LIVING TRUSTS. Understanding NOT FOR DISTRIBUTION. Your Imprint Here. Your Imprint Here. How To Avoid Probate, Save Taxes and More

Transcription

1

2 Panel 8 NOT FOR DISTRIBUTION Panel 1 Benefits of a Living Trust n Avoids probate at death, including multiple probates if you own property in other states n Prevents court control of assets at incapacity n Brings all of your assets together under one plan n Provides maximum privacy n Quicker distribution of assets to beneficiaries n Assets can remain in trust until you want beneficiaries to inherit n Can reduce or eliminate estate taxes n Inexpensive, easy to set up and maintain n Can be changed or cancelled at any time n Difficult to contest n Prevents court control of minors inheritances n Can protect dependents with special needs n Prevents unintentional disinheriting and other problems of joint ownership n Professional management with corporate trustee n Peace of mind n n n Understanding LIVING TRUSTS n n n How To Avoid Probate, Save Taxes and More Your Imprint Here Your Imprint Here This publication is designed to provide an accurate general overview with regard to the subject matter covered. It is sold with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Understanding Living Trusts is a registered trademark and is used with permission. Federal laws prohibit copying or reproducing this publication, in part or in its entirely, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications by WealthCounsel, LLC ISBN /12 Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

3 Panel 2 NOT FOR DISTRIBUTION Panel 3 I have a will. Why would I want a living trust? Contrary to what you ve probably heard, a will may not be the best plan for you and your family. That s primarily because a will does not avoid probate when you die. A will must be validated by the probate court before it can be enforced. Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So the court could easily take control of your assets before you die a concern of millions of older Americans and their families. NOT FOR Fortunately, there is a simple and proven alternative to a will the revocable living trust. It avoids probate and lets you keep control of your assets while you are living even if you become incapacitated and after you die. What is probate? Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will. If you don t have a valid will, your assets are distributed according to state law. DISTRIBUTION What s so bad about probate? n It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now. n It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied. n Your family has no privacy. Probate is a public process, so any interested party can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process invites disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors. n Your family has no control. The court process determines how much it will cost, how long it will take, and what information is made public. Doesn t joint ownership avoid probate? Not really. Using joint ownership usually just postpones probate. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But if that owner dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated before it can go to the heirs. Watch out for other problems. When you add a co-owner, you lose control. Your chances of being named in a lawsuit and of losing the asset to a creditor are increased. There could be gift and/or income tax problems. And since a will does not control most jointly owned assets, you could disinherit your family. With some assets, especially real estate, all owners must sign to sell or refinance. So if a co-owner becomes incapacitated, you could find yourself with a new co-owner the court even if the incapacitated owner is your spouse. Why would the court get involved at incapacity? If you can t conduct business due to mental or physical incapacity (dementia, stroke, heart attack, etc.), only a court appointee can sign for you even if you have a will. (Remember, a will only goes into effect after you die.) Once the court gets involved, it usually stays involved until you recover or die and it, not your family, will control how your assets are used to care for you. This public, probate process can be expensive, embarrassing, time consuming and difficult to end. It does not replace probate at death, so your family may have to go through probate court twice! Does a durable power of attorney prevent this? A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so. However, many financial institutions will not honor one unless it is on their form. If accepted, it may work too well, giving someone a blank check to do whatever he/ she wants with your assets. It can be very effective when used with a living trust, but risky when used alone. What is a living trust? A living trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die. But, unlike a will, a living trust can avoid probate at death, control all of your assets and prevent the court from controlling your assets if you become incapacitated. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

4 Panel 4 NOT FOR DISTRIBUTION Panel 5 How does a living trust avoid probate and prevent court control of assets at incapacity? When you set up a living trust, you transfer assets from your name to the name of your trust, which you control such as from Bob and Sue Smith, husband and wife to Bob and Sue Smith, trustees under trust dated (month/day/year). NOT FOR Legally you no longer own anything; everything now belongs to your trust. So there is nothing for the courts to control when you die or become incapacitated. The concept is simple, but this is what keeps you and your family out of the courts. Do I lose control of the assets in my trust? Absolutely not. You keep full control. As trustee of your trust, you can do anything you could do before buy and sell assets, change or even cancel your trust. That s why it s called a revocable living trust. You even file the same tax returns. Nothing changes but the names on the titles. Is it hard to transfer assets into my trust? No, and your attorney, trust officer, financial adviser and insurance agent can help. Typically, you will change titles on real estate, stocks, CDs, bank accounts, investments, insurance and other assets with titles. Most living trusts also include jewelry, clothes, art, furniture, and other assets that do not have titles. Some beneficiary designations (for example, insurance policies) should also be changed to your trust so the court can t control them if a beneficiary is incapacitated or no longer living when you die. (IRA, 401(k), etc. can be exceptions.) Doesn t this take a lot of time? It will take some time but you can do it now, or you can pay the courts and attorneys to do it for you later. One of the benefits of a living trust is that all of your assets are brought together under one plan. Don t delay funding your trust; it can only protect assets that have been transferred into it. DISTRIBUTION With No Will With A Will With A Living Trust At Incapacity (unable to handle your financial affairs) Court Control: Court appointee oversees your care, must keep detailed records, reports to court, and usually must post bond (even if appointee is your spouse). Court approves all expenses, oversees financial affairs. Court Control: Same as no will. No Court Control: Your successor trustee manages your financial affairs according to instructions in your trust for as long as necessary. (In some states, court intervention may be required for health care decisions.) At Death Probate: Court orders your debts paid and assets distributed according to state law. Probate: Same as no will, but assets distributed per your will (if valid and any contests are unsuccessful). No Probate: Debts paid and assets distributed by successor trustee according to instructions in your trust. Court Costs, Legal & Executor Fees Death: Often estimated at 3-8% of estate s value. Incapacity: Impossible to estimate. Same as no will. Costs can increase if will is contested after your death. Minimal or no court costs. Reduced legal fees (minimal for small estates; larger/complex estates require more). Time Death: Usually 9 months to 2 years or longer before heirs inherit. Incapacity: Court involved until recovery or death. Same as no will. Death: Often just weeks. Larger/complex estates take longer for tax returns, asset division. Incapacity: No delays. Flexibility & Control None: Court processes, not your family, have control at incapacity and death. When you die, assets are distributed according to state law. Limited: Same as no will except, when you die, assets are distributed according to your will (if valid and any contests are unsuccessful). You can change your will at any time. Maximum: You can change/discontinue your trust at any time. Assets stay under control of your trust, even at incapacity and after your death. More difficult than a will to contest. Privacy None: Court proceedings are public record. Family can be exposed to disgruntled heirs, unscrupulous solicitors. None: Same as no will. Maximum: Living trusts are not public record. Your family can take care of your financial affairs privately. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

