Revocable Living Trust Tax

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                                                                          First Merit Bank, N.A.
                                                                             Trust Company


Revocable living trusts are increasingly popular in estate planning. With them, titles to real estate, securities and other
assets are placed in a trust while the owner is still alive. The plan's major focus is to outline instructions for managing
the individual's assets during his or her lifetime and how to distribute them after death. When your assets are placed in
the trust, they are under control of the trustee. However, don't let this frighten you. You may choose to be your own
trustee with our bank named as successor trustee, or you may want to name our bank immediately -- whichever you


Revocable living trusts can help you avoid probate, obtain favorable estate tax and income tax results, provide for the
management of assets and for the distribution or retention in trust of assets at death.


With a will, your estate must be settled in probate court where attorney and executor fees can add up; delays are likely
and the proceedings are all a matter of public record. On the other hand, a living trust is settled out of court with a
trustee distributing assets according to your pre-determined plan. This process is almost always faster, less expensive
and with more respect to individual privacy. Your trust may also own out-of-state real estate, thus avoiding the
expense         of      filing      an       ancillary      administration      (out       of      state       probate).

 The majority of husband/wife living trusts are established to be divided into two sub-trusts at the death of a
spouse. One is called the "A" or marital trust and the other are called the "B" or residuary trust. At the death of a
spouse, the two trusts are funded according to a formula to allow the maximum amount to pass tax-free into the
"B" trust. This amount currently can be as high as $650,000. The surviving spouse may be able to receive
principal from both the "A" and "B" trusts, with specified restrictions, while also receiving income from the
assets. At the death of the sole surviving spouse, the property in the "B" trust passes tax-free to named
beneficiaries, while the assets in trust "A" will not be subject to tax if they don't exceed $650,000. So, with
careful planning, as much as $1,300,000 can pass tax-free to children and other beneficiaries. Without the "A"
and "B" trust plan, beneficiaries would owe $200,000+ in federal taxes on a $1,300,000 estate. As previously
referenced, the amount of property exempt from Federal Estate Tax is $650,000. Based upon legislation passed
in 1997 this amount will be raised during the next several years until the exemption reaches $1 million per
individual in 2006, thus allowing $2,000,000 to be exempted from taxation with proper trust planning.

                                          INCOME TAX SAVINGS

 Frequently individuals wonder if there are "income tax savings" with a Revocable Living Trust. It's important
to realize that while the Grantor (the person creating the trust) is living, taxable events, such as the sale of stock
at a gain, will be "passed through" the trust and taxed personally to the Grantor. This effectively means that
there are no positive or negative income effects while the Grantor is living.

 At the death of the Grantor, property within the trust, or property held in the individual's name, will receive a
"stepped up" basis for income tax purposes. The "stepped up" basis is determined by the fair market value of the
assets on the date of the death of the Grantor. Any gain in the value of an asset between its time of purchase and
the application of the "stepped up basis" will avoid taxation. Income tax will be due only on any subsequent
increase in value between the "date of the death" (stepped up value) and its sales price.

 An area where the trust may significantly help with income tax planning would occur after the death of the
Grantor. The trust could be directed to "sprinkle" income to a class of beneficiaries. This could include a spouse,
children and grandchildren. If the spouse is in a high tax bracket and doesn't need the income, the trustee could
pay it to the children and/or grandchildren who are in a lower tax bracket, thus saving tax dollars for the family


 One of the main benefits of placing assets into a living trust is to avoid court supervised guardianships should
the parties become unable to manage their own financial affairs. For example, if a home or stock is in joint
tenancy outside of a trust, a spouse cannot sell it should the other spouse become incompetent. Instead, they
would have to petition the court to name them as a guardian and then keep copious records, which have to be
produced to the court annually. The living trust can avoid these problems. Since title to assets belongs to the
trustee, guardianship proceedings are not necessary and assets can be managed without inconvenience. Because
you may wish to act as your own trustee, you can provide for a successor in the event of your incapacity

                                     MANAGEMENT OF ASSETS

 One of the primary advantages of naming a corporate trustee is the assistance you will receive with your
investments. Normally an administrator and portfolio manage will work with you, or your beneficiaries, to
determine short, intermediate and long-term financial needs. Whether the concern is long-term growth,
immediate income or a balance of these two, you or your family will receive recommendations based on your
particular circumstances. The trustee will then create an investment portfolio tailored to your needs. This asset
management is provided for a modest annual fee (usually 1% or less of the assets under management) rather
than sales commissions or charges on securities and mutual funds. Therefore, the client is assured of objectivity
and unbiased judgment.

