2022 Trust Forum Presentations

Trust Forum

November 7-9

@ www.csbs.org ε @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1129 20th Street NW / 9th Floor / Washington, DC 20036 / (202) 296-2840

Trust Forum San Diego, CA November 7-9, 2022

Monday, November 7, 2022 8:00 AM – 8:30 AM

Breakfast Meeting Room: Luke Easter

Welcome & Opening Remarks Sebastien Monnet, CSBS Vice President Learning & Development Meeting Room: Ted Williams

8:30 AM – 8:45 AM

State of the State Joey Samowitz, CSBS Policy Development Manager Meeting Room: Ted Williams

8:45 AM – 10:00 AM

Break

10:00 AM – 10:15 AM 10:15 AM – 11:30 AM

ERISA Update Arsalan Malik, Groom Law Group Meeting Room: Ted Williams

Lunch (on your own)

11:30 AM – 1:00 PM 1:00 PM – 2:00 PM

Generation Skipping Tax Andrew Katzenstein, Proskauer Rose LLP Meeting Room: Ted Williams

Break

2:00 PM – 2:15 PM 2:15 PM – 3:15 PM

How to Spot a Recession: Community Banker Insights & Other Unique Economic Indicators Tom Siems, CSBS Chief Economist Meeting Room: Ted Williams

Break

3:15 PM – 3:30 PM 3:30 PM – 4:30 PM

Custody Services for Crypto-Assets Jamie Bazarow, Federal Reserve Bank of St. Louis Meeting Room: Ted Williams

Networking Reception Meeting Room: Jack Graham

5:00 PM – 7:00 PM

Tuesday, November 8, 2022 8:00 AM – 8:30 AM

Breakfast Meeting Room: Luke Easter

Financial Markets Update (virtual) Matthew Stagner, VOYA Meeting Room: Ted Williams

8:30 AM – 9:30 AM

Break

9:30 AM – 9:45 AM 9:45 AM – 10:45 AM

Illiquid Assets: The Hidden Half of Client Portfolios Brad Davidson, CEO, UA Central LLC Meeting Room: Ted Williams

Break

10:45 AM – 11:00 AM 11:00 AM – 11:45 AM

OFAC Sanctions Update (virtual) Jennifer White, Federal Reserve Bank Thomas Weldy, Federal Reserve Bank Meeting Room: Ted Williams

Lunch (on your own)

11:45 AM – 1:00 PM 1:00 PM – 2:00 PM

Federal Reserve Update Kendra Hartnett, Senior Manager Consumer Compliance Meeting Room: Ted Williams

Break

2:00 PM – 2:15 PM 2:15 PM – 3:15 PM

FDIC Update Thomas H. Belcher, Senior Examination Specialist Meeting Room: Ted Williams

Break

3:15 PM – 3:30 PM 3:30 PM – 4:30 PM

Cybersecurity Threat Briefing John Kim, FBI Assistant Special Agent-in-Charge Meeting Room: Ted Williams

Wednesday, November 9, 2022 8:00 AM – 8:30 AM

Breakfast Meeting Room: Luke Easter

Breakout Sessions & Sharing – What Interesting Items Are You Seeing? Joey Samowitz, CSBS Policy Development Manager Meeting Room: Ted Williams

8:30 AM – 9:30 AM

Break

9:30 AM – 9:45 AM 9:45 AM – 10:45 AM

Developing the Trust Examiner of the Future Sebastien Monnet, CSBS Vice President Learning & Development Meeting Room: Ted Williams Closing Remarks Sebastien Monnet, CSBS Vice President Learning & Development Meeting Room: Ted Williams

10:45 AM – 11:00 AM

Adjourn

11:00 AM

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Trust Forum San Diego, CA November 7-9, 2022

ATTENDEES Alabama State Banking Department Davenport, Steven

Steven.Davenport@banking.alabama.gov Mackey.Harwell@banking.alabama.gov

Harwell, Mackey

Arkansas State Bank Department Black, Lance

lblack@banking.state.ar.us kdavis@banking.state.ar.us dhill@banking.state.ar.us

Davis, Kelly Hill, Dustin

California Department of Financial Protection and Innovation Chavez, Roberto

roberto.chavez@dfpi.ca.gov thomas.egu@dfpi.ca.gov Cecilia.Fuentes@dfpi.ca.gov

Egu, Thomas

Fuentes, Cecilia

Khatchadourian, Sandra

Sandra.Khatchadourian@dfpi.ca.gov Klara.Kirchen@dfpi.ca.gov George.Lai@dfpi.ca.gov Chris.Martens@dfpi.ca.gov Jaspreet.Mathauda@dfpi.ca.gov Phuong.Miller@dfpi.ca.gov Angelito.Miranda@dfpi.ca.gov Tanaka.Mudavanhu@dfpi.ca.gov Mohammad.Noor@dfpi.ca.gov Sandra.Perdomo-Salazar@dfpi.ca.gov

