1. Overview of Estate Planning

Question 1

Estate Planning Process

Answer 1

-Gather data
-Establish objectives
-Identify influencing factors
-Identify weaknesses
-Select technique
-Implementation
-Monitor and revise plan

Question 2

Lifetime planning phases

Answer 2

accumulation, preservation, distribution

Question 3

Estate Planning documents

Answer 3

-Will
-POA
-Trust

-Deeds
-assets & liabilities
-ins policies
-retirement plan/IRA info
-Govt benefits
-tax dos
-closely held business docs
-info about inheritances, windfalls, and large sums

Question 4

Will

Answer 4

-testator: person creating the will determines how assets transfer upon death
-names guardians, executors, needs to be executed by attorney
-bequests/transfers assets separately owned by testator (probate assets), eg bank accounts, brokerage, real estate to heirs

Requirements:
-Sound mind
-of Age/majority
-In writing
-Signed
-Declared Last Will and Testament
-Witnessed by 2/3 competent individuals
-Attestation Clause (validly executed according to state laws)

Question 5

Trust

Answer 5

Legal entity created by grantor, who establishes and funds trust, and arranges testamentary or inter vivos/living trust, and transfers property to trustee. Title to property is held by trustee for the benefit of beneficiary.
Trustee, which can be an individual, investment firm, or bank, has fiduciary responsibility/legal obligation to manage in best interests of the beneficiary.

Question 6

POA types

Answer 6

• Durable: ability to act immediately and does not lapse even if principal becomes incapacitated/disabled
• Non-durable: Remains active until specific task is fulfilled/up to incapacitation
  -springing- active after confirmed legally incapacitated
  -general- broad array lapses at disability/incapacitation
  -special- on specific matter, ends upon completion/set time

Question 7

probate substitutes

Answer 7

by law, trust and contract / beneficiary designation

Question 8

Importance of having a will

Answer 8

-property transfer, guardianship and cost for administrator

Question 9

Pros/Cons of Will

Answer 9

-Disputes can be settled in probate court ; but if estate is big, then legal and admin fees can be high and is paid by estate
-probate process shortens time creditors can make claims against estate, usually takes 6-9 mo.1-2 yrs depending on complexity; however if challenged, can drag on for years and freeze assets
-Probate estates may use fiscal year, which may be favorable for income tax purposes; however must be probated in state located in/auxiliary probate’-becomes public record and only effective at death

Question 10

Reasons for using trust

Answer 10

-Avoid probate if funded with assets during lifetime
- More difficult to challenge in courts than wills
- Shelter taxes from estate taxes
- Professional asset management
- Confidentiality
- Provide for special needs child without eliminating governmental programs like Medicaid
- Philanthropic purposes/charitable gifting
- Hold money until child reaches designated age
- Ensure children from a previous marriage will receive some inheritance
- Private instructions regarding mgmt, control, disposition of assets

Question 11

Trustee

Answer 11

Holds legal title to trust assets and manages for beneficiaries, may have powers:
- Collect trust property, settle claims, and sue or be sued.
- Sell, acquire or manage the trust property in a manner that is in the best interests of the beneficiaries.
- Vote corporate shares.
- Borrow money and use the trust corpus as collateral, if approved by the court.
- Enter into contracts and leases that do not exceed the duration of the trust.
- Make payments to a beneficiary of the trust.
- Make required divisions and distributions of trust property.
- Receive additional assets into the corpus of the trust.

Duties:
-Carry out the trust in accordance with the terms of the trust agreement or will.
-Not to delegate the trustee’s duties to another individual. Any duty that calls on the trustee to exercise skill and judgment may not be delegated unless the trust agreement provides otherwise.
-Administer the trust with the degree of skill and care that would be required if the trustee were dealing with his or her own assets.
-Administer the trust solely in the best interests of the beneficiaries.
-Possess, protect, and preserve the trust property.
-Separate and earmark trust property.
-Make the trust property productive.
-Make distributions in accordance with the trust agreement and the best interests of the beneficiaries.

Question 12

Pros & Cons of Revocable Trust

Answer 12

-the grantor, the trustee, and the beneficiary may all be the same person
PROS:
- may escape probate,
-Grantor may change/cancel trust
-Assets professionally managed by trustee in event of incapacity
- Trustee can be replaced if skills don’t meet expectations

CONS:
-there are no income tax advantages, so pay taxes on income and cap gain on trust assets
-assets are considered part of estate for estate tax purposes
-if unfunded, fail to avoid probate/reduce estate tax

Question 13

Pros & Cons of Irrevocable Trust

Answer 13

Separate legal entity may pay taxes at trust’s tax rates. Grantor does not have control of property placed in trust, may reduce value of grantor’s estate, may be subject to gift tax liability

PROS:
-Appreciation on assets excluded from estate, minimizing estate taxes at death
- Income earned on assets can be directed to beneficiary and results in tax savings if beneficiary is in lower tax bracket
- assets avoid probate

CONS:
Loss of control of assets and assets may be subject to gift taxes

Question 14

Testamentary trust

Answer 14

Funded with assets after death: reduce estate taxes, professional inv mgmt, make sure estate ends in right hands

