106-1 Estate Planning Process, Property Titling Considerations, and Property Law Systems

Question 1

CFP Board Financial Planning Steps

Answer 1

1. Establish and define the relationship w/ the client
2. Gather client data
3. Analyzing and evaluating the client’s financial status
4. Develop and present the financial planning recommendation
5. Implement the financial planning recommendation
6. Monitor

Question 2

3 Basic Forms of Legal Interests that may be held by individuals when owning property

Answer 2

1. Fee Simple
2. Life Estate
3. Term of Years

Question 3

Fee Simple

Answer 3

Maximum ownership interest a person may have in property
aka fee or fee simple absolute
Fee Simple ownership gives the owner the right to use, possess, and/or dispose of the property in any way he chooses during life and at death

Question 4

Life Estate

Answer 4

A partial interest in property that gives a person the right to possess and use the property for the remainder of the individual’s life or the remainder of someone else’s life

Example: father’s will might leave his daughter a life estate in the family home

Question 5

Term of years

Answer 5

aka an interest for years

entitles the owner to the possession and/or enjoyment of property for a fixed period

Example: a lease

Question 6

Present Interest

Answer 6

One that confers an immediate right to enjoy the benefits of the property

Life estate is an example

Question 7

Future Interest

Answer 7

Enjoyment of the benefits of the property does not occur until some point in the future

Most common types of future interests are remainders and reversions

Question 8

Remainder

Answer 8

The right of a 3rd party (someone other than the original owner) to use, possess, and enjoy the property after the intervening right of someone else, typically, the owner of a life estate

Question 9

Reversion

Answer 9

The right of the original owner or transferor to use, possess, and enjoy property after an intervening interest

Question 10

Transfer Tax

Answer 10

Imposed on the value of assets transferred to another, either through gift (gift tax) or inheritance (estate tax)

Question 11

Gift tax annual exclusion

Answer 11

Only a gift of a present interest in property entitles the donor to take the gift tax annual exclusion

e.g. a life estate

Question 12

Community Property System

Answer 12

Generally assumes that property acquired during marriage belongs equally to both spouses (i.e. to the community)

Separate property is defined as property one spouse acquires during marriage by gift or inheritance or as property acquired before marriage

Important to recognize that each spouse has an undivided, immediately vested 1/2 interest in all community property

Question 13

Common-Law System

Answer 13

States that do not follow the community property system follow the common-law system

Does not assume that property acquired during marriage belongs equally to both spouses and generally allows spouses to title their property in whatever manner they choose

Separate property, in the common-law system, means property titled individually in only one spouse’s name

Vast majority of states have the common-law system

Question 14

Major advantage of community property compared w/ property titled in jt tenancy w/ right of survivorship between spouses in a common-law state

Answer 14

the death of the first community property spouse, under the basis rules that generally apply to inherited property, both halves receive a stepped-up basis

This is not the case in a common-law state where only the decedent spouse’s half of the total interest held as joint tenants w/ right of survivorship receives a stepped-up basis

Question 15

Most important principle w/ moving to a state w/ a different legal system (community property vs. common law)

Answer 15

Does not automatically change the nature of the property

Question 16

Tenancy in Common (TC)

Answer 16

The ownership of property by 2 or more people, each of whom owns an undivided but possibly unequal (fractional) interest in the entire property

Undivided interest of each owner is treated as being owned outright and can be sold, donated, willed, or passed through intestate succession

Often the preferred method of ownership when unmarried or unrelated people desire concurrent ownership of property
It is also possible for married couples to own property concurrently as tenants in common.
TC ownership is frequently the result of siblings inheriting property form their parents in that form

Question 17

Joint tenancy w/ Right of Survivorship (JTWROS)

Answer 17

involves the co-ownership of property by 2 or more people, each of whom owns an undivided, equal interest in the entire property
Fundamental characteristic of property owned as JTWROS (whether these owners are spouses or nonspouses) is that the property passes to the surviving owner(s) by right of survivorship, by operation of law

Question 18

Spousal Joint Tenants

Answer 18

If spouses take title to property as joint tenants, there are no gift tax implications on the acquisition date of the property regardless of the amount each spouse contributed to the acquisition of the property

For estate tax purposes, when the first spouse dies, the decedent spouse’s gross estate includes only 50% of the value of property

When one spousal joint tenant dies, the surviving spouse receives a stepped-up basis in the 50% of the joint property that was included in the decedent’s gross estate

Question 19

Nonspousal Joint Tenants (Consideration Furnished Rule)

Answer 19

Applies if the joint owners were not spouses at the time of the first joint tenant’s death

If the owners contributed an unequal amount to the acquisition price, the owner contributing more of the purchase price makes a gift to the other owner(s) equal to the amount contributed in excess of an equal contribution

If the decedent had gifted the surviving joint owner the money the survivor used as his part of the acquisition purchase price, the funds are traceable back to the decedent as the actual contributor, and 100% inclusion is still required at his death

Question 20

Tenancy by the entirety (TE)

Answer 20

Is a limited form of joint tenancy w/ right of survivorship that can exist only between spouses

Question 21

Trust ownership / 3 Required Parties to a Trust

Answer 21

A trust is a legal entity that includes 3 required parties:

1. Grantor/Creator/Settlor
2. Beneficiary
3. Trustee

Question 22

Person who establishes the trust

Answer 22

Known as the grantor, creator, or settlor of the trust

Question 23

Trust Beneficiary

Answer 23

Person or persons for whose benefit the trust is established

The beneficiaries hold equitable title to the trust assets

Question 24

Trustee

Answer 24

Person holding legal title to the trust assets - the trustee has a fiduciary responsibility to act at all times on behalf of the trust beneficiaries

Question 25

Trust Corpus

Answer 25

Aka Trust res

Trust assets held by the trust