Kirchen, Klara

Lai, George

Martens, Chris

Mathauda, Jaspreet

Miller, Phuong

Miranda, Angelito Mudavanhu, Tanaka Noor, Mohammad

Perdomo-Salazar, Sandra

Perez, Daisy

Daisy.Perez@dfpi.ca.gov Cathy.Philpott@dfpi.ca.gov Yvonne.Ramirez@dfpi.ca.gov

Philpott, Cathy Ramirez, Yvonne

Sen, Jacky

jacky.sen@dfpi.ca.gov

Steiner, Brooke

Brooke.Steiner@dfpi.ca.gov camtu.tran@dfpi.ca.gov

Tran, Camtu

Vo, Ann

ann.vo@dfpi.ca.gov

Yang, Shirley

Shirley.Yang@dfpi.ca.gov

Minnesota Department of Commerce Barness, Kasie

kasie.barness@state.mn.us

Kansas Office of the State Bank Commissioner Ellis, Ralph

clint.ellis@osbckansas.org kylee.fine@osbckansas.org

Fine, Kylee

Hamlett, Charles Hodges, Matthew

charles.hamlett@osbckansas.org matt.hodges@osbckansas.org

Mississippi Department of Banking & Consumer Finance Alexander, Andrew

Andrew.Alexander@dbcf.ms.gov

Dowdle, Paul

Paul.Dowdle@dbcf.ms.gov

Nevada Financial Institutions Division Smith, Michael

mtsmith@fid.state.nv.us

New York State Department of Financial Services Atwell, Michael

Michael.Atwell@dfs.ny.gov lynson.gilstrap@dfs.ny.gov reena.mathew@dfs.ny.gov

Gilstrap III, Lynson Mathew, Reena

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Ryan, James

James.Ryan@dfs.ny.gov

North Carolina Office of Commissioner of Banks Burns, William

gburns@nccob.gov wgray@nccob.gov wstott@nccob.gov

Gray, William Stott, William

South Carolina Office of the Commissioner of Banking Fulmer, Deidre

deidre.fulmer@banking.sc.gov

South Dakota Division of Banking Wester, Matthew

matthew.wester@state.sd.us

Texas Department of Banking Fry, Sylvia

sylvia.fry@dob.texas.gov

Washington Department of Financial Institutions Mann, Corrie

corrie.mann@dfi.wa.gov

SPEAKERS Conferene of State Bank Supervisors Siems, Tom

tsiems@csbs.org

Federal Bureau of Investigation Kim, John

jkim3@fbi.gov

Federal Deposit Insurance Corporation Belcher, Thomas Federal Reserve Bank of San Francisco Hartnett, Kendra

tbelcher@fdic.gov

kendra.hartnett@sf.frb.org

Federal Reserve Bank of St. Louis Bazarow, Jamie

jamie.a.bazarow@stls.frb.org

Groom Malik, Arsalan

amalik@groom.com

Proskauer Katzenstein, Andrew

akatzenstein@proskauer.com

UA Central, LLC Davidson, Brad

brad@manageua.com

CSBS STAFF Monnet, Sebastien Samowitz, Joseph

smonnet@csbs.org jsamowitz@csbs.org

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ERISA Update Key Concepts & Recent Developments CSBS Trust Forum – San Diego, California Monday, November 7, 2022 Presented by Arsalan Malik, Groom Law Group

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Agenda

• Part I: ERISA Overview & Relevance

• Part II: Anything Happen Since 2019?

• Part III: Closer Look at Select Topics • ESG • Cryptocurrency • Federal Examinations (i.e., Department of Labor investigations)

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ERISA Overview & Relevance

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Introduction to ERISA • The Employee Retirement Income Security Act of 1974 (“ERISA”) governs the operation and administration of private pension and welfare benefit plans, and the assets of such plans. • Although rooted in trust law, ERISA’s fiduciary duties are considered to be “the highest known to the law.”

Liability and Enforcement • ERISA has an extensive liability and enforcement regime, which includes personal liability for fiduciaries, as well as co-fiduciary liability. • The DOL actively enforces ERISA. ERISA also provides a private right of action for participants.

Fiduciary Responsibility

Administrative Requirements • ERISA has a number of rules regarding reporting and disclosure, plan documentation and governance, claims procedures, and rules governing custody and control of “plan assets.”

• ERISA imposes the “highest” fiduciary duties under law. • This standard is supplemented by ERISA’s prohibited transaction rules.

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Definition of “Fiduciary” • A person is a “fiduciary” to a plan to the extent that person – • Has any authority or control over the management or disposition of plan assets, • Has discretionary authority over plan administration, OR • Renders investment advice to the plan for a fee.

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Definition of “Fiduciary” • The definition is “functional” ⎯ This means that you can be a fiduciary regardless of whether you’re identified as a fiduciary in any document or whether you accept fiduciary status. ⎯ Your conduct—not your official role or duties—determine whether you are a fiduciary.

“Wow, I had no idea that I was a fiduciary!”

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Common ERISA Fiduciaries

• Plan administrator. • Administrative and investment committees. • Trustee. • Investment managers and investment advisors. • Claims decision-makers. • Functional fiduciaries : Anyone who exercises discretion over plan investments or administration.