5 Panel 6 NOT FOR DISTRIBUTION Panel 7 Should I consider a corporate trustee? You may decide to be the trustee of your trust. However, some people select a corporate trustee (bank or trust company) to act as trustee or co-trustee now, especially if they don t have the time, ability or desire to manage their trusts, or if one or both spouses are ill. Corporate trustees are experienced investment managers, they are objective and reliable, and their fees are usually very reasonable. If something happens to me, who has control? If you and your spouse are co-trustees, either can act and have instant control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee, the successor trustee you personally selected will step in. If a corporate trustee is already your trustee or co-trustee, they will continue to manage your trust for you. NOT FOR What does a successor trustee do? If you become incapacitated, your successor trustee looks after your care and manages your financial affairs for as long as needed, using your assets to pay your expenses. If you recover, you resume control. When you die, your successor trustee pays your debts, files your tax returns and distributes your assets. All can be done quickly and privately, according to instructions in your trust, without court interference. DISTRIBUTION Who can be successor trustees? Successor trustees can be individuals (adult children, other relatives, or trusted friends) and/or a corporate trustee. If you choose an individual, you should also name some additional successors in case your first choice is unable to act. Does my trust end when I die? Unlike a will, a trust doesn t have to die with you. Assets can stay in your trust, managed by the trustee you selected, until your beneficiaries reach the age(s) you want them to inherit. Your trust can continue longer to provide for a loved one with special needs, or to protect the assets from beneficiaries creditors, spouses and future death taxes. How can a living trust save estate taxes? Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount at that time. (Your state may also have its own death or inheritance tax.) If you are married, your living trust can include a provision that will let you and your spouse use both of your exemptions, saving a substantial amount of money for your loved ones. Doesn t a trust in a will do the same thing? Not quite. A will can contain wording to create a testamentary trust to save estate taxes, care for minors, etc. But because it s part of your will, this trust cannot go into effect until after you die and the will is probated. So it does not avoid probate and provides no protection at incapacity. Is a living trust expensive? Not when compared to all of the costs of court interference at incapacity and death. How much you pay will depend primarily on your goals and what you want to accomplish. How long does it take to get a living trust? It should only take a few weeks to prepare the legal documents after you make the basic decisions. Should I have an attorney do my trust? Yes, but you need the right attorney. A local attorney who has considerable experience in living trusts and estate planning will be able to give you valuable guidance and peace of mind that your trust is prepared and funded properly. If I have a living trust, do I still need a will? Yes, you need a pour-over will that acts as a safety net if you forget to transfer an asset to your trust. When you die, the will catches the forgotten asset and sends it into your trust. The asset may have to go through probate first, but it can then be distributed as part of your overall living trust plan. A guardian for minor children must also named in a will. Is a living will the same as a living trust? No. A living trust is for financial affairs. A living will is for medical affairs it lets others know how you feel about life support in terminal situations. Are living trusts new? No, they ve been used successfully for hundreds of years. Who should have a living trust? Age, marital status and wealth don t really matter. If you own titled assets and want your loved ones (spouse, children or parents) to avoid court interference at your death or incapacity, you should probably have a living trust. You may also want to encourage other family members to have one so you won t have to deal with the courts at their incapacity or death. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

6 Panel 8 NOT FOR DISTRIBUTION Panel 1 Charitable Lead Trust (CLT) A CLT is just about the opposite of a CRT. You transfer an asset to the trust, which reduces the size of your estate and saves estate taxes. But instead of paying the income to you, the trust pays it to a charity for a set number of years or until you die. After the trust ends, the trust assets will go to your spouse, children or other beneficiaries estate tax-free. 3 Buy Life Insurance Depending on your age and health, buying life insurance can be an inexpensive way to replace an asset given to charity and/or to pay any remaining estate taxes. The three-year rule mentioned earlier does not apply to new policies. But you should not be the owner of the policy that would increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an ILIT and have the trustee purchase the policy for you. n n n Understanding ESTATE TAXES n n n How To Reduce Or Eliminate Your Estate Tax Cost Your Imprint Here Your Imprint Here This publication is designed to provide an accurate general overview with regard to the subject matter covered. It is sold with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Federal laws prohibit copying or reproducing this publication, in part or in its entirely, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications by WealthCounsel, LLC ISBN /12 Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

7 Panel 2 NOT FOR DISTRIBUTION Panel 3 What are estate taxes? Estate taxes are different from and in addition to probate expenses, which can be avoided with a revocable living trust, and final income taxes, which must be paid on income you receive in the year you die. Federal estate taxes are expensive (historically, 45%-55%) and they must be paid in cash, usually within nine months after you die. Because few estates have the cash, it has often been necessary to liquidate assets to pay these taxes. But, if you plan ahead, you can reduce and even eliminate estate taxes. Who has to pay estate taxes? Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress at that time. In 2011 and 2012, the federal exemption is $5 million (adjusted for inflation in 2012) and the tax rate is 35%. If Congress does not act before the end of 2012, the exemption in 2013 will be $1 million and the top tax rate will be 55%. Some states also have a death or inheritance tax. Year of Death Exempt Amount Top Tax Rate 2011 and $5 million*...35% 2013 and thereafter...$1 million...55% * Adjusted for inflation in 2012 How is the net value of my estate determined? To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance. How can I reduce or eliminate my estate taxes? In the simplest terms, there are three ways: 1. If you are married, use both estate tax exemptions. 2. Remove assets from your estate before you die. 3. Buy life insurance to replace assets given to charity and/ or pay any remaining estate taxes. NOT FOR Assets Included in Your Taxable Estate $7,000,000 $6,000,000 $5,000,000* $4,000,000 $3,000,000 $2,000,000 Federal Estate Taxes 35%* If, when you die, your net estate (assets less debts) is more than the amount exempt from estate taxes at that time, estate taxes must be paid. *2011 and 2012 federal estate tax exemption and tax rate; 2012 exemption adjusted for inflation is $5 million. When Bob dies, he leaves everything to Sue, so no estate taxes are due then. But when Sue dies, her estate of $10 million uses her $5 million exemption. The tax bill on the remaining $5 million? $1,750,000! Congress tried to fix this. If Bob dies in 2011 or 2012, his unused exemption can be transfered to Sue. But if Sue remarries and outlives her new husband, she would lose Bob s unused exemption. Also, by leaving everything to Sue, Bob has no control over how his share of the assets are managed or distributed. Plus, any growth on the assets will be included in Sue s estate and taxed when she dies. If Bob and Sue plan ahead, they can use both exemptions and solve these problems. A tax-planning provision in their living trust splits their $10 million estate into two trusts of $5 million each. When Bob dies, his trust uses his $5 million exemption. When Sue dies, her trust uses her $5 million exemption. This reduces their taxable estate to $0, so the full $10 million can go to their loved ones. DISTRIBUTION 1 Use Both Exemptions If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But there can be problems when the second spouse dies. For example, let s say Bob and Sue have a combined net estate of $10 million and they both die when the federal exemption 0 In addition, Bob can keep control over how his share of the estate is managed and distributed; the assets are valued and taxed only at his death, so no growth is included in Sue s estate; yet, the assets in Bob s trust can be available for anything Sue needs. Married couples with estates of all sizes find these benefits appealing. (This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.) Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