                                 CONTINUOUS FLOW OF ASSETS

 Another benefit of the living trust is that when you die, the trust keeps on working without the inconvenience
and delay you would find in probate. For example, should you die and your trust provides for income to your
spouse, he/she can expect to be paid without delay. This is definitely not the case with probate.


 Without a living trust, when you die anyone can go to court and find out what assets are in probate. So details
about beneficiaries or the estate enter the public record. As you might expect, this may not always be
advantageous to the deceased party or his/her family.


Trusts can be contested, but not as easily as a will. You don't even need a lawyer to contest a will. The usual
grounds for contesting a will are undue influence or mental incompetence. This is more difficult to prove when
you have a trust in existence for a long period of time, which has been operating under the influence of the
Grantor. To contest a living trust, the person must hire a lawyer to initiate a civil suit. However, trust assets are
normally not frozen, because of the legal action and will continue to be managed and distributed according to the
plan, pending the outcome of any litigation.

                                      INCOME TAX DEDUCTIONS

Currently, you can take the costs of creating a living trust as an income tax deduction if you itemize. The same is
not true when creating a will. In addition, all trust administration expenses except those attributable to any tax-
exempt income, are also deductible to the extent that they exceed the 2% miscellaneous business expense


Everything in your estate needn't be in your living trust in order for it to be properly managed when you die. A
properly drafted will, along with properly designated life insurance, pension plan and profit sharing forms will,
in effect, "pour over" all assets into your trust for centralized control and distribution. Without the trust, your
assets could be distributed piece by piece, which could cause delays and inequities. For example, if the child you
name as the beneficiary of your pension plan dies within a short time of your death, the funds could be
distributed to their spouse, even though your intent was to care for your grandchildren. To prevent this, you
might name the trust beneficiary of your pension plan, because of its stipulations that your child must survive
you for a period of time before assets are distributed. Because of the complexity of income, estate, and gift tax
law it's extremely important that issues such as these be carefully reviewed.


With a traditional will, state law may prohibit you from choosing certain people to administer your will in
probate. However, with a living trust, you can designate almost any corporation or person as trustee, regardless
of their state of incorporation or residency.


For most people, the advantages of living trusts far outweigh the disadvantages. Some things to consider, however,
include the problem of transferring titles to homes and other property, bank accounts, securities, businesses and other
investments into the name of the trust. The trust will have to file a separate income tax each year if someone other than
the Grantor is serving as trustee. The trustee will also be entitled to compensation. Legal fees to create the trust,
although normally modest, are another consideration.


To avoid probate, it is essential that you understand the rules that apply to transferring assets. The trustee can only
manage assets, which have been transferred to it. If you die and assets have not been placed in the trust, they will then
go through the probate process. Below is an overview of the most common assets transferred to revocable living


If a corporate trustee is used, they will assist you with the necessary documentation to transfer the assets into the trust.
This will include obtaining the tax cost of your securities, as most corporate trustees will provide a tax cost tracking
service to you. This becomes extremely important if your stocks have had splits and/or stock dividends, or if your
mutual funds have had capital gains distributions.

If the trustee is an individual (where no bank is involved), the most common way to transfer securities is to place them
in the name of the trustee as trustee of the specific trust (i.e. John Doe, Trustee of the Doe Revocable Trust dated
January 2, 1998). Registration and deregistration of securities by this method is rather simple, but you may encounter
transfer delays while certain conditions of the broker are being met.