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“Settlor” vs. Fiduciary Activities

• It is important to understand the distinction between “settlor” and fiduciary activities. • Importantly , when acting as a settlor, ERISA’s fiduciary standards do not apply. • “Settlor” activities (e.g., employer business decisions relating to plan establishment and design) are not fiduciary activities .

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“Settlor” vs. Fiduciary Activities

Actually, we’re ‘settlors,’ so we’re not subject to the fiduciary provisions of ERISA right now.

But hast thou forgotten the standards under ERISA?

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Overview of Fiduciary Duties

• ERISA § 404 requires fiduciaries to — • Act prudently; • Act solely in the interest of the plan’s participants and beneficiaries ( aka the duty of loyalty); • Use plan assets only to pay plan participants and beneficiaries and “reasonable” plan expenses; • Diversify plan investments to avoid large losses; and • Comply with governing plan documents.

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Prohibited Transaction Rules

• ERISA prohibits –

Kickbacks

Conflicts of Interest

Self-Dealing

Fiduciaries from receiving any consideration for its own account from any party dealing with the plan in connection with a transaction involving the plan’s assets.

Acting on behalf of a party whose interests are adverse to the plan in any transaction involving the plan.

Dealing with the assets of the plan in the fiduciary’s own interest or for its own account.

• However, statutory and administrative exemptions are available to permit transactions that would otherwise constitute prohibited transactions.

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Financial Institution Fiduciary Status

• Financial institutions wear various hats. • At the plan-level – • Asset custodian. • Directed trustee. • Discretionary trustee. • At the service provider or “market” level – • Collective investment fund trustee. • Investment adviser / investment manager.

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Sooo, Anything Happen Since 2019?

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Quick Takeaway

• During a time where everything slowed down , retirement policy was as active as ever in 2020-2021. • The ERISA world was shaped by numerous developments on the legislative, regulatory, and litigation fronts. • There are also a number of industry-level trends affecting the ERISA space.

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Legislative Update

• On December 20, 2019, the SECURE Act was enacted into law. • The SECURE Act is the first major retirement reform since the Pension Protection Act of 2006. • The law made several changes with respect to plan administration, including: • Increased RMD age to 72. • Mandated long-time, part-term worker coverage. • Increased limit on automatic enrollment safe harbor from 10% to 15%. • Made changes to various credits (e.g., small employer plan start-up credit).

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Legislative Update

• In addition, the SECURE Act included provisions on several notable fronts, including – • Pooled employer plans. • Lifetime income disclosure. • Lifetime income investment options.

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Legislative Update

• COVID relief legislation – i.e., the CARES Act and Families First Act – included provisions affecting benefit plans. • In addition to various general relief measures, the laws addressed retirement policy in several ways, including by:

• Expanding existing worker protection laws (e.g., FMLA). • Expanding/relaxing conditions for health insurance coverage.

• Modifying retirement laws to increase access to benefits (e.g., plan loans and distributions) and mitigate losses as a result of economic decline (e.g., RMD rules).

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Legislative Update

Build Back Better – Proposed Changes • Focus on “mega” IRAs.

• Contribution restrictions on certain taxpayers. • Mandatory distributions for certain taxpayers. • Elimination of “back door” Roth IRA conversions. • Extension of statute of limitations for IRS enforcement.

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Legislative Update

SECURE 2.0 • Rare example of bipartisan effort in era of extreme divisiveness. • Current expectation is that it will pass before year-end. • Key Provisions • Student loan matching. • Extension to required minimum distribution age. • Availability of CITs to 403(b) plans. • PEPs for 403(b) plans. • Retirement “lost and found.”

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Regulatory Update

• Since 2020, the Department of Labor has issued a series of rulemaking. • The transition in Presidential Administrations has had an impact on retirement policy and the future outlook.

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Regulatory Update

DOL Snapshot • Electronic Disclosure.

• Lifetime Income Illustrations. • Investment advice exemption. • Cybersecurity. • Missing participants. • ESG ( deeper dive in a few ). • Cryptocurrency ( deeper dive in a few ). • QPAM Exemption.

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Litigation Update

• ERISA litigation has proliferated over the past decade. • Lawsuits have frequently targeted plan fees (e.g., recordkeeping fees, investment expenses). • Lawsuits often include a variety of challenges specific to plan investments, with claims targeting – • Overall expense ratios, • Use of actively vs. passively managed options,

• Use of higher cost share classes, • Revenue sharing practices, and • Inclusion of affiliated/proprietary investments.

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Litigation Update

• For plaintiffs’ firms, victory typically means achieving a settlement since most “401(k) fee” lawsuits rarely go to trial. • As a result, the focus is not necessarily to be right on the law – rather, the goal is to raise plausible claims that survive the motion to dismiss stage. • New Trend : Uptick in litigation regarding target date funds, which often serve as the default investment. • New Spin on New Trend : In the last few months alone, lawsuits have been filed against nearly a dozen of the largest plans (e.g., Microsoft, Capital One, Citigroup) with respect to their BlackRock TDFs. • Allegation : the funds were too cheap.

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Industry Update • Recordkeeper consolidation. • Financial wellness products. • Status of plan data as a “plan asset.”

