Trust Basics By Jingang Xu (internal training use for Anna Li’s team only)

A trust is a legal entity that holds the title to property and assets for the benefits of yourself (Revocable living trust) or beneficiaries (Irrevocable trust) What is a trust?

Two Types of Trusts: Revocable Living Trust (or just called “Living Trust”): you can change, even revoke the trust. Irrevocable Trust (Such as “ILIT”): once setup, you cannot change or revoke it.

Parties to a trust: Grantor (also called “Trustor”, “Settlor”) Trustees (including co-trustee and successor trustee) Beneficiaries

Grantor Trust Agreement (Legal documents) Trust Properties and Assets (funding the trust) Trustee manages trust according to the trust agreement Beneficiaries Have the rights to trust properties Under the terms of trust agreement

Trust is the major vehicle for estate planning Other estate planning vehicles: Will Durable Power of Attorney (for Health Care and Finances) Life Insurance (usually owned by trust)

Living Trust Living Trust is always revocable when the grantor is alive. It becomes irrevocable upon the grantor’s death. The major purposes of living trust: 1) To avoid probate 2) To save estate tax by creating a special living trust: AB Trust

Why Avoid Probate? Time: average 6~9 months Cost: may cost 5~9% of the estate value, even higher if the will is invalid or contested Lose privacy: probate (court) documents are public records

A Revocable Living Trust: A contract in writing that states: – while you are alive you do as you wish with the trust asset(you are the trustee while you are alive) – you name a successor Trustee – successor Trustee distributes your assets to your beneficiaries upon your death without court supervision ( avoid probate ). –No tax benefit for this kind of living trust, you pay tax for the trust while you are alive. The trust has no tax ID. If trust asset exceeds estate tax exemption upon your death, estate tax is due (9 months after death)

Estate Tax Exemption & Rate 2006$2 million46% 2007$2 million45% 2008$2 million45% 2009$3.5 million45% 2010No Federal Estate Tax 0% 2011$1 million55% Year: Estate Tax Exemption: Top Estate Tax Rate:

AB (A-B) Trust: double estate tax exemption for a married couple AB trust is created by establishing a living trust with an AB provision. The couple are joint owners of the AB trust. The AB trust (only one trust) remain revocable while both spouses are alive. When the first spouse dies, the trust splits into two trusts: “A” trust and “B” trust. “A” trust contains the surviving spouse’s half of the estate, and it is a revocable living trust totally controlled by the surviving spouse. “B” trust (also called “shelter trust”) contains the deceased spouse’s half of the estate, and it is an irrevocable trust belongs to the beneficiaries named in the trust (typically the couple’s children). Since “B” trust is never considered part of the surviving spouse’s estate, only “A” trust is subject to estate tax when the surviving spouse dies. But if assets in both “A” and “B” trusts are equal or less than the exemption limit, no estate tax for the couple!

An Example of AB Trust Revocable Living Trust ($4 million Asset) (Joint trust by a couple: John and Susan ) “A” Trust“B” Trust When John died in 2006: “A” Trust (revocable) For Susan’s estate: $2 million (Marital Deduction Trust) “B” Trust (irrevocable) For John’s estate: $2 million (Credit Shelter Trust) When Susan died in 2007: Distribution of Trust Assets: $4 million With no estate tax Kid 1Kid 2Kid 3

Irrevocable Life Insurance Trust (ILIT) Why ILIT? Asset protection against law suits and other creditors not only for you, the grantor, but also for your beneficiaries (life insurance itself has some function in asset protection, but not in all states and not to the same extent as ILIT) With properly structured ILIT, proceeds of life insurance can be excluded from the estate of the insured Cost-effective way to pass asset to your beneficiaries (tax benefits of life insurance and gift) ILIT will allow you to control when, how, and why your beneficiaries receive the proceeds of the life insurance

ILIT Basics: Usually, grantor of the ILIT is the insured Grantor funds the ILIT, and the ILIT is the owner of the insurance policy The ILIT is the only beneficiary of the life insurance (why?) The beneficiaries of the ILIT are usually your loved ones: your spouse and your children When the insured (grantor) dies, the proceeds of the life insurance go to the ILIT, and then the beneficiaries of the ILIT will receive benefits according to the terms and conditions of the ILIT legal documents.

ILIT Basics (continued) Trustee of ILIT should be an “independent trustee” to prevent “incidents of ownership” which IRS may consider. Grantor, grantor’s spouse, and certain of the grantor’s relatives should not be the trustee. Professional financial advisor and financial institution (like bank) can be a good trustee. Funding the ILIT should follow the annual gift tax exemption rule (currently $13,000/year). But in order to qualify gift tax exemption, the trustee should send a so- called “Crummey Letter” to the beneficiaries and wait for 30~60 days (the beneficiaries must have the “present interest” of the funding, they can use the money if they want to). If 60 days elapsed and the money is still available, the trustee is then free to use the money to pay the insurance premium.

Procedures to Establish an ILIT: 1)The need for the irrevocable trust is established 2)Consult a qualified estate-planning attorney, design terms of the trust, including naming the beneficiaries of the trust and choosing of both initial and successor trustees. 3)Begin applying for life insurance and do medical examination to find out if the insured is insurable. There is no need to draft a trust if the grantor is not insurable. The insured should not sign anything at this point other than in his or her capacity as insured (WRL has “Cash On Delivery” policy for this purpose, contact , ext for more information) 4)Attorney drafts the irrevocable life insurance trust. 5)Grantor and trustee sign the ILIT agreement (contract). Then, the trustee should apply for a tax ID for the ILIT. 6)Grantor funds the trust, and the trustee send out “Crummey Letter” to the beneficiaries and wait for 30~60 days. 7)Trustee applies for the life insurance and signs the application (the ILIT as insurance owner). 8)The trustee completes the application and pays initial premium.

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