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CHARITABLE REMAINDER TRUSTS

A Charitable Remainder Trust normally is used as a strategy for converting highly appreciated assets into income producing assets, without income tax liability.  The Charitable Remainder Trust is an irrevocable trust with both charitable and non-charitable beneficiaries.

The donor transfers highly appreciated assets into the trust and retains an income interest. Upon expiration of the income interest, the remainder in the trust passes to a qualified charity of the donor’s choice.

If properly structured, the CRT permits the donor to receive income, estate, and/or gift tax advantages. These advantages often provide for a much greater income stream to the income beneficiary than would be available outside the trust.

Unitrust vs. Annuity Trust

There are two types of CRT the Unitrust and the Annuity Trust.  The main difference between the two is the way your annual income, paid to you by the trust, is calculated.

Under the provisions of a Unitrust, the annual payment to you must be a fixed percentage of the market value of a trust’s assets as determined each year or, alternatively, the lesser of 5 percent of such value or the trust’s income.  You can see that there are no guarantees of the specific amount you will receive.  Your payments will depend upon the changing values of the trust property or income from year to year.

Using an Annuity trust, the trust specifies an annual amount to be paid to you.  This guarantees that you will receive a specific amount which you can depend upon every year.

Charitable Remainder Trust – Potential Benefits

  • Eliminate Capital Gains Tax
  • Tax deductible transfers to trust
  • Trust income can be significantly greater than income generated outside trust
  • You choose duration of income from trust
  • Increased retirement income
  • Eliminate estate tax on trust assets
  • Preserve estate for family & heirs through survivorship policy funded with added income
  • Provide charitable bequests to the causes of your choice

Those Who Would Benefit Most From a CRT May Have Some of the Following Characteristics

  • Own highly appreciated assets
  • Would like to reposition such assets
  • Are in a high income tax bracket
  • Are subject to estate tax at death
  • Have philanthropic desires

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

WITHOUT A WILL, THERE’S NO WAY

A will is a legal document that transfers what you own to your beneficiaries upon your death. It also names an executor to carry out the terms of your will and a guardian for your minor children, if you have any.

Your signature and those of two witnesses make your will authentic. Witnesses don’t have to know what the will says, but they must watch you sign it and you must watch them witness it.

Hand-written wills – called holographs – are legal in about half the states, but most wills are typed and follow a standard format.

Who Needs a Will?

The short answer is everyone! However, it’s imperative to make a will as soon as you have any real assets, or get married, and certainly by the time you have children.

What If You Don’t Have a Will?

Without a will, you die intestate. The law of your state then determines what happens to your estate and your minor children. This process, called administration, is governed by the probate court and is notoriously slow, often expensive, and subject to some surprising state laws. It’s estimated than more than two-thirds of Americans die intestate. Do you really want a court deciding vital family matters such as how to divide your estate and custody of your children?

What Should Your Will Include?

Your will should contain several key points in order to be valid. The following list is a start; check with a local estate attorney for a more comprehensive list:

  • Your name and address.
  • A statement that you intend the document to serve as your will.
  • The names of the people and organizations – your beneficiaries – who will share in your estate.
  • The amounts of your estate to go to each beneficiary (usually in percentages rather than dollar amounts.)
  • An executor to oversee the disposition of your estate and trustee(s) to manage any trust(s) you establish.
  • Alternates to provide both executor responsibilities and trustee(s).
  • A guardian to take responsibility for your minor children and possibly a trustee to manage the children’s assets in cooperation with the guardian.
  • Which assets should be used to pay estate taxes, probate fees and final expenses.

What Is A Living Will?

A living will expresses your wishes about being kept alive if you’re terminally ill or seriously injured.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

LIVING TRUSTS: A TOOL FOR THE LIVING

One of the most popular estate planning instruments today is the revocable living trust.

Trusts are used to maintain control and disposition of assets after death, and some can be used to minimize the estate tax impact of property transfers.

The difference between a revocable and irrevocable trust is whether the trust creator can change or terminate the trust. In the revocable trust, the creator can change the terms and conditions of the trust, or even eliminate the trust altogether. An irrevocable trust, on the other hand, cannot be altered once established.

When used and implemented correctly, an irrevocable living trust offers many benefits.

Using a Living Trust for Financial Protection

A revocable living trust provides financial protection in the event you are no longer able to manage your financial affairs yourself. You can be trustee while you are healthy, but if you have a stroke or become otherwise incapacitated, your successor trustee would manage your assets in the trust.