• Pension risk transfers (“PRTs”). • Cryptocurrency / digital assets. • Cybersecurity. • Cannabis businesses. • Pooled Employer Plans (“PEPs”). • Abortion access / response to Supreme Court’s Dobbs decision.

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Closer Look at Select Topics

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ESG Considerations

• ESG is a hot issue in a number of contexts and regulatory fronts. • From ERISA perspective, key question is squaring ESG considerations with fiduciary duties. • Current Status : Waiting for DOL final rule (any day now). • For better or worse, ESG is now a political issue –notably, the politics affect retirement policy. • DOL’s views on ESG tend to evolve with Presidential administration. • “Golden Rule” for ERISA Fiduciaries • Focus on risk and return characteristics. • Do not subordinate objectives to other social/political goals

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Cryptocurrency

DOL’s Strong Opposition • In March 2022, DOL issued Compliance Assistance Release 2022-01. • DOL cautions plan fiduciaries to exercise “extreme care” before adding a crypto option to an investment line-up. • DOL has a number of concerns. • Guidance is currently being challenged. • Despite warnings, industry seems to be going the other way…

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Cryptocurrency

Other Considerations • Is crypto even a permitted investment? • Custody (how do you “hold” it?). • Valuation. • Fraud and security risks. • Volatility.

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DOL Enforcement

• The DOL is authorized to investigate any plan subject to ERISA, or any service provider handling plan assets. • DOL investigations are rarely random, and may be launched as a result of – • A participant complaint. • Information on a Form 5500 filing (e.g., disclosure of a prohibited transaction, rejected filing). • Information the DOL obtains in another investigation (e.g., an investigation of a service provider that is engaged by the plan). • Plan sponsor bankruptcies or other notable corporate filings/events.

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DOL Enforcement

• DOL investigations have traditionally focused on – • Plan expenses / investments. • Delinquent contributions. • Missing participants. • Abandoned plans. • New focus areas include – • ESG (at least in the prior Administration). • Cybersecurity. • Cryptocurrency. • On H&W side, COVID claims administration and mental health parity.

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DOL Investigations – What Happens?

• DOL investigations begin with the issuance of a notice requesting various materials and information from a plan or service provider. • The notice will often include a warning that if a plan or service provider does not respond by a specified date, the DOL will appear onsite at the recipient’s office to examine documents.

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DOL Investigations – What Happens?

• Among other materials, the DOL regularly requests: • Plan documents and trust agreements. • Investment policy statement. • Service provider agreements. • Fiduciary meeting minutes and other materials (reports, presentations). • Plan census information. • Fidelity bond and fiduciary liability insurance policies. • …and information about YOU – state examinations!

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DOL Investigations – What Happens? • The DOL regularly requests interviews with plan fiduciaries. • During an interview, the DOL will expect an individual to – • Be familiar with the plan and understand his or her fiduciary responsibilities. • Explain fiduciary committee process. • Explain any matters flagged by the DOL in its review of meeting minutes or other materials. • Describe oversight practices, including how fees are monitored.

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DOL Investigations – What Happens?

• DOL investigations may be resolved through a voluntary compliance resolution. • Typically, if the DOL’s concerns relate to plan practices, the DOL may issue a “closing letter” if the plan implements requested changes (e.g., missing participant search steps). • If the DOL concludes that plan losses occurred, DOL will seek damages from plan fiduciaries and/or service provider. • The DOL’s conclusions could be challenged, but often involves a long and difficult process.

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Questions?

GENERATION-SKIPPING TAX Review for Trust Administrators

Andrew M. Katzenstein, Esq. akatzenstein@proskauer.com 310-284-4553

CSBS Executive Trust Forum 900 Bayfront Court San Diego, California 92101 November 7, 2022 1:00 p.m. – 2:00 p.m.

BEFORE 1982 – YOU’RE TAXED ON WHAT YOU OWN WHEN YOU DIE

Rich Family

Poor Family

Estate Tax

Estate Tax

No Tax

Estate Tax

No Tax

Estate Tax

This is the rich getting richer and the poor getting poorer…

Why? Because for tax purposes when they die C and GC aren’t treated as “owning” the trust assets for estate tax purposes.

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HOW THE GST “FIXES” THE PROBLEM

Rich Family

Poor Family

Estate Tax

Estate Tax

GST

Estate Tax

Estate Tax

GST

Rich and poor pay tax at each generational level…

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WHAT DO PEOPLE CONFUSE ABOUT THE GST? 1. The Unified credit and the generation-skipping tax exemption – both $12,060,000.

a. The unified credit avoids tax when the parent dies and assets pass to a trust for child.

tax avoided by united credit

$12,060,000 unified credit $12,060,00 GST exemption

P C

b. The GST exemption avoids tax when the child dies and the assets pass to grandchildren. $12,060,000 unified credit $12,060,00 GST exemption P

C

No tax

GC

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WHAT DO PEOPLE CONFUSE ABOUT THE GST?

2. “I want the money to be for my children, not skip them so the money is for my grandchildren.”

a. It’s not the money that skips the generation (children), just the tax. b. - Child is trustee - Child takes what is needed for HEMS - Child has power to appoint to his/her children at death P C

No tax

GC

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THE KEY TO THE GST – THE INCLUSION RATIO • Every trust has an inclusion ratio (“IR”). • IR dictates how much GST is due when there is a generation-skipping tax event. • In a perfect world, the IR=O or IR=1.