Another alternative, if you are your own trustee, is a bank custody account. You, as trustee, transfer assets to a bank,
which then holds them in a special custody account. The bank then processes your securities and passes the dividends
or interest to you as trustee. Because the bank holds the securities, there are not undue delays with the sale or transfer,
as discussed earlier. If you have unregistered securities (those in bearer form), you should encounter no transfer or
registration problems.
                                                  REAL ESTATE

Transfer of these assets leads to many of the same problems encountered in entrusting securities. Reason being -- the
trust agreement defines the trustee's power to deal with the real estate. In most cases your lawyer will prepare a deed,
which transfers the property from you personally to your trust.

Out-of-state realty can be complicated because oftentimes a corporate trustee (bank) or successor trustee from the
grantor's state of residence has no power to act in the state where the real estate is located. This may require the use of
a nominee partnership (or ancillary trustee), which can be created by the grantor or by the grantor's attorney.

If you have any interests in real estate that don't constitute absolute ownership, such as a land contract, vendor's or
vendee's interest or a lessee's interest, you may consider assigning these interests to the trust.
                                               BANK ACCOUNTS

The best way to fund bank accounts through a living trust is to register the account in the name of the trustee (John
Doe, Trustee of the John Doe Living Trust, dated January 2, 1998). This information should be on the registration card
held by the banking institution. In addition, any checkbooks, pass cards, etc. should reflect the trustee status. In cases
where there is more than one trustee, all names should appear so that all signatures are not required to transact

                                              LIFE INSURANCE

In most cases, insurance on a grantor's life is made payable to the trustee. The grantor needs to make sure that the
beneficiary of the life insurance is the trust.

                                                SERIES E BONDS

To transfer Series E bonds to a living trust, you need to apply to the Bureau of Public Debt or Federal Reserve Bank
on FORM PD 1851. As a result, all bonds will be re-issued in the name of the trustee and will reflect the original date
of issue. Consequently, you will not incur any new income tax consequences.

                                          RETIREMENT BENEFITS

You may want to transfer the guaranteed portion of your retirement plan, as opposed to benefits that terminate at your
death, to the trustee in the same manner as life insurance. This issue must be carefully reviewed because of potential
income tax consequences.


When the grantor of the trust is not the trustee, an identifying number is required for income tax purposes. Known as
an employer identification number (EN, it performs the same function for the trust as a Social Security number does
for an individual. The number will also be used when filing fiduciary income tax returns for the trust. The bank being
named trustee, or becoming a successor trustee under the terms of a self-trusted trust, will normally apply for the EIN
and handle all paperwork associated with this process.

                                     ADMINISTERING THE TRUST

The trustee is the legal owner of all trusts assets. A properly working trust agreement makes sure that all assets are
managed and disposed according to the desire of the trust's grantor. By its very nature, a revocable living trust gives
the owner the right to amend or revoke any or all of the terms, including the naming or replacing of trustees. Although
these conditions provide for maximum flexibility over the control of assets, people who use living trusts must meet
certain obligations.

                                              RECORD KEEPING

There is a required level of maintenance with all living trusts. The trustee is responsible for keeping accurate records
with regard to: income received, income paid out, additions to principal, deductions from principal, principal on hand
and changes in trust investments. All transactions must be fully documented, preferably at the time when the trust is
established. After the death of a grantor, oftentimes it is near to impossible to gather certain information needed for
the proper administration of the trust. Where there are successor trustees, accurate and up-to-date records are even
more important, should the assets pass from trustee-to-trustee whose capabilities include tax lot accounting in
securities, asset summary statements, and transaction statements that detail all activities within an account.

                                                  TAX RETURNS

If the trustee is other than the grantor, the trustee must file appropriate federal income tax return forms. Normally, a
corporate trustee will prepare the appropriate trust tax returns for your personal trust advisor.

                                   ADD IT UP -- A REVOCABLE LIVING TRUST
                                           MAY BE RIGHT FOR YOU

This document has attempted to explain the advantages and disadvantages of revocable living trusts. While the main
purpose of a trust is to gain maximum control over assets without probate or unnecessary taxation, there may be other
advantages or disadvantages encountered on an individual basis. For further information, please contact your attorney
or the FirstMerit Trust Division nearest you.

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