Using a Living Trust for Privacy

Another benefit of revocable living trusts is continued privacy because the instrument will bypass probate. The trust can function like a will, dictating at what age children are to receive trust assets and the percentage shares of the distribution. The trust can be linked to a pour-over will, a short document that names the executor and that determines how taxes, creditors, and final expenses will be paid. The pour-over will directs the executor to gather all assets not included in the trust and pour them over into the trust. Once that happens, the trustee will follow the directions included in the trust. The pour-over will must be filed with the probate court, but because it doesn’t say much, it doesn’t reveal much.

Using a Living Trust to Reduce Probate

Regarding probate, living trusts offer another useful feature — if you own property in a state other than your state of residence, when you die, that property must go through what’s known as an ancillary probate. Many people think it’s worth setting up the trust just to avoid the out-of-state probate hassle, which necessitates hiring a lawyer in that other state.

Using a Living Trust as a Management Tool

The living trust can be used as a tool to manage your property, and can be especially helpful if you become incapacitated because the successor trustee can manage your property, rather than a court-appointed trustee, which takes time. The benefit of having an immediate successor can be especially important if you own a business or other assets that need to be managed seamlessly.

Other Benefits of a Living Trust

Finally, you can include provisions in the trust that preserve the use of your estate and use the gift tax exclusion to set up other trusts that will help reduce estate taxes.

Disadvantages of a Living Trust

There are disadvantages to using a revocable living trust as well. You must re-title assets into the trust name, which entails a lot of paperwork. And although creditors only have a limited time after your death to make claims against your estate while it’s being probated, there is no time limit within which creditors may go after assets in a living trust.

Conclusions

If your goal in using a revocable living trust is only to avoid probate, there are easier ways to accomplish this task. However, the revocable living trust can provide a wide variety of estate planning benefits that are difficult to achieve with any other estate-planning tool.

Trusts can be extremely complex and generally require the aid of an experienced estate-planning attorney. Please contact us for more information on charitable trusts.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

GIFTING STRATEGIES FOR ESTATE PLANNING

The federal government imposes a substantial tax on gifts of money or property that exceed certain levels. Without such a tax, someone with a sizable estate could give away a large portion of his or her property before death and escape death taxes altogether. For this reason, the gift tax acts more or less as a backstop to the estate tax. And yet, few people actually pay a gift tax during their lifetime. A gift program can substantially reduce overall transfer taxes; however, it requires good planning and a commitment to proceed with the gifts.

Advantages of Gift Giving

You may have many reasons for making gifts — for some gift giving has personal motives, for others, tax planning is what motivated them. Most often, you will want your gift-giving program to accomplish both personal and tax motives. A few reasons for considering a gift-giving plan include:

  • Assisting someone in immediate financial need
  • Providing financial security for the recipient
  • Giving the recipient experience in handling money
  • Seeing the recipient enjoy the property
  • Taking advantage of annual exclusion allowance
  • Paying gift tax now to reduce overall taxes later
  • Giving tax advantaged gifts to minors
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

WHAT IS A LIVING WILL?

In the aftermath of the tragic case involving Terri Schiavo, interest in living wills has increased markedly. A living will expresses your wishes about being kept alive if you’re terminally ill or seriously injured.

Other famous Americans have used living wills to retain control over their final medical care through use of a living will and a health care power of attorney. During the final weeks of his life, former President Richard Nixon refused “heroic measures” and received only palliative (comfort-easing) care at his home. Similarly, former First Lady Jacqueline Kennedy Onassis refused life-prolonging medical intervention before her passing.

Perhaps you’ve reflected on your own wishes if you were to face a similar situation. Although no one likes to imagine the possibility of being in such a helpless state, the statistical possibility of such an event remains significant. This is why it’s wise to ensure that your wishes will be respected if you become incapacitated.

Just as a will becomes the governing entity for your estate after you die, a living will can make your wishes clear and legally binding in the event of a devastating illness or injury. A living will is often referred to as a health care power of attorney. In it you state how you should be treated in the event of a terminal disease, severe illness, or tragic accident. By giving such directions when you are healthy, your relatives won’t have to make difficult decisions on your behalf, and you’ll receive the type of care you desire.

Issues you might want to consider addressing include:

  • Organ donation
  • Religious and faith issues
  • Hospital, nursing home, and hospice arrangements
  • Funeral arrangements

To carry out your living will, you’ll need a health care directive, a written statement that expresses how you wish to be treated in advance of any incapacity. Make sure you give precise, comprehensive directions.