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WHAT IS A GENERATION-SKIPPING EVENT?

• Taxable Termination Taxable Distributions

Direct Skip

P

P

(G)P

Estate Tax

C

C

GST

GST

And GST

GC

GC

GC

Note: There isn’t GST until money “touches” a “skip person.” A skip person is someone two or more generations below the transferor. The transferor is the last person in whose estate the assets would have been subject to tax (in the testamentary context) or the person who would pay gift (in the inter vivos context). In the examples above, P and (G)P are the transferor. Be Careful: - A general power of appointment can change the transferor. - If H dies and funds a QTIP Trust H = transferor, but when W dies she is the transferor. - Even if someone isn’t related to the transferor they can be a skip person (go by number of years - someone more than 37-1/2 years younger than the transferor is a skip person).

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HOW IS GST DETERMINED? • GST = Taxable Amount x (Maximum Federal Rate x IR).

• Taxable Amount – asset that “touches” the grandchild (“skip person”) in one of the three types of generation-skipping events outlined on the earlier slide. • Maximum Federal Rate = 40%. • IR – that’s the key…

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WHAT IS THE INCLUSION RATIO? • IR = 1 – GST Exemption Allocated/Value of the Property Transferred. • Example 1 ‒ Parent gives $10M to a trust for child, remainder to grandchild. ‒ Parent causes $10M of GST exemption to be allocated to the trust. ‒ SO: IR = 1 – (10M/10M) = 0. • Example 2 ‒ Parent gives $10M to a trust for child, remainder to grandchild. ‒ Parent has no GST exemption left, so none is allocated to the trust. ‒ SO: IR = 1 – (0/10M) = 1.

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WHAT IS THE INCLUSION RATIO? • Example 3

‒ Parent gives $10M to a trust for child, remainder to grandchild. ‒ Parent causes $5M of GST exemption to be allocated to the trust. ‒ SO: IR = 1 – (5M/5M) = ½. When calculating GST: GST = Taxable Amount x (40% x IR).

• If IR = 0, the GST is imposed at 0% on the Taxable Amount (40% x 0 = 0%). • If IR = 1, the GST is imposed at 40% on the Taxable Amount (40% x 1 = 40%). • If IR = ½, the GST is imposed at 20% on the Taxable Amount (40% x ½ = 20%).

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WHY IN A PERFECT WORLD SHOULD IR BE 0 OR 1? • Distributions from trusts with IR = 1 should be made to children – no GST tax as not a generation-skipping event – the child is not a “skip person.” • Distributions from trusts with IR = 0 should be preserved, to the greatest extent possible, for grandchildren or more remote generations – otherwise, a distribution to a child “wastes” the GST exemption. • If a trust has a “mixed” IR, then distributions to children waste some GST exemption, and distributions to grandchildren or more remote generations requires payment of some GST.

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WHAT SHOULD A TRUSTEE SUGGEST IF THEY ARE ADMINISTERING A TRUST WITH A MIXED INCLUSION RATIO? 1. If Settlor is alive and has more GST exemption, have Settlor allocate enough GST exemption to the trust to get the IR = 0. The GST exemption grows with inflation. Next year, the inflation adjustment will provide $860,000 more GST exemption to everyone; most settlors have more GST exemption to use in cleaning up mixed inclusion ratios. 2. Divide the mixed inclusion ratio trust into two trusts – one with an IR = 0 and the other with an IR = 1. Then, distribute to children from IR = 1 trust and to grandchildren or more remote issue from trust with IR = 0. (This is called a “qualified severance” and is permitted under Treasury Regulations.)

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WHEN MAKING DISCRETIONARY DISTRIBUTIONS WHAT SHOULD THE TRUSTEE CONSIDER? 1. Use up IR = 1 trusts for children before making distributions to children from IR = 0 trusts. 2. If the only trust for child is an IR = 0 trust, consider: a. If child wants to buy a home, rather than distribute cash out to child to purchase the home in child’s name, buy the home in trust name. This keeps the IR = 0 trust “full” so more can pass to child’s children without estate tax (or GST tax) when child dies. b. If child wants a distribution to fund a business, have the trust invest in and own the business instead. The child is compensated for work in the business but value of the business itself stays in the IR = 0 trust to pass without estate tax (or GST tax) when child dies. c. Can consider loaning money to child from IR = 0 trust rather than making distribution. Leaves IR = 0 trust “full” so more can pass without estate tax (or GST tax) when assets ultimately pass to grandchildren. 3. Try to make distributions to grandchildren or more remote issues from trusts with IR = 0.

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WHAT INVESTMENT CONSIDERATONS SHOULD A TRUSTEE TAKE INTO ACCOUNT RELATED TO THE GST? 1. If there are IR = 1 and IR = 0 trusts for the same beneficiary, when diversifying the investments for that beneficiary in his/her trusts, the IR = 0 trust should have the “growth” assets and the IR = 1 the more liquid/conservative investments. 2. This approach: a. Focuses growth on the IR = 0 trust while limiting growth in the IR = 1 trust, so more passes to grandchildren without transfer tax when child dies. b. Leaves liquid assets in IR = 1 trust so available for distributions to child.

