The Universal Planning Tool

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Job Leonard
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1 Trusts: The Universal Planning Tool Presented by Carla Wigen, Sr. Regional Fiduciary Manager Karen Josephson, Sr. Wealth Planner Wells Fargo Private Bank provides financial services and products through Wells Fargo Bank, N.A. and its affiliates. Wells Fargo & Company does not provide tax advice. Please consult your professional tax advisor to determine how this information may apply to your own situation.

2 Agenda I. Trust Basics II. Common Trusts Used in Estate Planning III. Update on Washington Trust Laws 2

3 Trust Basics 3

4 What is a Trust? A trust is created when a person aka Grantor/Trustor/Settlor transfers Property to a Trustee for the benefit of a Beneficiary. Common purposes include Management of assets Avoidance of probate Protection ti from creditors Removing assets from Grantor s taxable estate Making gifts to minors Making charitable gifts 4

5 Revocable vs. Irrevocable Trusts Revocable trust can be amended or terminated by the grantor. Creation does not result in a taxable gift. Typical uses include: management of assets for grantor; avoidance of probate, e.g. revocable living i trustt Irrevocable trust cannot be amended or terminated by the grantor. Generally, transfer of asset to an irrevocable trust will result in a taxable gift. Typically used in estate planning to remove assets from both the probate estate and the taxable estate, e.g. GRAT, ILIT 5

6 Testamentary vs. Non-Testamentary Trust Testamentary Trust a trust that takes effect upon the death of the creator and is generally created under a will, e.g. credit shelter trust. Non-Testamentary Trust a trust that takes effect upon creation, e.g. life insurance trust. 6

7 Trust vs. Power of Attorney Power of Attorney Created during lifetime Created by a Principal, giving authority to an Attorney-in- fact Principal retains ownership of assets Automatically terminates upon death of Principal Relatively easy to create Trust Can take effect during life or upon death Created by a Grantor, giving authority to a Trustee Grantor transfers ownership of assets to the trust t May last beyond life of Grantor More complicated than POA to create 7

8 Trustee Selection Trust may have one or more trustees. Trustee can be an individual or a corporate trustee. Issues to consider in trustee selection: Purpose of trust Size of trust Type of assets in the trust Complexity of administration Situation surrounding beneficiary 8

9 What Size and Type of Assets are Appropriate for Trusts Assets such as retirement accounts may not be transferable without unwanted tax consequences Assets such as closely held business may be more difficult to administer Consider that it may be impractical to administer a trust that is too small or only holds non-financial assets Corporate trustees may have a minimum size and may limit the type of assets they will administer 9

10 How Long May a Trust Last? 29 states have perpetual and long term dynasty trust statutes: Alaska, Arizona, Colorado, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Kentucky, Maine, Maryland, Michigan, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Virginia, Washington, Wisconsin and Wyoming. Consider how long it will be practical to keep trust in existence How many beneficiaries Cost of administration Cultural changes and advances over generations 10

11 Trust Taxation If the trust is a Grantor trust, all income is reported on Grantor s If the trust is a non-grantor trust, the trust reports income on form Married Filing Joint* Trusts and Estate* * As of

12 Common Trusts Used in Estate Planning 12

13 Credit Shelter Trust Illustration Revocable Living i Trust $10 Million First Spouse Dies Credit Shelter Trust $5.25 Million Marital Trust $4.75 Million (1) First Spouse s estate tax exemption amount funds Credit Shelter Trust ($5.25 Million in 2013) (2) Residual estate assets fund Marital Trust Surviving Spouse Dies (3) No federal Estate Tax is due since amount in Credit Shelter Trust is below Surviving Spouse s unused exemption amount ($5.25 Million in 2013) 13

14 Spousal Lifetime Access Trust: Example Key Assumptions Husband s Separate Assets $5,250,000* Growth Rate of 4% Income Rate of 3% 2% of principal distributed to wife annually Wife s death occurs in 25 years Gift to trust Spousal Lifetime Access Trust $5,250,000* 000* Distributions to wife Cumulative principal Distributions of $5,351,605, (in addition to discretionary income) Net to heirs at Wife s death $17,683,788 *$5,250,000 reflects 2013 Federal Estate Tax Exemption 14