8 Panel 4 NOT FOR DISTRIBUTION Panel 5 Use Both Exemptions & Save Estate Taxes Sue s Trust $ 5,000,000-5,000,000 Exemption $ 0 Taxable Estate Bob & Sue $10 Million Beneficiaries $10 Million Bob s Trust $ 5,000,000-5,000,000 Exemption $ 0 Taxable Estate Tax planning in a living trust lets you and your spouse use both of your estate tax exemptions. Using the exemption and tax rate as an example, you could transfer up to $10 million estate tax free to your loved ones, saving up to $1,750,000 in federal estate taxes. 2 Remove Assets From Your Estate One way to reduce estate taxes is to reduce the size of your estate before you die. So, spend some and enjoy it! Also, you probably know whom you want to have your assets after you die. If you can afford it, why not make some gifts now and save estate taxes? It can be very satisfying to see the results of your gifts, something you can t do if you wait until you die. Appreciating assets are best to give because any future appreciation will also be out of your estate. Gifted assets keep your cost basis (what you paid for them), so recipients may pay capital gains tax when they sell. But at 15% on assets held longer than 12 months, that would be less than estate taxes (35-55%) if you keep the assets until you die. Some popular strategies are introduced below. Note that these are irrevocable, so you can t change your mind later. Tax-Free Gifts Federal law lets you give up to $13,000 ($26,000 if married) to as many people as you wish each year. So if you give $13,000 to each of your two children and five grandchildren, you will reduce your estate by $91,000 a year (7 x $13,000), $182,000 if your spouse joins you. (This amount is tied to inflation and may increase every few years.) State laws may differ. NOT FOR DISTRIBUTION If you give more than this, the excess will be considered a taxable gift and will be applied to your $5 million ($10 million if married) unified gift and estate tax exemption. (If you use it while you are living, it s considered a gift tax exemption; if you use it after you die, it s an estate tax exemption.) Charitable gifts are still unlimited. So are gifts for tuition and medical expenses if you give directly to the institution. Irrevocable Life Insurance Trust (ILIT) You can remove the value of your insurance from your estate by making an ILIT the owner of the policies. As long as you live three years after the transfer of an existing policy, the death benefits will not be included in your estate. Usually the ILIT is also beneficiary of the policy, giving you the option of keeping the proceeds in the trust for years, with periodic distributions to your spouse, children and grandchildren. Proceeds kept in the trust are protected from irresponsible spending, creditors and even spouses. Qualified Personal Residence Trust (QPRT) A QPRT removes your home, a substantial asset, from your estate now, yet you can continue to live there. It allows you to transfer your home to a trust (QPRT) for a period of time, usually years. During this time, you continue to live there. When the trust term is up, the home transfers to the trust beneficiaries, usually your children. If you wish to stay there longer, you may make arrangements to pay rent. If you die before the trust term ends, your home will be included in your estate, just as it would without a QPRT. A QPRT leverages your estate tax exemption. Since your children will not receive the house until the trust ends, its value as a gift is reduced. For example, if the current value of your home is $250,000 and you put it in a QPRT for 15 years, its value for tax purposes could be as little as $75,000. That leaves much more of your exemption for other assets. Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT) These are much like a QPRT. The main difference is that a GRAT or GRUT lets you transfer an income-producing asset (stock, real estate, business) to a trust for a set number of years, removing it from your estate and still receive the income. (If the income is a set amount, the trust is called a GRAT. If the income fluctuates, it s called a GRUT.) When the trust ends, the asset will go to the beneficiaries of the trust. Since they will not receive it until then, the value of the gift is reduced. If you die before the trust ends, some or all of the asset may be in your estate. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

9 Panel 6 NOT FOR DISTRIBUTION Panel 7 Limited Liability Company (LLC) and Family Limited Partnership (FLP) LLCs and FLPs let you reduce estate taxes by transferring assets like a family business, farm, real estate or stocks to your children now, and still keep control. They can also protect the assets from future lawsuits and creditors. NOT FOR You and your spouse can set up an LLC or FLP and transfer assets to it. In exchange, you receive ownership interests. Though you have a fiduciary obligation to other owners, you can control the LLC (as manager) or FLP (as general partner). You can give ownership interests to your children, which removes value from your taxable estate. These interests cannot be sold or transferred without your approval, and because there is no market for these interests, their value is often discounted. This lets you transfer the underlying assets to your children at reduced value, without losing control. Charitable Remainder Trust (CRT) A CRT lets you convert a highly appreciated asset (like stocks or investment real estate) into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes, and lets you benefit a charity that has special meaning to you. With a CRT, you transfer the asset to an irrevocable trust. This removes it from your estate. You also get an immediate charitable income tax deduction. The trust then sells the asset at market value, paying no capital gains tax, and reinvests in income-producing assets. For the rest of your life, the trust pays you an income. Since the principal has not been reduced by capital gains tax, you can receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen. DISTRIBUTION STRATEGY How To Reduce or Eliminate Estate Taxes BENEFITS 1. If Married, Use Both Exemptions Uses both spouses estate tax exemptions, doubling the amount protected from Living Trust with Tax Planning estate taxes and saving a substantial amount for your loved ones 2. Remove Assets From Estate Simple, no-cost way to save estate taxes by reducing size of estate Make Annual Tax-Free Gifts $13,000 ($26,000 if married) each year per recipient (amount tied to inflation) Unlimited gifts to charity and for medical/educational expenses paid to provider Transfer Life Insurance Policies to Removes death benefits of existing life insurance policies from estate Irrevocable Life Insurance Trust Included in estate if you die within three years of transfer Qualified Personal Residence Trust Removes home from estate at discounted value You can continue to live there Grantor Retained Annuity Trust Removes income-producing assets from estate at discounted value Grantor Retained Unitrust You can continue to receive income Limited Liability Company Lets you start transferring assets to children now to reduce your taxable estate Family Limited Partnership Often discounts value of business, farm, real estate or stock Can protect the assets from future lawsuits, creditors, spouses You keep control Charitable Remainder Trust Converts appreciated asset into lifetime income with no capital gains tax Saves estate taxes (asset out of estate) and income taxes (charitable deduction) Charity receives trust assets after you die Charitable Lead Trust Saves estate taxes (asset out of estate) and income taxes (charitable deduction) Income goes to charity for set time period, then trust assets go to loved ones 3. Buy Life Insurance Can be inexpensive way to pay estate taxes and/or replace charitable gifts Through Irrevocable Life Insurance Trust Death benefits not included in your estate Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

