy that complies with RMD regulations and aligns with your overall financial goals. Plan for the Future: Look beyond immediate RMDs to consider how these rules impact your longer-term retirement and estate planning. While working with a financial professional, you may see these changes not just as a source of confusion but as an opportunity for strategic planning. By proactively adjusting to the new RMD age requirements, investors can work towards better managing their tax liabilities, enhancing their philanthropic impact, and refining their retirement strategies. The key lies in staying informed, seeking professional guidance, and being flexible as the landscape of retirement finance continues to evolve. Important Disclosures The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine your Required Minimum Distribution timeline or which options may be appropriate for you, consult your financial professional. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. This article was prepared by FMeX.  LPL Tracking #502283-02

What is it? A qualified domestic trust (QDOT) allows a U.S. citizen spouse to transfer assets to a noncitizen spouse without having to pay federal gift and estate tax at the time of the transfer. Generally, spouses are treated as one economic unit. They may transfer assets between themselves free from federal gift and estate tax under the unlimited marital deduction. This defers any federal tax liability on marital assets until the death of the surviving spouse, keeping the whole of those assets available to the surviving spouse for his or her own support or for any other purpose. At the surviving spouse’s death, his or her estate (regardless of citizenship) is then entitled to an applicable exclusion amount ($12,060,000 in 2022), and excess amounts are subject to estate tax at rates as high as 40 percent (in 2022). However, the unlimited marital deduction does not apply when a citizen spouse transfers assets to a noncitizen spouse. The reason for this is that the federal government is concerned that noncitizen spouses will leave the United States once assets are transferred to them, thereby removing the assets from the federal estate tax system forever. Without the unlimited marital deduction, surviving spouses who are not citizens can only receive, tax free, amounts that do not exceed the decedent spouse’s available exemption. Assets over that amount are subject to estate tax, and may be substantially reduced by such tax, depleting the assets remaining available to the surviving spouse. The QDOT was created by Congress as a substitute for the unlimited marital deduction. A QDOT temporarily qualifies property passing to a surviving noncitizen spouse for the marital deduction until the surviving spouse’s death, and ensures that the property will eventually be taxed. Tip: Another way to avoid paying federal gift and estate tax on transfers from a citizen spouse to a noncitizen spouse is to have the noncitizen spouse become a naturalized citizen of the United States. As long as the noncitizen spouse becomes a U.S. citizen before the citizen spouse’s federal estate tax return is filed, and as long as the noncitizen spouse has been a resident of the United States at all times after the death of the citizen spouse and before becoming a U.S. citizen, transfers to the surviving spouse will qualify for the unlimited marital deduction. Tip: A citizen spouse can transfer up to a certain amount each year ($164,000 in 2022) to a noncitizen spouse free from federal gift tax under a special exclusion. If the gifting program begins early enough, the citizen spouse can transfer a substantial amount of assets tax free to the noncitizen spouse. To qualify for this special exclusion, the gift to the noncitizen spouse must qualify under the rules for the standard annual gift tax exclusion. The gift must also meet the requirements for the unlimited marital deduction (as if the recipient spouse were a citizen). The noncitizen spouse may then use the assets for his or her own support or for any other purpose. Some estate planning attorneys recommend that the noncitizen spouse use such gifts to purchase life insurance on the citizen spouse. By following this strategy, the noncitizen spouse can leverage the value of the special exclusion. How does a QDOT work? A QDOT can be created by will or a separate trust document prior to the death of the citizen spouse. At the citizen spouse’s death, assets are transferred to the QDOT. Because the transfer qualifies for a marital deduction, no federal estate tax will be imposed on the transfer. The surviving noncitizen spouse can receive all the income from the trust for the remainder of his or her lifetime. However, with limited hardship exceptions, the surviving noncitizen spouse cannot receive distributions of principal from the trust without paying federal estate tax on the distributions. Upon the death of the surviving spouse, the assets pass to the remainder beneficiaries named either in the trust document or by the surviving spouse under a power of appointment. The remaining assets in the QDOT on the surviving noncitizen spouse’s death are subject to estate tax as if they were in the estate of the first spouse to die. That is, estate tax is calculated using the tax rates in effect at the time of death of the first decedent. The QDOT may be set up as an estate trust in which no income is paid to the surviving noncitizen spouse. Therefore, closely held stock (non-dividend-paying) and other non-income-producing assets may be