Funding Options. Life Insurance:

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1 Living Trusts There are several disadvantages of wills. Wills go through probate and probate can be expensive. It can cause lengthy delays in the distribution of property to your heirs. Your will is open to the public and offers no privacy. Fortunately, each of these problems can be eliminated through the creation of a revocable living trust. A living trust is a legal document that allows you to hold your property as trustee and use it for your own benefit. You control the specific terms of your living trust. When you are the trust maker, trustee, and beneficiary of your own living trust you can do anything you wish with the assets held by your living trust. It is important that you fund your trust during your lifetime. A living trust is a revocable trust. The trust maker retains the right to alter the trust, amend it, or revoke it. You control all of your property all of the time. Generally, establishing a living trust will not require an additional income tax return. There are not additional income or real estate taxes. There are no gift tax consequences with a living trust. The transfer of property into the trust is not a gift because the trust maker retains the right to revoke it. There are no estate tax benefits (unless the living trust includes A-B Trust provisions). Since a living trust is revocable, all property held by the trust is included in the trust maker s estate at death for purposes of calculating federal estate tax liability. The advantages of a living trust also include streamlining the administration of your estate. Although you may initially appoint yourself as trustee, you can plan for successor trustees in the event of your disability or death. Through a living trust you can also control the timing of the distributions to your heirs. You may wish to distribute the estate to the heirs over a period of time. You may even wish to add creditor protection to protect your children and grandchildren from losing the inheritance to divorce and protect them from gold diggers. Assets held in a living trust are not considered part of the trust maker s probate estate. You generally avoid time delays, publicity, probate administration fees including attorney fees, court cost, appraiser fees, filing fees, bond premiums and executor fees. does not practice law. We strongly urge you to seek the advise of a knowledgeable attorney

2 An A-B Trust is usually included in a Revocable Living Trust. It provides a surviving spouse access to the family s accumulated wealth and minimizes the federal estate tax bills when the estate transfers to the heirs. The A-B Trust accomplishes these goals by using the spouses lifetime unified transfer credits and takes advantage of the unlimited marital tax deduction. This provides for tax free transfers between husband and wife, There are two methods to create an A-B Trust; a living trust and a testamentary trust. If the trust makers (husband and wife) create an A-B Trust as part of their living trust, the B Trust will not come into play until the first spouse s death. If they create a testamentary A-B Trust, they do so by using their wills. It is best to implement an A-B Trust through a living trust because assets held by a living trust are not considered part of the probate estate. They are not subject to probate administration fees. The A-B Trust is actually two trusts. The B Trust is designed to hold an amount equal to one spouse s lifetime exemption, which is currently $3,500,000 (for 2009). The A Trust is created to hold the remaining estate assets. Upon the death of the first spouse the A Trust assets are transferred to the surviving spouse. This is done through the unlimited marital deduction. A-B Trusts An A-B Trust is usually included in a Revocable Living Trust. It provides a surviving spouse access to the family s accumulated wealth and minimizes the federal estate tax bills when the estate transfers to the heirs. The A-B Trust accomplishes these goals by using the spouses lifetime unified transfer credits and takes advantage of the unlimited marital tax deduction. This provides for tax-free transfers between husband and wife. There are two methods to create an A-B Trust; a living trust and a testamentary trust. If the trust makers (husband and wife) create an A-B Trust as part of their living trust, the B Trust will not come into play until the first spouse s death. If they create a testamentary A-B Trust, they do so by using their wills. It is best to implement an A-B Trust through a living trust because assets held by a living trust are not considered part of the probate estate. They are not subject to probate administration fees. The A-B Trust is actually two trusts. The B Trust is designed to hold an amount equal to one spouse s lifetime exemption, which is currently $$3,500,000 (for 2009). The A Trust is created to hold the remaining estate assets. Upon the death of the first spouse the A Trust assets are transferred to the surviving spouse. This is done through the unlimited marital deduction. does not practice law. We strongly urge you to seek the advise of a knowledgeable attorney