You’ll also need a health care proxy, designating a representative to make your health care decisions based on the guidelines you provide in the directive if you are incapacitated or unable to communicate your desires.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

FUNDAMENTAL QUESTIONS ABOUT ESTATE PLANNING

Many people assume estate planning is all about reducing taxes. But it’s also about making sure your assets are distributed according to your wishes both now and after you’re gone. Here are three questions to consider before you begin your estate planning.

1. Who Should Inherit Your Assets?

If you are married, you must consider marital rights before deciding who should inherit your assets. States have different laws designed to protect surviving spouses. If you die without a will or living trust, state law dictates how much passes to your spouse. Even with a will or living trust, if you provide less for your spouse than state law deems appropriate, the law will allow the survivor to receive the greater amount.

Once you’ve considered your spouse’s rights, ask yourself these questions:

  • Should your children share equally in your estate?
  • Do you wish to include grandchildren or others as beneficiaries?
  • Would you like to leave any assets to charity?

2. Which Assets Should Your Survivors Inherit?

You may want to consider special questions when transferring certain types of assets. For example:

  • If you own a business, should the stock pass only to your children who are active in the business?
  • Should you compensate the others with assets of comparable value?
  • If you own rental properties, should all beneficiaries inherit them?
  • Do they all have the ability to manage property?
  • What are each beneficiary’s cash needs?

3. When and How Should They Inherit the Assets?

To determine when and how your beneficiaries should inherit your assets, you need to focus on three factors:

  • The potential age and maturity of the beneficiaries,
  • The size of your estate versus your and your spouse’s need for income during your lifetimes, and
  • The tax implications of your estate plan.

Outright bequests offer simplicity, flexibility and some tax advantages, but you have no control over what the recipient does with the assets once they are transferred. Trusts can be useful when the beneficiaries are young or immature, when your estate is large, and for tax planning reasons. They also can provide the professional asset management capabilities an individual beneficiary lacks.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

SELECTING AN EXECUTOR OR TRUSTEE

Whether you choose a will or a living trust, you also need to select someone to administer the disposition of your estate – an executor or personal representative and, if you have a living trust, a trustee. An individual (such as a family member, a friend or a professional advisor) or an institution (such as a bank or trust company) can serve in these capacities. Many people name an individual and an institution to leverage their collective expertise.

What does the executor or personal representative do? He or she serves after your death and has several major responsibilities, including:

  • Administering your estate and distributing the assets to your beneficiaries.
  • Making certain tax decisions.
  • Paying any estate debts or expenses.
  • Ensuring all life insurance and retirement plan benefits are received.
  • Filing the necessary tax returns and paying the appropriate federal and state taxes.

Whatever your choice, make sure the executor, personal representative or trustee is willing to serve, and consider paying a reasonable fee for the services. The job isn’t easy, and not everyone will want or accept the responsibility. Designate an alternate in case your first choice is unable or unwilling to perform. Naming a spouse, child, or other relative to act as executor is common, and he or she certainly can hire any professional assistance that might be needed.

Finally, make sure the executor, personal representative, or trustee doesn’t have a conflict of interest. For example, think twice about choosing an individual who owns part of your business, a second spouse or children from a prior marriage. A co-owner’s personal goals regarding the business may differ from those of your family, and the desires of a stepparent and stepchildren may conflict.

Selecting a Guardian for Your Children

If you have minor children, perhaps the most important element of your estate plan doesn’t involve your assets. Rather, it involves your children’s guardianship. Of course, the well being of your children is your priority, but there are some financial issues to consider:

  • Will the guardian be capable of managing your children’s assets?
  • Will the guardian be financially strong? If not, consider compensation.
  • Will the guardian’s home accommodate your children?
  • How will the guardian determine your children’s living costs?

If you prefer, you can name separate guardians for your child and his or her assets. Taking the time to name a guardian or guardians now ensures your children will be cared for as you wish if you die while they are still minors.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

ESTATE SETTLEMENT ISSUES

You also should be aware of the other procedures involved in estate settlement. Here is a quick review of some of them. Your attorney, as well as the organizations mentioned, can provide more details.

Transferring Property

When thinking about transferring your property, what probably first comes to mind are large assets, such as stock, real estate and business interests. But you also need to consider more basic assets, including:

  • Safe deposit box contents. In most states, the bank seals the box as soon as it learns of the death and opens it only in the presence of the estate’s personal representative.
  • Savings bonds. The surviving spouse can immediately cash in jointly owned E bonds. To cash in H and E bonds registered in the deceased’s name but payable on death to the surviving spouse, they must be sent to the Federal Reserve.