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NOW THAT YOU ARE GST EXPERTS WHAT SHOULD YOU DO? 1. Find out the IR for each trust you administer. 2. If a mixed IR, try to clean it up. 3. Situate investments to maximize growth in IR = 0 trusts and cash to spend in IR =1 trusts. 4. Remember that you want to keep IR = 0 trusts as intact as possible when responding to requests for funds from children, and distribute first from IR = 1 trusts. 5. If distributing to grandchildren, try to do so only from IR = 0 trusts. 6. When there are additions to a trust, you must recalculate the IR. For example, if annual exclusion gifts are made to a trust, or if cash is contributed to an ILIT to pay premiums, the math must be done … if you don’t know the trust’s IR, you can’t know how to administer that trust.

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REPORTING GENERATION-SKIPPING EVENTS AND PAYING THE GST 1. Taxable Terminations a. Trustee must file Form 706-GSC(T) by April 15 in the year following the termination. b. The Trustee pays the tax. 2. Taxable Distributions a. Trustee must file Form 706-GSC(D-1) by April 15 in the year following the taxable distribution. b. The beneficiary pays the tax. Note: If trustee pays the tax, this is another taxable distribution to report and pay tax on. 3. Direct Skips a. Taxpayer (GP) making the gift reports on Part 2 of Schedule A on Form 709. b. Taxpayer (GP) pays the tax.

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Economic Update: How to Spot a Recession in Real Time? By Thomas F. Siems, Ph.D. CSBS Chief Economist

CSBS Trust Forum November 7, 2022 San Diego, CA

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What Does This Barcode Say?

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The U.S. Business Cycle

Black = Months in Contraction (Recessions)

1855 1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015

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How is a Recession Defined?

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How is a Recession Defined? • Two consecutive quarters of negative real GDP growth (two contracting quarters)? (Simplistic Rule of Thumb)

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How is a Recession Defined? • Two consecutive quarters of negative real GDP growth (two contracting quarters)? (Simplistic Rule of Thumb) • A significant decline in economic activity that is spread across the economy and that lasts more than a few months? (NBER Definition)

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Coincident Economic Indicators

650

Personal Income

150 Economic Indicators, Indexed (January 1959 = 100) 250 350 450 550

Manufacturing and Trade Sales

Coincident Economic Index

Industrial Production

Payroll Employment

Sources: The Conference Board; Bureau of Economic Analysis

50

Jan Ͳ 59

Dec Ͳ 60

Nov Ͳ 62

Oct Ͳ 64

Sep Ͳ 66

Aug Ͳ 68

Jul Ͳ 70

Jun Ͳ 72

May Ͳ 74

Mar Ͳ 78

Feb Ͳ 80

Jan Ͳ 82

Dec Ͳ 83

Nov Ͳ 85

Oct Ͳ 87

Sep Ͳ 89

Aug Ͳ 91

Jul Ͳ 93

Jun Ͳ 95

May Ͳ 97

Mar Ͳ 01

Feb Ͳ 03

Jan Ͳ 05

Dec Ͳ 06

Nov Ͳ 08

Oct Ͳ 10

Sep Ͳ 12

Aug Ͳ 14

Jul Ͳ 16

Jun Ͳ 18

May Ͳ 20

Apr Ͳ 76

Apr Ͳ 99

Apr Ͳ 22

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Coincident Economic Indicators A Closer Look Since 2000

650

Personal Income

150 Economic Indicators, Indexed (January 1959 = 100) 250 350 450 550

Manufacturing and Trade Sales

Industrial Production

Coincident Economic Index

Payroll Employment

Sources: The Conference Board; Bureau of Economic Analysis

50

Jan Ͳ 00

Oct Ͳ 00

Jan Ͳ 03

Oct Ͳ 03

Jan Ͳ 06

Oct Ͳ 06

Jan Ͳ 09

Oct Ͳ 09

Jan Ͳ 12

Oct Ͳ 12

Jan Ͳ 15

Oct Ͳ 15

Jan Ͳ 18

Oct Ͳ 18

Jan Ͳ 21

Oct Ͳ 21

Jul Ͳ 01

Apr Ͳ 02

Jul Ͳ 04

Apr Ͳ 05

Jul Ͳ 07

Apr Ͳ 08

Jul Ͳ 10

Apr Ͳ 11

Jul Ͳ 13

Apr Ͳ 14

Jul Ͳ 16

Apr Ͳ 17

Jul Ͳ 19

Apr Ͳ 20

Jul Ͳ 22

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Total U.S. Nonfarm Payroll Employment Surpasses Former Peak (Feb 2020)

155,000

150,000

145,000

135,000 Thousands of Persons 140,000

130,000

Source: U.S. Bureau of Labor Statistics

125,000

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Help Wanted! Over 10 Million Open Jobs Available in the U.S.