Question 15

Spousal Transfers

Answer 15

• Provides lifetime support of surviving spouse
  -Determine whether property used for lifetime support should be in ind/spouse’s taxable estate
  -Det who chooses beneficiary of estate @ death of surviving spouse

Bypass trust / nonmarital trust/B-trust:
-may provide lifetime support of surviving spouse, after death, remaining assets distributed to beneficiaries who were selected by original grantor
Since surviving spouse doesn’t have control over who will receive the remaining value, the value should avoid inclusion in estate of surviving spouse/bypasses estate of surviving spouse. Unified tax credit may eliminate tax liability

Marital trust: gives surviving spouse lifetime interest in income and/or principal within trust AND qualifies for unlimited marital deduction. Assets transferring into marital trust will be included in grantor’s estate, but unlimited marital ded postpones payment of estate tax until death of surviving spouse

GPA/A-Trust: Marital trust where surviving spouse has full control over all income and principal, including naming beneficiaries

QTIP: Surviving spouse has limited access to principal and control of beneficiaries- often used in second marriages to ensure children from prev marriage will receive inheritance

Question 16

Intergenerational transfers

Answer 16

any transfer of property from one generation to another

Question 17

Which of the following allows the grantor to retain control and use of his or her assets? (Select all that apply)

Answer 17

Joint tenancy means that the owner’s interest is not passed to the surviving owner until his or her death. Funds of a revocable trust are still controlled and used by the grantor. Use of contracts such as IRAs to pass assets to beneficiaries does not give any interest of the assets to the beneficiaries until the owner passes away.

Question 18

Estate tax

Answer 18

Imposed on property of deceased before transfer (federal level only, can be state level)

-Gross Estate Value (LI proceeds, pensions, collectibles, inv, RE, assets)
-Subtract deductions (Funeral, admin, debt, taxes, marital, charitable)
=Taxable Estate
+Add cumulative lifetime gifts
=Adjusted Taxable estate
-Look up Estate Tax payable before credits
-Subtract Unified Tax Credit $5,311,800

Question 19

Inheritance tax

Answer 19

Levied on property when received by beneficiary (state level)

Question 20

Bypass/credit shelter trust/optimum marital deduction plan

Answer 20

• Property sheltered by unified credit of $12,920,000

Question 21

ILIT

Answer 21

Remove death benefit proceeds from insured’s estate, must survive by 3 years, can specify how proceeds are to be used

Question 22

How to minimize estate tax

Answer 22

-Spend, but not on estate items like real property
-Pre-fund: purchase ILIT that would pay for estate taxes/transfer insurance policy to trust >3yrs from death
-Give away: annual exclusion gifts/charitable gifts

Question 23

If Sean left 50% of his estate to his spouse Karen and 50% to charity, how much of it would be deductible in 2023?

Answer 23

Marital and charitable transfers are 100% deductible.

Question 24

Who appoints a guardian?

Answer 24

by the court and is charged with the responsibility of caring for another (the ward). Parents can name a guardian of their minor children in a will. The court usually honors their choice. (That person is a testamentary guardian.)

Question 25

Your mother bought a stock at the height of the dot.com market in 2000. Today, it is trading at 50% of her purchase price. Your mother, age 75, is in poor health. What would you suggest she do?

Answer 25

Sell it, take the loss, and invest in CDs.

Question 26

Which of the following statements regarding a gifting strategy to reduce one’s estate is NOT correct?

1A donor can pay medical expenses for a friend without gift tax consequences if the funds are paid directly to the medical providers.
2Gifts to a charity are not tax deductible if the gifts exceed the annual exclusion amount in one tax year.
3Gifts are not taxable to the donee.
4The donor is responsible for paying any gift tax due.

Answer 26

The annual gift tax exclusion does not apply to charitable gifts. Charitable gifts are unlimited, but the tax deduction a donor receives each year will depend on the taxpayer’s AGI, as well as the type of property gifted and the type of charity to which the gift is made.

Question 27

The federal estate tax is a tax on

Answer 27

the transfer of property when a person dies. It is measured by the value of the property rights that are shifted from the decedent to others.

It is a tax on the right to transfer property or an interest in property, rather than a tax on the right to receive property, which is the basic characteristic of an inheritance tax.

Question 28

After establishing and prioritizing estate planning objectives, what is the next step in the estate planning process?

Answer 28

Identify the factors that limit or affect the selection of estate planning techniques.

Question 29

Mr. Harper has been working with his attorney to write a new will before he gets married. The attorney has handwritten instructions signed by Mr. Harper in his file. What happens if Mr. Harper dies on the way to sign the new will?

Answer 29

Both his old will and the unsigned will can be admitted to probate.

This handwritten, signed document is a holographic will. Requirements are that it is in the testator’s handwriting and signed. The Uniform Probate Code allows courts to accept such documents. Nuncupative wills are oral wills. They must be made in the presence of witnesses generally during a final illness or combat situation.

Question 30

Tess is traveling to India this month and is unable to be present for an in-person contract signing. Which of the following is the BEST type of power of attorney if she only needs the agent to act on her behalf for this signature?

Answer 30

A nondurable power of attorney can be used if a principal needs the agent to complete a specific task on their behalf (e.g., signing a form while the agent is on vacation).