transferred to the QDOT and still qualify for the deferral of estate taxes. The QDOT may also be set up as a qualified terminable interest property (QTIP) trust, where the surviving spouse receives all the income from the trust for life, but the first spouse to die designates in the trust instrument where the assets in the trust will pass when the surviving spouse dies. The QDOT may also be set up as a life estate with a general power of appointment where the surviving spouse receives income for life and can designate where the assets pass upon his or her death. In either case, the surviving spouse must be given the right to the income from the trust for life (distributed at least annually) and the right to force the trustee to make any nonproductive assets income-producing. Who can create a QDOT? The citizen spouse, the personal representative of the deceased citizen spouse, or the surviving noncitizen spouse can create a QDOT. The QDOT must be created by the time the estate tax return for the deceased citizen spouse’s estate is filed. Therefore, if the citizen spouse dies and has failed to set up a QDOT, either the citizen spouse’s personal representative or the surviving noncitizen spouse can create a QDOT to hold assets transferred to the noncitizen spouse by the citizen spouse. In this manner, assets that have been left directly to the noncitizen spouse can be transferred to the QDOT and thereby made to qualify for the unlimited marital deduction. Furthermore, an existing trust can be reformed to meet all of the requirements of a QDOT, and a transfer to the reformed trust will qualify for the unlimited marital deduction. What are the requirements for a QDOT? The QDOT must be set up under either U.S. federal or state law A QDOT must be administered under the laws of a state in the United States or under the laws of the District of Columbia. All records of the trust must be kept within a state or the District of Columbia. One trustee must be either an individual who is a U.S. citizen or a domestic corporation At least one of the trustees of the QDOT must be an individual who is a citizen of the United States or a domestic corporation. The type of domestic corporation that is typically named as a trustee is a bank or a trust company. The QDOT must follow special rules Special rules apply to both large and small QDOTs. If the QDOT has assets in excess of $2 million, it is classified as a large QDOT. The trust instrument must then require either that at least one of the trustees be a bank or that the U.S. trustee (who can be an individual trustee) furnish a bond or letter of credit equal to 65 percent of the fair market value of the assets in the trust. A small QDOT (a trust with less than $2 million in assets) must either have a bank as the trustee or require that no more than 35 percent of the trust assets be real property located outside the United States. The U.S. trustee must be given the power to withhold estate tax, if any, from distributions made to the noncitizen spouse The trust document must stipulate that the trustee has the power to withhold the federal estate tax, if any, from any distribution of principal that is made to the noncitizen spouse. The U.S. trustee must be able to withhold the tax without the approval of the other trustee. The personal representative of the deceased citizen spouse’s estate must make an irrevocable election on the estate tax return To qualify for QDOT treatment, the personal representative of the deceased citizen spouse’s estate must make an irrevocable election by checking the correct box on the federal estate tax return. Tradeoffs Assets in a QDOT must be subject to federal estate tax at the death of the noncitizen spouse Technically, the value of the QDOT assets is not included in the estate of the surviving noncitizen spouse. However, the QDOT must be subject to tax when the surviving spouse dies — the tax is calculated as if the assets were included and taxed in the deceased citizen spouse’s estate. Any appreciation in the value of the assets after the transfer to the trust is also taxed upon the noncitizen spouse’s death, again as if it were included in the deceased citizen spouse’s estate and not with reference to the assets of the noncitizen spouse. Although the surviving spouse can receive income from the trust, it is virtually impossible for that spouse to remove assets (i.e., principal) from the trust without paying federal estate tax. Because of the special way QDOTs are treated, the noncitizen spouse will not be able to reduce federal estate tax on assets left to him or her in a QDOT in this manner. If a QDOT fails to meet any of the QDOT requirements, then federal estate tax may be imposed If a QDOT fails to meet any of the QDOT requirements at any time after the death of the citizen spouse, estate tax may be imposed on the assets in the QDOT as of the date the trust failed the requirements. Federal estate tax will be imposed as if the surviving spouse (the noncitizen) had died on the day the trust failed the requirements. However, the QDOT assets are taxed as if they were included in the deceased citizen spouse’s estate for estate tax purposes. The surviving spouse cannot take principal out of the QDOT without having to pay estate tax, if any are due If the trustee distributes principal from the QDOT to the noncitizen spouse, the distribution may be subject to federal estate tax, if federal estate tax was imposed in the year the citizen spouse died. Federal estate tax is calculated as if the distribution