Investment Review and Outlook - by Matthew C. Kelman, Vice President
The beginning of the second quarter of 2021 saw a continuation of the broad trends that exemplified the first three months of the year, before the emergence of the Delta variant of the novel coronavirus appeared, putting into doubt some of the optimism of a return to normal that permeated the financial markets.
We understand this can be a busy and hectic time, and we standby ready to assist you. Below is a rough timeline as to when you can expect to receive your tax documents from Exchange Bank:
- 1099 Tax Information Statement (for agency accounts and tax reserves): The IRS deadline to provide Form 1099-DIOB is February 15, with an option to extend to March 15. Due to delays at the fund level and complex reporting requirements, we expect to mail the majority of our 1099s by late February with the balance to be mailed in early March.
- Form 1099-R & 5498 (for retirement accounts): If you’ve received a distribution from your retirement account, your 1099-R will be issued on or before the January 31 deadline. If a contribution was made to your IRA, your Form 5498 will be issued on or before the deadline of May 31.
- Form K-1 and Grantor Letters (for trusts): These forms are a component of each trust’s fiduciary income tax return and carry the same filing deadline that you have as an individual (April 15). You should expect to receive your K-1/Grantor Letter by mid to late March, with a few exceptions to be issued in early April.
We will make every effort to expedite our tax reporting documents, in hopes for a smooth and easy tax season for all. If you haven’t received your tax documents within the time periods specified above, feel free to contact your account officer for a status update. And always, please let us know if you have any questions or if there is anything we can do to help.
~ Your Trust and Investment Management Team
By Emily Menjou, VP/Personal Trust Fiduciary Manager
As residents of beautiful California, we are presented with countless benefits from our great state – beaches, mountains, vineyards, and the California state of mind, to name a few. With these benefits, we must also be aware of the risks associated with our geographic location.
It seems Californians have always been aware of the potential for a major earthquake, and many think the “big one” is coming in just matter of time. In addition, we are now faced with the unfortunate reality that California is prone to wildfires. With Mother Nature’s unpredictable tendencies, all we can do is be prepared.
Websites like www.ready.gov and www.redcross.org provide valuable information for family plans and supply kits in the event of an emergency. Taking preparedness one step further, below are 10 suggestions to achieve preparedness for your estate plan:
- Review your estate plan to ensure it meets your current wishes. Make an appointment with your estate planning attorney for changes.
- Get organized. Compile list of financial assets, professional advisors and insurance providers.
- Provide copies of your current estate planning documents and list of assets to your successor trustee or executor.
- Create an inventory of your assets and liabilities and update it once a year.
- Locate your life insurance policies and secure them with other critical documents.
- Ensure beneficiary designations are up-to-date for your retirement accounts, life insurance policies and annuities.
- If you receive your financial statements electronically, consider creating a password file so your representatives can access your information.
- Keep an up-to-date written contact list for key individuals including beneficiaries, family and friends.
- If you’ve appointed a healthcare agent or financial power of attorney, make sure that the concerned individuals have copies of these documents.
- Keep a copy of critical documents somewhere that can likely be accessed outside of a disaster zone. Consider a safe, safety deposit box, or secure cloud storage.
The best day to get prepared is today, as we never know what tomorrow will hold. As a parting thought, it is an honor to live in a community that cares so much about one another. Please let us know if there is anything that we, at Exchange Bank, can do to help.
By Emily Menjou, VP/Personal Trust Fiduciary Manager
As each tax season comes and goes, I’m reminded that many clients and beneficiaries are unclear on the income tax implications associated with income earned in their trusts, and more specifically, who pays the tax? The question is straightforward, but the answer depends on a variety of factors. For example, is the trust a grantor trust or a non-grantor trust? Is income required to be distributed, or is it discretionary? Is income currently being distributed?
The IRS generally defines a grantor trust as any trust “over which the grantor or other owner retains the power to control or direct the trust’s income or assets.” The grantor is the person who created and funded the trust, and often serves as trustee during his or he own lifetime with the ability to control the trust’s income and assets. Revocable or living trusts are common forms of a grantor trust.