15 Irrevocable Life Insurance Trust (ILIT) Illustration (1) Donor(s) make annual exclusion gifts (up to $14,000 per beneficiary in 2013) to the ILIT Donors Irrevocable Life Beneficiaries i i Insurance Trust (2) The trustee of the ILIT uses the gifted funds to (3) Upon Donor(s) death, life insurance acquire life insurance on the Donor(s), naming pays out to the ILIT, which, h in turn, the ILIT as the policy s owner and beneficiary distributes assets to named beneficiaries 15

16 Charitable Lead Trust (CLT) Illustration (Non-Grantor) Donors Charitable Lead Trust (1) Donor(s) gift assets into CLT (no (2) The chosen charity receives current income tax) deduction an income stream from the CLT during trust term Charity (3) Beneficiaries receive the remaining i trust t assets upon end of trust term Beneficiaries 16

17 Pet Trusts: Common Law Did Not Allow Grantor Assets $2,000,000 Gift to trust Pet Trust $2,000,000 Distributions only for benefit of designated animal or animals Net to residuary beneficiaries NO SPIDERS! 17

18 Update on Washington Trust Laws 18

19 Mandatory 60 Day Notice Applies to all trusts formed or becoming irrevocable after 1/1/2012 Trustee must provide: Existence of the trust; Identity; Trustee s s name, address and phone number; and Right to request information 19

20 General Duty to Keep Beneficiaries Informed Applies to all trusts Duty not waive able able Washington safe harbor report 20

21 Disclosures Wells Fargo Wealth Management and the Wealth Planning Center (part of Wells Fargo Private Bank) provide products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. These materials may contain certain assumptions based on information provided by you to Wells Fargo. The information and opinions in this report were prepared by Wells Fargo Wealth Management. Information and opinions have been obtained or derived from sources that we consider reliable but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Wealth Management s opinions as of the date of this report and are for general information purposes only. Wells Fargo Wealth Management does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of you own situation at the time your taxes are prepared. This information is for educational purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation of an offer to buy, or a recommendation of any security. Wells Fargo does not guarantee that the information supplied is complete or timely, undertake to advise you of any change in its opinion, or make any guarantees of future results obtained from its use. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. The allocation mentioned here may be different from your individual allocation due to your unique individual circumstances, but is targeted to be in the allocation ranges for your objective. The asset allocation referenced in this material may fluctuate based on asset values, portfolio decisions and account needs. The asset allocation suggestions referenced in this material do not take the place of a comprehensive financial analysis. Some alternative investments and complementary strategies may be available to pre-qualified investors only. Insurance products are available through insurance subsidiaries of Wells Fargo & Company and underwritten by non-affiliated Insurance Companies. California i Insurance License Number Not available in all states. Real Estate investments carry a certain degree of risk and may not be suitable for all investors. Because of the short-term nature of options, it is likely that the investor will trade them more frequently than stocks or bonds, and that each time an option-related trade is effected, the investor will be charged a commission. Commissions on option transactions generally amount to a higher percentage of the principal than commissions for normal stock trades. Additionally, investors should not buy options unless they are prepared to lose the total amount of premiums and commissions paid. Investors should not sell covered call options unless they are prepared to deliver the related securities at the strike price upon exercise of the option. This communication is not a Covered Opinion as defined by Circular 230 and is limited to the Federal tax issues addressed herein. Additional issues may exist that affect the Federal tax treatment of the transaction. The communication was not intended or written to be used, and cannot be used, or relied on, by the taxpayer, to avoid Federal tax penalties. Investment & Insurance Products: *Not FDIC Insured *No Bank Guarantee *May Lose Value 2013 Wells Fargo Bank, N.A. All rights reserved. Member FDIC. NMLSR ID

Dynasty Trust. For: Aaron Tyler. Presented By: [Licensed user's name appears here]

Dynasty Trust. For: Aaron Tyler. Presented By: [Licensed user's name appears here] Dynasty Trust For: Aaron Tyler Presented By: [Licensed user's name appears here] Preface In the accompanying presentation, you will see the financial data comparing an Irrevocable Non-Dynasty Trust vs.