of principal had been included in the estate of the first spouse to die. Estate tax will not be imposed if the distribution is made to the noncitizen spouse before his or her death under a hardship exception. Unfortunately, the IRS is very strict regarding what it considers to be a hardship distribution. The trustee of the QDOT should consult an experienced estate planning attorney before making any hardship distributions. If a QDOT pays estate tax on a distribution of principal, then that payment is considered a taxable distribution There is a double whammy if the QDOT makes a distribution of trust principal and pays estate tax out of trust assets. The payment of estate tax itself from the trust assets is considered a taxable distribution. A further tax will be due on the payment of the tax on the first distribution of trust assets. If the second payment of the tax was also made from trust assets, this would again be considered a taxable distribution subject to further tax, and so on. For this reason, QDOTs are generally set up with the understanding that the trust principal will almost never be paid out to the surviving noncitizen spouse, or if principal distributions are made to the surviving spouse, the taxes on such distributions will be paid out of the noncitizen spouse’s personal assets. The surviving spouse is liable for federal income tax on trust income If the QDOT pays income to the surviving noncitizen spouse, that spouse is responsible for paying federal income tax, if any, on the income received by him or her. The basic (applicable) exclusion amount is not available to the noncitizen spouse for QDOT taxable events A person who is not a citizen of the United States may use the basic (applicable) exclusion amount to shelter his or her own assets from federal estate tax. However, a noncitizen spouse cannot use it to shelter any distributions of principal from a QDOT, because QDOT assets are never considered part of the noncitizen spouse’s tax base but rather continue to be considered part of the deceased spouse’s estate for estate tax purposes. Similarly, a noncitizen spouse cannot use the applicable exclusion amount to shelter assets in a QDOT from estate tax upon his or her death. QDOTs are complicated to set up and administer There are many complex rules and regulations that must be followed to make a QDOT work. An experienced and competent estate planning attorney should be hired to draft the trust document. Furthermore, there may be grave and costly consequences if the trust fails any of the QDOT requirements. For example, if at any time the trust fails to meet the QDOT requirements, federal estate tax may be imposed on the trust assets as if the surviving spouse had died on the date the trust failed the requirement (if estate tax was imposed in that year). This means there could be a substantial unplanned estate tax liability at a time when the surviving spouse is not able to pay the tax. Questions & Answers What happens if the noncitizen spouse becomes a naturalized citizen after the QDOT is established? The QDOT will not be subject to the special estate tax rules once the noncitizen spouse becomes a naturalized citizen if one of the three following tests is met: The surviving spouse was a resident of the United States at all times after the decedent’s death and before becoming a citizen, or no distributions were made from the QDOT before he or she became a citizen No taxable distributions were made from the QDOT before the surviving spouse became a U.S. citizen The surviving spouse elects to treat any taxable distributions made to him or her before he or she became a U.S. citizen as taxable gifts by him or her, and he or she elects to treat any reduction in the special estate taxes due to the predeceasing spouse’s applicable exclusion amount as a reduction in his or her own applicable exclusion amount This article was prepared by Broadridge. LPL Tracking #1-05113520

Does a revocable living trust (RLT) help mitigate inheritance tax?  No.  Does an RLT offer tax advantages during life?  No.  So why consider making a revocable trust part of your estate plan?  While there are limits to what a revocable living trust can do, there are some compelling reasons to consider making one part of your estate plan. First, assets titled in the name of a revocable living trust pass outside the probate process following the death of the trusts creator, aka grantor or trustor.  The probate process involves reporting to and supervision by the probate court in the county of last residence of the grantor.  It also typically involves fees, which vary state to state, levied by the court.  Due to the reporting requirements and the need to court sign-off, settling a probate estate tends to be cumbersome.  While the settlement process through a revocable living trust must still follow state mandated rules, such as filing a notice to creditors and waiting the mandated period for potential claims to be filed, the lack of court supervision, reporting and fees make settlement through a trust less burdensome and more cost efficient.

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

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

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

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

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

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

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

What 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