10 Panel 8 NOT FOR DISTRIBUTION Panel 1 to pay taxes on the amount you convert. Also, if you qualify, you can make after-tax contributions to a Roth IRA. Unlike a traditional IRA that requires you to start taking money out on April 1 after age 70 1 /2, there are no minimum distributions required during your lifetime with a Roth IRA. And, generally, after five years or age 59 1 /2 (whichever is later), all withdrawals are income tax-free. So you can leave your money there, growing tax-free, for as long as you wish. You can stretch out a Roth IRA just like a regular IRA. After you die, distributions can be paid over the actual life expectancy of your beneficiary. Your spouse can even do a rollover and name a new beneficiary. And, remember, all distributions to your beneficiaries will be income tax-free. Do I need professional assistance? Yes. Even though the rules are now simpler, they are stilll loaded with tax traps and penalties. Make sure you get expert advice, especially if you have a sizeable amount in tax-deferred plans and your estate is large enough to pay estate taxes. n n n Understanding WHO SHOULD BE BENEFICIARY OF YOUR IRA n n n How To Turn A Modest Tax-Deferred Account Into Millions For Your Family (includes IRAs, 401(k)s, pensions, profit sharing and other qualified plans) Your Imprint Here Your Imprint Here This publication is designed to provide an accurate general overview with regard to the subject matter covered. It is sold with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Federal laws prohibit copying or reproducing this publication, in part or in its entirely, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications by WealthCounsel, LLC ISBN /12 Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

11 Panel 2 NOT FOR DISTRIBUTION Panel 3 How would you like to turn your modest tax-deferred account into millions for your family? Depending on whom you name as beneficiary, you can keep this money growing tax-deferred for not only your and your spouse s lifetimes, but also for your children s or grandchildren s lifetimes. That can turn even a modest inheritance into millions. Don t I have to use this money for my retirement? When you reach a certain age, usually April 1 after you are 70 1 /2, Uncle Sam says you must start taking some money out. (This is called your required beginning date.) But if you do not use all this money before you die, naming the right beneficiary can keep it growing tax-deferred for decades. How much will I have to take out? Calculating the amount you must withdraw each year (your required minimum distribution) is much easier now than it used to be. Each year, you divide the year-end value of your account by a life expectancy divisor from the Uniform Lifetime Table (provided by the IRS). The result is the minimum you must withdraw for that year. You can always take out more. NOT FOR DISTRIBUTION For example, the divisor at age 70 is If your year-end account balance is $100,000, you divide $100,000 by 27.4, making your first required minimum distribution $3,650. Each year the divisor is smaller, but it never goes to zero. Even at age 115 and older, the divisor is 1.9. To recalculate or not recalculate is no longer an issue. Everyone now gets the benefit of recalculating his/her life expectancy. Option 1: Spouse Most married people name their spouse as beneficiary. That s because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide many more years of tax-deferred growth. Also, if your spouse is more than ten years younger than you are, you can use a different life expectancy chart that makes your required distributions even less. (This lets the tax-deferred growth continue longer on more money.) How does the spousal rollover option work? If you die first, your surviving spouse can roll over your tax-deferred account into his/her own IRA, further delaying income taxes until he/she must start taking required minimum distributions on April 1 after age 70 1 /2. When your spouse does the rollover, he/she will name a new beneficiary, preferably someone much younger, as your children and/or grandchildren would be. After your spouse dies, the beneficiary s actual life expectancy can be used for the remaining required minimum distributions. The results, shown in the chart below, can be phenomenal. For example, let s say your grandson is 20 when he inherits a $100,000 IRA from your spouse. Over the next 63 years (the life expectancy of a 20-year-old), the $100,000 IRA can provide him with over $1.7 million in income! Total Income from IRA Over Beneficiary s Lifetime* Doesn t my beneficiary affect my distribution? Not any longer. Now, almost everyone uses the same chart to calculate distributions, even if you have no beneficiary. After you die, distributions are based on your beneficiary s life expectancy (or the rest of your life expectancy if you die without one.) Naming the right beneficiary is still critical to getting the most tax-deferred growth. That s much easier to do now, because you are no longer locked into the beneficiary you name when you take your first distribution. Whom can I name as beneficiary? You have five basic options: your spouse, if married; your children, grandchildren or other individuals; a trust; a charity; or some combination of the above. Life Value of IRA When Inherited by Beneficiary Age Exp. $50,000 $100,000 $500, $882,865 $1,765,731 $8,828, ,612 1,053,225 5,266, , ,421 3,212, , ,134 2,010,671 *Assumptions: 7% annual return; only required minimum distributions withdrawn. Income subject to income taxes. Under current IRS policy, your spouse can do this rollover and stretch out the IRA even if you had started taking required minimum distributions before you died. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

12 Panel 4 NOT FOR DISTRIBUTION Panel 5 What happens if my spouse dies first? If you don t remarry, you lose the spousal rollover option. This used to be a problem, because distributions after your death would still be based on your and your deceased spouse s life expectancies. But now you can name a new beneficiary, and after you die the distributions will be based on the new beneficiary s life expectancy. Are there any disadvantages of naming my spouse? Your spouse will have full control of this money after you die and is under no obligation to follow your wishes. This may not be what you want, especially if you have children from a previous marriage or feel that your spouse may be too easily influenced by others after you re gone. NOT FOR Also, if your spouse becomes incapacitated, the court could take control of this money. It could be lost to your spouse s creditors. And, finally, naming your spouse as beneficiary can cause your family to pay too much in estate taxes. (More about this later.) If any of this concerns you, keep reading. Option 2: Children, Grandchildren, Others If your spouse will have plenty of assets after you die, if you have reason to believe your spouse will die before you, or if you are not married, you could name your children, grandchildren or other individuals as beneficiary(ies). Because the distributions can be paid over your beneficiary s life expectancy after you die, the tax-deferred growth can continue even without the spousal rollover. DISTRIBUTION Are there any disadvantages? Anytime you name an individual as beneficiary, you lose control. After you die, your beneficiary can do whatever he/ she wants with this money, including cashing out the entire account and destroying your carefully made plans for longterm, tax-deferred growth. The money could also be available to the beneficiary s creditors, spouse and ex-spouse(s). And there is the risk of court interference at incapacity. If any of this concerns you, consider using a trust. For example, your trust could provide income to your surviving spouse for as long as he or she lives. Then, after your spouse dies, the income could go to someone else. The trust could even provide periodic income to your children or grandchildren, keeping the rest safe from irresponsible spending, spouses and/or creditors. While you are living, the required minimum distributions will still be paid to you over your life expectancy. After you die, the required distributions can be paid to the trust over the life expectancy of the oldest beneficiary of the trust. The trustee can withdraw more money if needed to follow your instructions, but the rest can stay in the account and continue to grow tax-deferred. You can name anyone as trustee, but many people name a bank or trust company, especially if the trust will exist for a long period of time. Are there any disadvantages? You will not be able to provide for your spouse and stretch out the tax-deferred growth beyond your spouse s actual life expectancy. That s because you must use the life expectancy of the oldest beneficiary of the trust which, in this case, would probably be your spouse. Also, many trusts pay income taxes at a higher rate than most individuals, but this only applies to income that stays in the trust. Distributions from your taxdeferred account that are paid to the trust are subject to income taxes and if the money stays in the trust, the higher tax rates would apply. But usually this is not a problem because the trustee has authority to distribute the money to the beneficiaries of the trust, who pay the income taxes at their own rates. Finally, the trust must meet certain IRS requirements, including that it is a valid trust under state law. It is advantageous to create an irrevocable Retirement Benefit Trust, also called a Stand-alone Retirement Trust, and to name this trust as the beneficiary on your beneficiary designation form. Option 3: Trusts Naming a trust as beneficiary will give you maximum control over your tax-deferred money after you die. That s because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when. Option 4: Charity If you are planning to leave an asset to charity after you die, a tax-deferred account can be an excellent one to use. That s because the charity will pay no income taxes when it receives the money, and the account will not be included in your tax Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