3 The surviving spouse may have complete control and access to the principal and income of the A Trust. The surviving spouse also has access to income from the B Trust. However, his or her right to invade the B Trust principal includes the ability to withdraw the greater of 5% of the trust principal or $5,000 each year. It also entitles him/her to use the principal for health, education, maintenance, and support. The surviving spouse s limited to access to the B Trust assets prevents it s inclusion in his or her estate at death. The B Trust assets are seen as passing from the first spouse directly to the children (or other designated heirs), bypassing the surviving spouse s estate. The first spouse s lifetime unified transfer credit is used to shelter the B Trust assets from estate tax. The surviving spouse s lifetime unified transfer credit remains available to shelter assets held by the A Trust. Each spouse can shelter up to $3,500,000 (for 2009)in assets from estate taxes, for a total of $7,000,000 unlimited marital deduction is used to transfer assets to the A Trust for the benefit of the surviving spouse. This will ensure that no estate taxes are paid at the time of the first spouse s death. Without the A-B Trust arrangement, all of the assets belonging to the first spouse could be transferred to the surviving spouse by way of the unlimited marital deduction. If the first spouse does not implement his/her unified transfer credit, it is lost. At the time of the surviving spouse s death his/her estate will contain all of the assets accumulated during both spouse s lifetimes. Only one unified transfer credit will be available to shelter a maximum of $3,500,000 (for 2009) in assets from estate tax. An A-B Trust can save your family over $1,500,000 (for 2009) in federal estate tax. Funding Options Life Insurance: Cash-rich life insurance is the ideal funding vehicle for all versions of a Revocable Living Trust. Life insurance is self-completing, which means that your funding objectives are achieved immediately upon the death of the insured. Both individual life insurance and second-to-die life insurance can be used in funding a Revocable Living Trust. When using life insurance to fund a Revocable Living Trust, it is paramount that cashrich life insurance be used (no term insurance) in order to avoid any loss of liquidity. Life insurance is one of the favored investment vehicles for a Revocable Living Trust. It is used by Fortune 500 companies to finance their deferred compensation plans. Life insurance has a self-completion feature and outstanding income tax advantages. does not practice law. We strongly urge you to seek the advise of a knowledgeable attorney

4 Following is a list of the income tax advantages: The death benefit is 100% income tax free. The accumulation of the cash value, or investment account, is also income tax free. All withdrawals, up to the amount of the total premium paid, are income tax free. Policy loans can be income tax free. The A Trust or Marital Trust of an A-B Trust: An annuity is an ideal investment for the A or Marital Trust of you re a-b Trust because the money grows income tax deferred. When you are ready to receive income, the principal and interest can be withdrawn on a tax-favored basis. This is called annuitization. Annuities are meant to be annuitized at some point. If you die with an annuity in your estate (either the second spouse dies or there is not spouse) it does not qualify for a stepped up cost basis. It will be subject to income tax on the gain over the original cost. It is therefore a good idea to draw down the annuity after the first spouse has died. The feature makes the annuity an excellent investment for the A Trust while utilizing the shrinking trust principle. Note the annuities should never be used in a irrevocable trust. In the irrevocable trust, the owner of the annuity is considered a non-natural person. This causes the investment gains to lose their tax deferred status. The Shrinking Trust Principal The surviving spouse has the right to spend the income from the A and B Trusts. In larger estates we strongly recommend that he/she exhaust the income and principal of the A Trust before using the B Trust assets. The larger the pool of A Trust assets remaining after the surviving spouse s death, the greater the estate tax paid. The surviving spouse should shrink the A Trust assets before using the B Trust assets, which will pass estate tax free. The B Trust assets will appreciate outside of both spouses estates. Investments, which are likely to show a significant appreciation, are appropriate B Trust assets. does not practice law. We strongly urge you to seek the advise of a knowledgeable attorney

5 The B Trust assets will be subject will be subject to the highest income tax rates. The best way to address this problem is by funding the B Trust with municipal bonds, or any other investment that yields tax free income. A cash rich life insurance policy is a ideal funding vehicle for a B Trust. The death benefit is paid to the beneficiary income tas free. Cash rich life insurance policies are available with either a fixed return, or variable return produced by mutual fund investments. Like and annuity, the cash values of a cash rich life insurance policy grow tax deferred. The B Trust will p ay income tax on the growth. A cash rich life insurance policy can legally be funded with just one premium payment. The cash values and the death benefit grow substantially faster. This offers a tremendous return for the ultimate beneficiaries of the B Trust your children. The QTIP Trust The surviving spouse also has the right to determine who will inherit the assets remaining in the A Trust after his/her death. This may create difficulties when the surviving spouse remarries and there are children from the first marriage. To address this concern, it is possible to create a third trust, known as the QTIP Trust. The QTIP Trust can exist with, or replace the A Trust. Like the A trust, the QTIP Trust allows the surviving spouse complete access to the trust income. Like the B Trust, the surviving spouse s access to the QTIP Trust principal is subject to exhaustion of the A Trust and limited by an ascertainable standard provision. Unlike the A Trust, the QTIP Trust can guarantee that any assets remaining after the surviving spouse s death will be left to the children from the first marriage. Summary A Revocable Living Trust with A-B provisions is a necessity if husband and wife wish to: Avoid probate fees, attorney fees, court costs, appraiser fees, filing fees, bond premiums, and executor fees. Eliminate or reduce federal estate taxes (death taxes). Avoid time delays at death. Avoid publicity. Allow the surviving spouse full enjoyment of the family assets. Provide creditor protection for your children and grandchildren. does not practice law. We strongly urge you to seek the advise of a knowledgeable attorney