Receiving Benefits

The surviving spouse or other beneficiaries may be eligible for any of the following:

  • Social Security benefits. For the surviving spouse to qualify, the deceased must have been age 60 or older or their children must be under age 16. Disabled spouses can usually collect at an earlier age. Surviving children can also get benefits.
  • Employee benefits. The deceased may have insurance, back pay, unused vacation pay, and pension funds to which the surviving spouse or beneficiaries are entitled. The employer will have the specifics.
  • Insurance they may not know about. Many organizations provide life insurance as part of the membership fee. They should be able to provide information.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

DEFERRING COMPENSATION

In addition to providing qualified plans to employees, many business owners implement nonqualified alternatives in order to supplement retirement benefits. These selective benefit plans are generally offered to key employees and owners. One popular nonqualified benefit is deferred compensation.

Basically, nonqualified deferred compensation refers to an arrangement between an employer and an employee in which compensation for current services is postponed until some future date or the occurrence of a future event. The effect is to postpone taxation for the employee until compensation is received – usually at retirement or disability.

Types of Deferred Compensation

Deferred compensation plans can be categorized several different ways. Plans can be:

  • Funded or unfunded.
  • Forfeitable or nonforfeitable.
  • Defined benefit or money purchase.
  • They can also provide one or a combination of death benefits, disability benefits and retirement benefits.

Funded plans generally involve a trust fund or escrow account where the employer transfers money at a later date for its “promise to pay” deferred compensation. These are not very popular as the participant may be deemed to have “constructive receipt” of such funds and therefore inherits a current tax liability when funded.

IRS Revenue Ruling 60-31, 1960-2 CB 174, states that an employee’s right to receive deferred compensation, backed during the deferral period solely by an employer’s “naked promise” to pay, produces no currently taxable income for the employee. A deferred compensation plan is not regarded as funded merely because the corporation purchased and owns a life insurance policy or annuity contract to make certain that funds will be available when needed.

Rabbi Trusts

One of the problems with a typical unfunded deferred compensation plan is that the employee has no guarantee that future payments will be made. If the employer defaults in making promised payments, becomes insolvent, or files bankruptcy, the employee simply becomes a general creditor waiting in line with all the other creditors hoping to recoup some of their receivables.

The rabbi trust protects an executive from an employer’s future unwillingness or inability to pay promised benefits while retaining the benefits of deferred income taxation. The IRS has stated in a series of private letter rulings that an irrevocable trust or an escrow account can be established to fund a deferred compensation agreement as long as the assets placed into the rabbi trust remain subject to the claims of general creditors. If this condition is met, the employee will not be deemed to have “constructive receipt” of the assets, and, therefore, will not have received a current economic benefit. Hence, the employee will not be required to pay taxes until the payments are made at a future date.

The rabbi trust gives the employee security in knowing that the employer is, in fact, setting aside money to fulfill its obligation under a deferred compensation agreement.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

The death of a major shareholder in a closely held corporation can seriously interrupt the continuity and profitability of the business. Surviving shareholders must struggle with how to continue the company as a profitable business with the loss of a key player. Heirs must concern themselves with how to replace the income that the shareholder had earned and how to extract their inherited portion of the company value.

To reduce potential areas of conflict and realize a smooth transition, company owners should enter into an agreement while the parties are still living. This is called a buy-sell agreement. Stock purchase plans are generally arrangements through which shareholders agree to sell their stock interests in the event of specific triggering events such as death, disability, or retirement.

Plan Types

Stock purchase plans are generally classified into three categories: stock redemption plans, cross purchase plans, and hybrid plans.

Under a stock redemption plan, the corporation agrees to purchase all or part of the stock interest of a shareholder. There are three approaches to stock redemptions – full redemptions, partial redemptions, and Section 303 redemptions.

In a cross purchase agreement, the remaining shareholders buy the stock interest of a single shareholder. They can either distribute the shares proportionally to what they had before the triggering event occurred or non-proportionally according to what is outlined in the buy-sell agreement.

A hybrid plan, or wait-and-see approach, gives the corporation the first chance to buy. If the corporation does not buy in within a specified time frame (for example, 90 days), the other stockholders have the option to buy. If that option is not exercised, then the corporation must buy the shares.

Factors to Consider

Many factors need to be considered when determining the best type of stock purchase plan to implement, cost factors, psychological factors, ease of administration, tax implications, and transfer for value rules to name a few. You should seek the advice of financial and legal counsel to help implement your plan.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.