13 Panel 6 NOT FOR DISTRIBUTION Panel 7 able estate when you die, reducing the amount your family may have to pay in estate taxes. (More later.) Option 5. Some or All of the Above You don t have to choose just one of these options. You can divide a large IRA into several smaller ones and name a different beneficiary for each one. (If your money is in an employer s plan, you can roll it into an IRA and then split it.) If you name several beneficiaries for one IRA, the oldest one s life expectancy will determine the payout after you die. But with separate IRAs (one for each beneficiary), each life expectancy will be used, providing the maximum stretch out. NOT FOR This is especially important if a charity is involved. It has a life expectancy of zero, so the IRS would consider it the oldest beneficiary. Depending on when you die, this could cause the entire IRA to be paid out in just five years. DISTRIBUTION If you divide your IRA now, you will need to calculate a distribution for each one, but it can be worth the trouble. Under a new rule, your IRA can be divided even after you die. Splitting a large IRA can also save estate taxes. What are estate taxes and why should I care? Estate taxes are different from, and in addition to, income taxes. When you die, your estate must pay estate taxes if its net value (including tax-deferred accounts) is more than the amount exempt at that time. In 2012, the federal exemption is $5,120,000; every dollar over this amount is taxed at 35%. Some states also have their own estate/inheritance tax; your estate could be exempt from federal tax but not from state tax. Estate taxes must be paid in cash, usually within nine months of your death. If money must be withdrawn from a taxdeferred account to pay the estate taxes, the result can be disastrous because income taxes must be paid on the money that is withdrawn to pay the estate taxes. What can I do about estate taxes? You can reduce your taxable estate by giving some assets to your loved ones now, often at discounted values. You can buy life insurance to pay estate taxes at a reduced cost. And, if you are married, make sure you use both estate tax exemptions. You see, everyone is entitled to an estate tax exemption. But many married couples waste one when they leave all their assets to each other. The marital deduction lets you leave your spouse an unlimited amount of assets when you die and pay no estate taxes at that time. But when your spouse dies later, he or she will only be entitled to one exemption. That can cause your family to pay too much in estate taxes. How can splitting my IRA help? Any assets you own, including a tax-deferred account, that you leave to anyone other than your spouse (your children, grandchildren or a trust) can use your exemption. Splitting a large IRA into smaller ones will make this easier to do. What if I m not married? If you are single, naming your beneficiary(ies) will be less complicated because you have just one estate tax exemption and there will be no spousal rollover option to consider. When can I change my beneficiary? You can change your beneficiary at any time while you are living, and the distributions after you die will be paid over that beneficiary s life expectancy (unless they cash out). It is very important to name both primary and contingent beneficiaries while you are living to allow for greater flexibility and clean up after your death. For example, your spouse could disclaim some benefits so a grandchild could inherit. No new beneficiaries can be added after you die (unless your spouse names new ones with a rollover), so make sure you include all appropriate ones. Some employer-sponsored plans (401(k), pension, profit sharing, etc.) have restrictions on beneficiary distribution options. But under a new rule, any beneficiary may now inherit employer plan assets and roll them into an IRA in the name of the decedent, continuing the tax-deferred growth over the beneficiary s own life expectancy. (Some restrictions apply.) If your plan will not let you do what you want, rolling your account into an IRA will usually give you more options. If your money is already in an IRA and the institution will not agree to your wishes, move your IRA to one that will. What about a Roth IRA? If you qualify, you may want to convert some or all of your tax-deferred money into a Roth IRA, although you ll have Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

14 Panel 8 NOT FOR DISTRIBUTION Panel 1 Benefits of a Charitable Remainder Trust Convert an appreciated asset into lifetime income. Reduce your current income taxes with charitable income tax deduction. Pay no capital gains tax when the asset is sold. Reduce or eliminate your estate taxes. Gain protection from creditors for gifted asset. Benefit one or more charities. Receive more income over your lifetime than if you had sold the asset yourself. Leave more to your children or others by using life insurance trust to replace the gifted asset. adviser, CPA, and/or favorite charity. Be sure an attorney experienced in CRTs prepares the documents. n n n Understanding CHARITABLE REMAINDER TRUSTS n n n How to Secure a Lifetime Income, Save Taxes & Benefit a Charity Your Imprint Here Your Imprint Here This publication is designed to provide an accurate general overview with regard to the subject matter covered. It is sold with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Federal laws prohibit copying or reproducing this publication, in part or in its entirely, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications by WealthCounsel, LLC ISBN /12 Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

15 Panel 2 NOT FOR DISTRIBUTION Panel 3 Since 1969, countless families have used charitable remainder trusts (CRTs) to increase their incomes, save taxes and benefit charities. What does a CRT do? A CRT lets you convert a highly appreciated asset like stock or real estate into lifetime income. It reduces your income taxes now and estate taxes when you die. You pay no capital gains tax when the asset is sold. And it lets you help one or more charities that have special meaning to you. NOT FOR How does a CRT work? You transfer an appreciated asset into an irrevocable trust. This removes the asset from your estate, so no estate taxes will be due on it when you die. You also receive an immediate charitable income tax deduction. The trustee then sells the asset at full market value, paying no capital gains tax, and re-invests the proceeds in incomeproducing assets. For the rest of your life, the trust pays you an income. When you die, the remaining trust assets go to the charity(ies) you have chosen. That s why it s called a charitable remainder trust. DISTRIBUTION Charitable Remainder Trust GRANTOR (You) 1 You transfer appreciated 3 Trustee pays you lifetime asset to trust. income. 2 4 TRUSTEE Trustee sells asset, paying no capital gains tax, and re-invests in income-producing assets. When you die, trust assets go to charity(ies) chosen by you. CHARITY A charitable remainder trust lets you convert a highly appreciated asset into lifetime income, without having to pay capital gains or estate taxes, and benefit a favorite charity. Why not sell the asset myself and re-invest? You could, but you would pay more in taxes and there would be less income for you. Let s look at an example. Years ago, Max and Jane Brody (ages 65 and 63) purchased some stock for $100,000. It is now worth $500,000. They would like to sell it and generate some retirement income. If they sell the stock, they would have a gain of $400,000 (current value less cost) and would have to pay $60,000 in federal capital gains tax (15% of $400,000). That would leave them with $440,000. (See chart at right.) If they re-invest and earn a 5% return, that would provide them with $22,000 in annual income. Multiplied by their life expectancy of 26 years, this would give them a total lifetime income (before taxes) of $572,000. Because they still own the assets, there is no protection from creditors and no charitable income tax deduction is available. What happens if they use a CRT? If they transfer the stock to a CRT instead, the Brodys can take an immediate charitable income tax deduction of $90,357. Because they are in a 35% tax bracket, this will reduce their current federal income taxes by $31,625. The trustee will sell the stock for the same amount (see chart at right), but because the trust is exempt from capital gains tax, the full $500,000 is available to re-invest. The same 5% return will produce $25,000 in annual income which, before taxes, will total $650,000 over their lifetimes. That s $78,000 more in income than if the Brodys had sold the stock themselves. And because the assets are in an irrevocable trust, they are protected from creditors. What are my income choices? You can receive a fixed percentage of the trust assets (like the Brodys), in which case your trust would be called a charitable remainder unitrust. With this option, the amount of your annual income will fluctuate, depending on investment performance and the annual value of the trust. The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income will increase as the value of the trust grows. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