The powers retained by the grantor to control or direct the trust assets result in ownership for income tax purposes. Therefore, any income or deduction earned by the trust will be taxed on the grantor’s individual income tax return, subject to applicable individual income tax rates. If the grantor is acting as his or her own trustee, the trust need not file a separate return as the trust’s income can be reported under the grantor’s social security number. In cases where there is an independent trustee, the trustee will typically provide the grantor with a Grantor Letter – a tax reporting document which passes income and deductions through to the grantor’s individual returns.
Any trust that is not a grantor trust is classified as a “non-grantor” trust. A trust established as a non-grantor trust is itself a taxable entity, requiring a separate income tax return to report income from assets which are owned by the trust. Most irrevocable trusts are non-grantor trusts.
In a typical scenario, the trust is required to pay income tax at the trust level for income which is retained within the trust. If the trust requires that net income be distributed to beneficiaries, the income is generally passed through to the beneficiary for tax purposes, regardless of whether it is actually distributed. For a discretionary trust where income is not required to be distributed, income flows to the beneficiary’s tax level to the extent it is actually distributed to the beneficiary, with undistributed income to be taxed at the trust level. In either case, capital gains taxes are generally paid at the trust level.
For non-grantor trusts, the trustee must file a fiduciary income tax return and issue a Schedule K-1 to the beneficiary, showing the amount and classification of trust income to be included on the beneficiary’s individual tax return.
It is important to note that trusts and individuals are subject to significantly different tax rates, which increases the importance of understanding tax treatment of grantor and non-grantor trusts. Tax brackets for trusts are compressed with trusts hitting the top tax rate (37% for 2018) for taxable income over $12,501, as compared to individual taxpayers who can report up to $500,000 of income before hitting the highest tax rate. As always, we recommend that you consult with a licensed tax professional for advice and guidance around your unique circumstances and how these rules may apply to you.
By Emily Menjou, VP/Personal Trust Fiduciary Manager
Throughout 2017, there were talks of various changes to estate tax laws, including President Trump’s proposal to eliminate the estate tax altogether. In December of 2017, the House and Senate passed the final plan which went into effect on January 1, 2018. Most notably, the estate tax has not been eliminated, however the new tax bill doubled the exemption amount for estate, gift and generation-skipping taxes from the $5 million base set in 2011 to a new $10 million base (indexed for inflation). The increased exemption amount will remain in effect from tax years 2018 through 2025, at which point it is expected to sunset back to pre-2018 levels.
Under the new plan, an individual can now shelter $11.2 million in assets from estate tax. Portability remains intact, allowing a surviving spouse to utilize a deceased spouse’s unused exemption amount. The result is that a married couple can now exclude $22.4 million from estate tax. These amounts will continue to increase for inflation through 2025. Although the vast majority of estates will not be subject to estate tax – now even fewer than before – the new tax bill offers a significant planning opportunity for wealthy families who may benefit from the increased exemption amounts while they remain in effect.
The new tax plan did not make any changes to rules allowing a cost basis adjustment at death, which were subject to elimination under earlier versions of the tax plan. The ability to adjust basis to date of death values provides the tax advantage of eliminating or shrinking capital gains on appreciated assets passing to heirs, which will continue to benefit a much larger number of American families than changes to the estate tax.
After indexing for inflation, the annual gift tax exclusion amount increases from $14,000 in 2017 to $15,000 in 2018. The gift tax exclusion is expected to remain at $15,000 for 2019 as well. Each individual can gift $15,000 per year to any number of individuals without dipping into the lifetime estate, gift and generation-skipping transfer tax exemption. This increase is not a result of the new tax plan, but a notable figure for estate and gift planning nonetheless.
If you are concerned that the new tax bill may have an impact on your estate plan, or to take advantage of the increased estate tax exemption amount, we recommend that you consult with your estate planning attorney and CPA. As always, we continue recommend periodic reviews of your estate planning documents to ensure they accurately reflect your wishes and financial position.
Meet Our Team
Our team is comprised of a group of certified individuals in the areas of trust administration, estate settlement, retirement plan management and investment management. With combined financial experience of over 250 years, our team has the capacity and expertise to provide personal services tailored to your financial needs. We have offices located in Santa Rosa, Roseville and Silicon Valley.