106-1 Estate Planning Process, Property Titling Considerations, and Property Law Systems Flashcards
CFP Board Financial Planning Steps
- Establish and define the relationship w/ the client
- Gather client data
- Analyzing and evaluating the client’s financial status
- Develop and present the financial planning recommendation
- Implement the financial planning recommendation
- Monitor
3 Basic Forms of Legal Interests that may be held by individuals when owning property
- Fee Simple
- Life Estate
- Term of Years
Fee Simple
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
Life Estate
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
Term of years
aka an interest for years
entitles the owner to the possession and/or enjoyment of property for a fixed period
Example: a lease
Present Interest
One that confers an immediate right to enjoy the benefits of the property
Life estate is an example
Future Interest
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
Remainder
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
Reversion
The right of the original owner or transferor to use, possess, and enjoy property after an intervening interest
Transfer Tax
Imposed on the value of assets transferred to another, either through gift (gift tax) or inheritance (estate tax)
Gift tax annual exclusion
Only a gift of a present interest in property entitles the donor to take the gift tax annual exclusion
e.g. a life estate
Community Property System
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
Common-Law System
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
Major advantage of community property compared w/ property titled in jt tenancy w/ right of survivorship between spouses in a common-law state
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
Most important principle w/ moving to a state w/ a different legal system (community property vs. common law)
Does not automatically change the nature of the property
Tenancy in Common (TC)
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
Joint tenancy w/ Right of Survivorship (JTWROS)
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
Spousal Joint Tenants
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
Nonspousal Joint Tenants (Consideration Furnished Rule)
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
Tenancy by the entirety (TE)
Is a limited form of joint tenancy w/ right of survivorship that can exist only between spouses
Trust ownership / 3 Required Parties to a Trust
A trust is a legal entity that includes 3 required parties:
- Grantor/Creator/Settlor
- Beneficiary
- Trustee
Person who establishes the trust
Known as the grantor, creator, or settlor of the trust
Trust Beneficiary
Person or persons for whose benefit the trust is established
The beneficiaries hold equitable title to the trust assets
Trustee
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
Trust Corpus
Aka Trust res
Trust assets held by the trust