16 Panel 4 NOT FOR DISTRIBUTION Panel 5 Comparison of Income After Sale receives it. Instead of lasting for someone s lifetime, the trust can also exist for a set number of years (up to 20). Without CRT With CRT Current Value of Stock $ 500,000 $ 500,000 Capital Gains Tax* - 60,000 0 Balance To Re-Invest $ 440,000 $ 500,000 5% Annual Income $ 22,000 $ 25,000 Total Lifetime Income $ 572,000 $ 650,000 Tax Deduction Benefit** $ 0 $ 31,625 *15% federal capital gains tax only. (State capital gains tax may also apply.) **$90,357 charitable income tax deduction times 35% income tax rate. Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily marketable, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year. Can I receive a fixed income instead? Yes. You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust s performance, your income will not change. This option is usually a good choice at older ages. It doesn t provide protection against inflation like the unitrust does, but some people like the security of being able to count on a definite amount of income each year. It s best to use cash or readily marketable assets to fund an annuity trust. In either (unitrust or annuity trust), the IRS requires that the payout rate stated in the trust cannot be less than 5% or more than 50% of the initial fair market value of the trust s assets. Do I have to take the income now? No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets will have appreciated considerably in value, resulting in more income for you. How is the income tax deduction determined? The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates. (Our example is based on a 3.0% Section 7520 rate.) Generally, the higher the payout rate, the lower the deduction. It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction can reduce your income taxes by 10%, 20%, 30% or even more. What kinds of assets are suitable? The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won t qualify, either, but you might consider paying off the loan.) Cash can also be used. NOT FOR Who should be the trustee? You can be your own trustee. But you must be sure the trust is administered properly otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator. DISTRIBUTION Who can receive income from the trust? Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives. The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees. Before naming a trustee, it s a good idea to interview several and consider their investment performance, ser Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

17 Panel 6 NOT FOR DISTRIBUTION Panel 7 vices and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income. Do I still have some control? Yes. For as long as you live, the trustee you select not the charity controls the assets. Your trustee must follow the instructions you put in your trust. You can retain the right to change the trustee if you become dissatisfied. You can also change the charity (to another qualified charity) without losing the tax advantages. Can I make any other changes? Generally, once an irrevocable trust is signed, you cannot make any other changes. Be sure you understand the entire document and it is exactly what you want before you sign. NOT FOR Sounds great for me. But if I give away the asset, what about my children? If you have a sizeable estate, the asset you place in a CRT may only be a small percentage of your assets, so your children may be well taken care of. However, if you are concerned about replacing the value of this asset for your children, there is an easy way to do so. DISTRIBUTION As the illustration below shows, you can take the Replace Asset with Insurance GRANTOR (You) income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust. The trustee of the insurance trust can then purchase enough life insurance to replace the full value of the asset for your children or other beneficiaries. Why use a life insurance trust? With a trust, the insurance proceeds will not be included in your estate, so you avoid estate taxes. You can keep the proceeds in the trust for years, making periodic distributions to your children and grandchildren. And any proceeds that remain in the trust are protected from irresponsible spending and creditors (even spouses). Life insurance can be an inexpensive way to replace the asset for your children. (Every dollar you spend in premium buys several dollars of insurance.) Insurance proceeds are available immediately, even if you and your spouse both die tomorrow. And, in addition to avoiding estate taxes, the proceeds will be free from probate and income taxes. So what s the catch? There really isn t one. Combining a charitable remainder trust with an irrevocable life insurance trust is a winning formula for everyone you, your children and the charity. You convert an appreciated asset into lifetime income, and because you pay no capital gains tax when the asset is sold, you receive more income than if you had sold it yourself and invested the sales proceeds. You receive an immediate charitable income tax deduction, reducing your current income taxes. And by removing the asset from your estate, you reduce estate taxes that may be due when you die. CHARITABLE REMAINDER TRUST LIFE INSURANCE TRUST With the life insurance trust replacing the full value of the asset, your children receive much more than if you had sold the asset yourself, and paid capital gains and estate taxes. Plus the proceeds are free of income and estate taxes, and probate. CHARITY CHILDREN Using the income tax savings and part of the income you receive from the charitable remainder trust, you can fund an irrevocable life insurance trust to replace the asset for your children. Finally, you will make a substantial gift to a favorite charity. And because the charity knows it will receive the gift at some point in the future, it can plan projects and programs now benefiting even before receiving the gift. Should I seek professional assistance? Yes. If you think a charitable remainder trust would be of value to you and your family, speak with a tax-planning attorney, insurance professional, corporate trustee, investment Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

18 Panel 8 NOT FOR DISTRIBUTION Panel 1 How can I evaluate a corporate trustee? Talk to several. Visit them if you can. Ask how long the trust department has been in business, how many trusts they manage, minimum and average size of trusts they manage (most require a certain amount of assets) and how much experience their people have in the trust business. Compare investment returns, fees (including when and how much the last increase was) and services. Ask to see samples of statements or reports you would receive and see how easy they are to understand. Facts and numbers are important, but so are the people. Do they seem to genuinely care about you and your family? Do they listen and seem to understand your concerns? Can you understand them? How confident are you that they will be there for you and your family when they are needed? n n n Understanding CORPORATE TRUSTEES n n n 7 Reasons To Have A Professional Help You Build, Manage and Protect Your Wealth Your Imprint Here Your Imprint Here This publication is designed to provide an accurate general overview with regard to the subject matter covered. It is sold with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Federal laws prohibit copying or reproducing this publication, in part or in its entirely, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications by WealthCounsel, LLC ISBN /12 Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