14000

12000

10000

8000

4000 Job Openings (in Thousands) 6000

2000

0

Dec Ͳ 00

Dec Ͳ 02

Dec Ͳ 04

Dec Ͳ 06

Dec Ͳ 08

Dec Ͳ 10

Dec Ͳ 12

Dec Ͳ 14

Dec Ͳ 16

Dec Ͳ 18

Dec Ͳ 20

Aug Ͳ 01

Apr Ͳ 02

Aug Ͳ 03

Apr Ͳ 04

Aug Ͳ 05

Apr Ͳ 06

Aug Ͳ 07

Apr Ͳ 08

Aug Ͳ 09

Apr Ͳ 10

Aug Ͳ 11

Apr Ͳ 12

Aug Ͳ 13

Apr Ͳ 14

Aug Ͳ 15

Apr Ͳ 16

Aug Ͳ 17

Apr Ͳ 18

Aug Ͳ 19

Apr Ͳ 20

Aug Ͳ 21

Apr Ͳ 22

Internal Use Only

Leading Economic Index

120

100

20 Leading Economic Index (2016 = 100) 40 60 80

Source: The Conference Board

0

Jan Ͳ 59

Jan Ͳ 61

Jan Ͳ 63

Jan Ͳ 65

Jan Ͳ 67

Jan Ͳ 69

Jan Ͳ 71

Jan Ͳ 73

Jan Ͳ 75

Jan Ͳ 77

Jan Ͳ 79

Jan Ͳ 81

Jan Ͳ 83

Jan Ͳ 85

Jan Ͳ 87

Jan Ͳ 89

Jan Ͳ 91

Jan Ͳ 93

Jan Ͳ 95

Jan Ͳ 97

Jan Ͳ 99

Jan Ͳ 01

Jan Ͳ 03

Jan Ͳ 05

Jan Ͳ 07

Jan Ͳ 09

Jan Ͳ 11

Jan Ͳ 13

Jan Ͳ 15

Jan Ͳ 17

Jan Ͳ 19

Jan Ͳ 21

Internal Use Only

Internal Use Only

The CSBS Community Bank Sentiment Index (CBSI) • Provides an economic perspective and outlook on economic activity from those closest to the action at the local level: community bankers

https://www.csbs.org/cbindex

Internal Use Only

Community Bankers • Critical players in the success of local communities…they know and talk to everyone! • Understand small businesses, regional issues, and local conditions (including hiring/expansion plans for area employers, consumer confidence, etc.) • Inform markets and policymakers, especially regarding opportunities and risks • Know conditions/outlooks in real-time (contrary to backward-looking, subject-to-revision economic data)

Internal Use Only

Internal Use Only

CBSI Component Trends from Q2 2019 to Q3 2022

Ͳ 20 0 CBSI (100=Neutral; <100=Negative Sentiment; >100=Positve Sentiment) 20 40 60 80 100 120 140 160 180

144

138

136

121

91

42

35

21

CBSI

Business Conditions

Monetary Policy

Regulatory Burden

Operations Expansion

Capital Spending

Profitability Franchise Value

Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022

Internal Use Only

Internal Use Only

Business Conditions

90

70

50

30

10

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Ͳ 10

Ͳ 30

Ͳ 50

Ͳ 70

Ͳ 90

BCp BCn BCi

Internal Use Only

Yield Curve and the CBSI Business Conditions Indicator

150

1.40

Yield Curve

130

Yield Curve (10 Ͳ year Treasury Minus 2 Ͳ year Treasury)

0.90

110

Business Conditions Index

70 CBSI Business Conditions Index 90

0.40

Ͳ 0.10

50

30

Ͳ 0.60

Internal Use Only

Monetary Policy

90

70

50

30

10

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Ͳ 10

Ͳ 30

Ͳ 50

Ͳ 70

Ͳ 90

MPp MPn MPi

Internal Use Only

Profitability

90

70

50

30

10

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Ͳ 10

Ͳ 30

Ͳ 50

Ͳ 70

Ͳ 90

PRp PRn PRi

Internal Use Only

Does Overall Community Banker Sentiment (CBSI) and Profitability Expectations Move Together?

100 110 120 130

40 50 60 70 80 90

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

CBSI

Profitability

Internal Use Only

Does Overall Community Banker Sentiment (CBSI) and Profitability Expectations Move Together?

100 110 120 130

40 50 60 70 80 90

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

CBSI

Profitability

Internal Use Only

Internal Use Only

Other Unique Economic Indicators • Daily Consumer Confidence (Morning Consult) • Restaurant Reservations (OpenTable) • Air Travelers (TSA) • Back-to-Normal Index (Moody’s Analytics and CNN Business)

Internal Use Only

Daily Consumer Confidence Index (Morning Consult)

Internal Use Only

U.S. Restaurant Reservations Back to 2019 Levels?

80%

60%

40%

20%

0%

Ͳ 20%

2/24/2020

3/24/2020

4/24/2020

5/24/2020

6/24/2020

7/24/2020

8/24/2020

9/24/2020

1/24/2021

2/24/2021

3/24/2021

4/24/2021

5/24/2021

6/24/2021

7/24/2021

8/24/2021

9/24/2021

1/24/2022

2/24/2022

3/24/2022

4/24/2022

5/24/2022

6/24/2022

7/24/2022

8/24/2022

9/24/2022

10/24/2020

11/24/2020

12/24/2020

10/24/2021

11/24/2021

12/24/2021

Ͳ 40%

Ͳ 60%

Ͳ 80%

Ͳ 100%

Source: OpenTable

Ͳ 120%

Internal Use Only

Daily Domestic Air Travel Back to 2019 Levels?