19 Panel 2 NOT FOR DISTRIBUTION Panel 3 With people living longer and health care costs continuing to rise, our savings must grow larger and last longer. Deciding where to put your money in an uncertain market with so many investment options from which to choose can be very confusing, and making a wrong decision can be very costly. One option you should not overlook is the bedrock of asset management and personal service the corporate trustee. What is a corporate trustee? A corporate trustee is a bank trust department or trust company. Its employees can help you build, manage and protect your wealth when you put your assets in a trust. A trust is simply a legal document that lets you reduce unnecessary legal fees, save taxes and keep control over your assets while you are living, if you become physically or mentally incapacitated, and after you die. When you set up a trust, you need to name someone (a trustee) to manage the assets your trust controls. While you can choose just about any adult, there are very good reasons why you should consider a corporate trustee. 7 Reasons To Use A Corporate Trustee 1. You ll gain the advantage of years of experience. Because they manage trusts on a daily basis, they are familiar with all kinds of trusts, tax and estate planning strategies, and the legal responsibilities of a trustee. NOT FOR DISTRIBUTION They can manage the assets in your trust now and/or after you die as your trust directs buying and selling assets, paying bills, filing tax returns, maintaining accurate records, and distributing income and assets. Most have experience with all kinds of assets, including stocks and bonds, real estate, farms, closely held businesses, mineral properties, international investments, and collectibles. 2. You ll enjoy the potential of even greater investment returns. Corporate trustees give their full attention to managing trust assets that s their job. And because their staff collectively has more experience and resources than an individual, they often achieve better results. After discussing your financial goals, risk tolerance and longterm objectives with you, they will recommend the best investment strategy for you. Then, depending on how involved you want them to be, they can provide ongoing advice, or even make decisions for you, to make sure your investments stay on track to reach your goals. 3. You ll protect your wealth because corporate trustees are regulated by both state and federal agencies. Also, most courts consider them experts and expect them to meet higher standards than a nonprofessional. 4. You ll receive reliable, professional service. A corporate trustee won t become ill or die, divorce, go on vacation, move away or become distracted by personal concerns or emotions as an individual might. 5. You ll value their objectivity. They will follow your trust instructions objectively and faithfully, something family members are often unable to do. 6. You ll tap their rich sources of advice and referrals. They routinely provide advice on investment, tax, retirement and estate planning issues, and can refer you to attorneys and other qualified professionals as needed. 7. You ll enjoy peace of mind. Knowing you have selected someone with experience and integrity to manage your financial affairs now and/or when you are no longer able to do so yourself can be very reassuring. When would I use a corporate trustee? If you set up an irrevocable trust (like a charitable or life insurance trust), or you plan to make gifts in trust strategies often used to save estate taxes by removing assets now from your taxable estate you will probably need to name someone other than yourself as trustee for tax reasons. A corporate trustee is a natural choice to make sure your irrevocable trust is administered properly. If you set up a revocable living trust to avoid probate when you die and prevent court control of your assets at incapacity you can be your own trustee. Even so, there are many benefits to having a corporate trustee involved. They can assist you in several ways: 1. As Trustee As trustee, a corporate trustee has full responsibility for managing your trust assets according to your instructions. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

20 Panel 4 NOT FOR DISTRIBUTION Panel 5 This would be an excellent choice if you are elderly and have no one you can trust to take care of your financial affairs. You may be widowed, have no children or other trusted relatives living nearby (or don t want to burden them), or you and your spouse may be in declining health. NOT FOR Even if you are capable of managing your own trust, a corporate trustee can be a wise choice. You may not have the time, desire or investment experience to manage your trust yourself. Or perhaps you just feel that someone with more time and experience could do a better job than you. 2. As Co-Trustee If you want to take advantage of a corporate trustee s investment experience but still be involved, you could have one work with you as co-trustee. Developing a working relationship with a corporate trustee now lets them become familiar with your objectives, your trust and your beneficiaries needs and personalities while you are around and able to provide guidance and input. It would also let you see how they would perform in your absence, let you evaluate their investment performance and service, and let you see how comfortable you feel with them overall a kind of trustee test drive. 3. As Investment Agent You could also name a corporate trustee as agent. While a co-trustee has equal responsibility with you (usually both signatures are required to transact business), an agent can have as much responsibility as you wish. DISTRIBUTION You can have an agent manage only a portion of your trust s assets (your stocks and bonds, for example) or just provide you with investment advice, with you making all final investment decisions. Could a Corporate Trustee Help You? Look at These 18 Real-Life Situations If you can relate to any of these situations, you could probably benefit from the services of a corporate trustee: Building Wealth with Professional Asset Management My spouse took care of all our investments. Since he (she) died, I don t know what to do or whom to trust. I don t know where I should invest my money. I m so confused by everything I read. I just received a large inheritance. I ve never had to invest this much money before. I travel a lot now (business or pleasure) and I don t have time to manage my investments like I used to. I recently sold my business (or other assets). Now I just need to figure out how to invest my money. I just received a large settlement from a lawsuit, divorce, etc. Wealth Protection with Retirement/Estate Planning I m retiring soon. I m not sure how I should take distributions from my IRA and other plans. I m a business owner/professional and I m wondering what my options are for retirement plans. I m changing jobs. Should I take a lump sum distribution from my current retirement plan? I want to avoid probate and save estate taxes. Smooth Settling of an Estate I m executor/personal representative of my father s estate (trustee of my father s trust). I don t know what I m supposed to do or how to do it. Peace of Mind at Incapacity I worry about what will happen to me and my money if I become mentally or physically incapacitated. I m concerned about my mother (father). I don t have the time to help her with her finances, and I m worried she might be taken in by some scam. Caring for Loved Ones/Gifts One of my children is not responsible with his own money. I shudder to think what will happen to his inheritance my money after I die. I want my children to be responsible and productive not spoiled or lazy from a large inheritance. I d like to make gifts to my children and grandchildren to save estate taxes. I have a child with special needs. I worry about what will happen to him when something happens to me. I d like to make a large gift to a charity. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