3,000,000

2,500,000

2019

Number of Daily Domestic Travelers Through TSA Checkpoints

2022

2,000,000

2021

1,500,000

1,000,000

2020

500,000

Source: Transportation Security Administration (TSA)

0

1/1

2/1 3/1

4/1 5/1

6/1 7/1

8/1

9/1 10/1 11/1 12/1

2021 Traveler Throughput 2020 Traveler Throughput 2019 Traveler Throughput 2022 Traveler Throughput

Internal Use Only

Back Ͳ to Ͳ Normal Index

110

100

60 Back Ͳ to Ͳ Normal Index (Feb 2020 = 100) 70 80 90

Moody's Analytics and CNN Business

50

29 Ͳ Feb Ͳ 20

31 Ͳ Mar Ͳ 20

31 Ͳ May Ͳ 20

30 Ͳ Jun Ͳ 20

31 Ͳ Jul Ͳ 20

31 Ͳ Aug Ͳ 20

30 Ͳ Sep Ͳ 20

31 Ͳ Oct Ͳ 20

30 Ͳ Nov Ͳ 20

31 Ͳ Dec Ͳ 20

31 Ͳ Jan Ͳ 21

28 Ͳ Feb Ͳ 21

31 Ͳ Mar Ͳ 21

31 Ͳ May Ͳ 21

30 Ͳ Jun Ͳ 21

31 Ͳ Jul Ͳ 21

31 Ͳ Aug Ͳ 21

30 Ͳ Sep Ͳ 21

31 Ͳ Oct Ͳ 21

30 Ͳ Nov Ͳ 21

31 Ͳ Dec Ͳ 21

31 Ͳ Jan Ͳ 22

28 Ͳ Feb Ͳ 22

31 Ͳ Mar Ͳ 22

31 Ͳ May Ͳ 22

30 Ͳ Jun Ͳ 22

31 Ͳ Jul Ͳ 22

31 Ͳ Aug Ͳ 22

30 Ͳ Sep Ͳ 22

30 Ͳ Apr Ͳ 20

30 Ͳ Apr Ͳ 21

30 Ͳ Apr Ͳ 22

Internal Use Only

Internal Use Only

Internal Use Only

State-Level Economic Indicators

See https://www.csbs.org/state Ͳ economic Ͳ dashboards

Internal Use Only

Internal Use Only

Internal Use Only

Lessons Learned. To Spot Recessions, Pay Attention to: • Fed policy decisions and external shocks that impact consumer pocketbooks (1991 recession)

Internal Use Only

Lessons Learned. To Spot Recessions, Pay Attention to: • Fed policy decisions and external shocks that impact consumer pocketbooks (1991 recession) • Distracted consumers who are potentially sidelined from normal economic pursuits (2001 recession)

Internal Use Only

Lessons Learned. To Spot Recessions, Pay Attention to: • Fed policy decisions and external shocks that impact consumer pocketbooks (1991 recession) • Distracted consumers who are potentially sidelined from normal economic pursuits (2001 recession) • Concerns raised by informed consumers that NINJAs and free enterprise cannot coexist forever (2008-09 financial crisis)

Internal Use Only

Lessons Learned. To Spot Recessions, Pay Attention to: • Fed policy decisions and external shocks that impact consumer pocketbooks (1991 recession) • Distracted consumers who are potentially sidelined from normal economic pursuits (2001 recession) • Concerns raised by informed consumers that NINJAs and free enterprise cannot coexist forever (2008-09 financial crisis) • Global forces and their impact on high-frequency consumer and business information (2020 pandemic/lockdown recession)

Internal Use Only

Lessons Learned. To Spot Recessions, Pay Attention to: • Fed policy decisions and external shocks that impact consumer pocketbooks (1991 recession) • Distracted consumers who are potentially sidelined from normal economic pursuits (2001 recession) • Concerns raised by informed consumers that NINJAs and free enterprise cannot coexist forever (2008-09 financial crisis) • Global forces and their impact on high-frequency consumer and business information (2020 pandemic/lockdown recession)

Internal Use Only

Conclusions • Are we in a recession?

Internal Use Only

Conclusions • Are we in a recession? • Well, it depends…

Internal Use Only

Conclusions • Are we in a recession? • Well, it depends… • Community Bankers have keen insights into economic, business and consumer financial decisions

Internal Use Only

Conclusions • Are we in a recession? • Well, it depends… • Community Bankers have keen insights into economic, business and consumer financial decisions • Other economic indicators provide unique economic perspectives

Internal Use Only

Conclusions • Are we in a recession? • Well, it depends… • Community Bankers have keen insights into economic, business and consumer financial decisions • Other economic indicators provide unique economic perspectives • Keep in mind the “lessons learned” from past experiences…know your customer

Internal Use Only

Questions?

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