21 Panel 6 NOT FOR DISTRIBUTION Panel 7 4. As Successor Trustee If you decide to be your own trustee (for example, of your revocable living trust), consider naming a corporate trustee as your successor trustee. In this capacity, they will step in and manage your trust for you when you can no longer act due to incapacity or death. Many people like the idea of having a professional take care of the paperwork, tax filings and other final details. Couldn t I name a relative or friend instead? You could, but keep in mind that family and friends are not always a good choice to be involved with your trust. NOT FOR They may be too busy with their own affairs, may reside in a distant area, may not get along with other family members, or may not be responsible or experienced enough to manage the trust assets. An innocent error by a well-meaning but inexperienced relative or friend could negate your careful planning and cost your beneficiaries thousands of dollars. an error administering your trust. But, of course, there is no insurance or bond that will protect you if your assets lose value simply due to a decline in market values. Should everyone use a corporate trustee? No, of course not. But many more people should consider one. Most people are just not aware of the many benefits a corporate trustee can offer them and their families. You need to look objectively at your situation and the type of trust you set up. If you have a modest estate and your trust is fairly simple, you may be fine being your own trustee and having a capable family member step in for you when you can no longer manage your trust yourself. But if your estate is larger, has a variety of assets, includes tax planning, or if you doubt your relatives capabilities or intentions, you should definitely consider a corporate trustee. DISTRIBUTION One option is having a relative (perhaps one or more of your adult children) and a corporate trustee work together. This would give you the professional experience and objectivity of a corporate trustee and the personal involvement of someone who knows you. Do I lose control if I use a corporate trustee? Not if the trust is prepared correctly. With most trusts, you can change your trustee at any time if you aren t satisfied. Even with an irrevocable trust, you or your beneficiaries can have the right to change the corporate trustee. Also, the trustee you select must follow the instructions you put in your trust while you are living, if you become incapacitated, and after you die. That s because a trust is a binding legal contract, and your trustee can be held liable if he or she doesn t follow your instructions. How safe are trust assets? Even if a bank or trust company fails, trust assets are safe. By law, trust assets must be kept separate from all other assets. They cannot be loaned out, mixed with the corporate trustee s own assets or used to satisfy its creditors. Because of these safeguards, trust assets are not insured by the FDIC. You are also protected against fraud, theft (for example, if an employee takes trust assets and disappears), or if they make Are there any disadvantages to using a corporate trustee? Because they must objectively follow the instructions for the trusts they manage, some beneficiaries (especially those who want the money now instead of when the trust states) have found them to be uncooperative. But that may be exactly what you want. One reason why many trusts are set up, and a corporate trustee chosen, is to keep a beneficiary from getting the money until Mom and Dad (or whoever set up the trust) intended. However, if you are concerned about a corporate trustee being too impersonal, you can always name a family member or close friend to act with them as co-trustee. Is a corporate trustee expensive? Most are very reasonable, especially when you compare their fee to the costs of paying others for estate and tax planning advice, for investment management, for preparing tax returns, and for investment trading commissions. A corporate trustee typically provides all these services and more for only a small percentage of the value of the assets they manage for you. (Fees are published, so you can find out what they are.) And because their compensation is based on how much those assets are worth (instead of on how many trades they make for you), a corporate trustee is motivated to help your assets grow. Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

22 Panel 8 NOT FOR DISTRIBUTION Panel 1 Benefits of a Life Insurance Trust n Provides immediate cash to pay estate taxes and other expenses after death. n Reduces estate taxes by removing insurance from your estate. n Inexpensive way to pay estate taxes. n Proceeds avoid probate, and are free from income and estate taxes. n Gives you maximum control over insurance policy and how proceeds are used. n Can provide income to spouse without insurance proceeds being included in spouse s estate. n Prevents court from controlling insurance proceeds if beneficiary is incapacitated. Should I seek professional assistance? Yes. If you think an irrevocable insurance trust would be of value to you and your family, talk with an insurance professional, estate planning attorney, corporate trustee, or CPA who has experience with these trusts. n n n Understanding LIFE INSURANCE TRUSTS n n n How to Reduce or Eliminate Your Estate Tax Cost Your Imprint Here Your Imprint Here This publication is designed to provide an accurate general overview with regard to the subject matter covered. It is sold with the understanding that the authors and publisher are not engaged in rendering legal, accounting or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Federal laws prohibit copying or reproducing this publication, in part or in its entirely, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications by WealthCounsel, LLC ISBN /12 Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC

23 Panel 2 NOT FOR DISTRIBUTION Panel 3 What does an irrevocable life insurance trust do? An irrevocable life insurance trust gives you more control over your insurance policies and the money that is paid from them. It also lets you reduce or even eliminate estate taxes, so more of your estate can go to your loved ones. What are estate taxes? Estate taxes are different from, and in addition to, probate expenses and final income taxes which are due on the income you receive in the year you die. Federal estate taxes are expensive (historically 45%-55%) and they must be paid in cash, usually within nine months after you die. Because few estates have the cash, it has often been necessary to liquidate assets to pay these taxes. But if you plan ahead, estate taxes can be reduced or even eliminated. Who has to pay estate taxes? Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress at that time. In 2011 and 2012, the federal exemption is $5 million (adjusted for inflation in 2012) and the tax rate is 35%. If Congress does not act before the end of 2012, the exemption in 2013 will be $1 million and the top tax rate will be 55%. Some states also have a death or inheritance tax. Year of Death Exempt Amount Top Tax Rate 2011 and $5 million*...35% 2013 and thereafter...$1 million...55% * Adjusted for inflation in 2012 What makes up my net estate? To determine your current net estate, add your assets (see chart at right) then subtract your debts. Insurance policies in which you have any incidents of ownership are included in your taxable estate. This includes policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or can name or change the beneficiary. You can see how life insurance can increase the size of your estate and the amount of estate taxes that must be paid. NOT FOR How does an insurance trust reduce estate taxes? The insurance trust owns your insurance policies for you. Since you don t personally own the insurance or have any incidents of ownership, it will not be included in your estate so your estate taxes are reduced. (There is a three-year rule for existing policies, which is explained later.) Determining Your Taxable Estate $7,000,000 $6,000,000 $5,000,000* $4,000,000 $3,000,000 $2,000,000 Federal Estate Taxes 35%* If, when you die, your net estate (assets less debts) is more than the amount exempt from estate taxes at that time, estate taxes must be paid. *2011 and 2012 federal estate tax exemption and tax rate; 2012 exemption adjusted for inflation With the exemption currently at more than $5 million, you may not need the estate tax savings right now. But it s important to understand how this works, because the exemption may be reduced as soon as 2013 and the value of your net estate may increase substantially by the time you die. Let s say you are married, with a combined net estate of $3 million, $1 million of which is life insurance, and both you and your spouse die when the estate tax exemption is $1 million and the top tax rate is 55%. A tax planning provision in a living trust or a will could protect up to $2 million from estate taxes. But your estates would have to pay $435,000 in estate taxes on the additional $1 million. With an insurance trust, the $1 million in insurance would not be in your estate. That would save your family $435,000 in estate taxes. What if my estate is larger than this? If your estate will still have to pay estate taxes after you transfer your insurance to a trust, you can reduce your estate tax costs by having the trust buy additional life insurance. Here are three very good reasons to do this: 1. If the trust buys the insurance, it will not be included in your estate. So the proceeds, which are not subject to probate or income taxes, will also be free from estate taxes. 2. Insurance proceeds are available right after you die. So your assets will not have to be liquidated to pay estate taxes. 3. Life insurance can be an inexpensive way to pay estate taxes and other expenses (see chart at right). So you can leave more to your loved ones. DISTRIBUTION 0 Federal laws prohibit copying or reproducing this publication in part or in its entirety, in any manner or by any means. The publisher actively polices the misuse and illegal misappropriation of its publications WealthCounsel, LLC