7. Estate Planning Documents

Question 1

Will

Answer 1

Legal document to dispose one’s separately owned assets to chosen heirs/beneficiaries, is revocable and testamentary/becomes operative after death

Question 2

Pour-over will

Answer 2

Funded through probate process, assets are transferred to previously established trust

Question 3

Will clauses and statutes

Answer 3

• residuary clause directs the testator’s property that was not disposed of through other will clauses, to pass outright to others or to an existing trust.
• dispositive clause may name a class of beneficiaries: per capita/stirpes
• fiduciary appointment clause in a will appoints primary and contingent executors, guardians, and trustees for testamentary trusts.
• tax apportionment clause designates the source for payment of death taxes
• simultaneous death statute
• divorce or annulment statute addresses how property in the will should be handled if it was bequeathed to a spouse, but the couple is no longer married at the time of an ex-spouse’s death.

Question 4

Laws of intestacy

Answer 4

Domicile state determines intestacy laws

Question 5

Execution requirements

Answer 5

Testator must be at least 18 years of age.
The testator must have mental capacity.
The will must be signed by the testator and witnessed by at least two witnesses.

If execution requirements are not met according to state law, then laws of intestacy apply. Nuncupative/oral wills are not permitted. Some states allow holographic/handwritten wills

Question 6

Testamentary trust

Answer 6

Named trustee manages assets on behalf of beneficiaries until certain age

Question 7

Revocable intrument

Answer 7

Will can be amended, altered or revoked before death. If revoked and no new will is executed, then considered intestate

Question 8

Codicil

Answer 8

Legal instrument that allows the testator to revoke and/or change all or part of an existing will and must be executed in the same way as the original will, usually for minor changes at a lower cost

Question 9

Types of wills

Answer 9

-Simple/ I Love you wills- to leave all property to surviving spouse: reciprocal: to each other/mutual may be reciprocal: allows selection of executor and guardian
-Joint wills: the last will and testament for two individuals. Disadvnatages: survivor may not be able to change will and terminable interests will not qualify for the marital deduction.
-Pour-over wills
-Tax-effective wills: estate tax exemption equivalent and/or the marital deduction and/or the charitable deduction are incorporated to minimize estate tax liability
-Holographic wills: hand written, accepted by few states

Question 10

Pretermitted heir

Answer 10

child or spouse not named in a decedent’s will

Question 10

forced/elective share

Answer 10

Allows surviving spouse to take control of property per the testator’s will, or
reject the provisions of the will and receive a share prescribed by statute.

Question 10

Uniform Probate Code (UPC) approach

Answer 10

increasing percentage of the estate based upon the number of years that the decedent and the surviving spouse were married up to a maximum of one-half of the estate for marriages lasting >+15yrs

Question 11

Will contests

Answer 11

The testator of the will was not of sound mind at the time the will was executed.
The testator was unduly influenced by another individual at the time the will was executed, and this undue influence had a direct impact on the distribution of the estate.
The testator was fraudulently deceived, and as a result of the fraud, disinherited a person who ordinarily would have taken a greater share of the estate.
The testator suffered from an insane delusion at the time the will was drafted.

Question 11

Augmented estate

Answer 11

probate property, the decedent’s share of JTWROS property held with a non-spouse, life insurance with a non-spouse beneficiary, plus property transferred into a revocable trust within two years of the decedent spouse’s death.

Question 12

Three types of guardianship

Answer 12

-person provides personal care
-/conservatorship of estate manages ward’s property and financial affairs
-plenary guardianship manages both

Question 13

Process of Becoming a Guardian or Conservatorship

Answer 13

-when individual files petition in court indicating incapacitation: guardian ad litem (guardian to represent ward and protect rights). If declared incompetent, then may appoint guardian/conservator to exercise ongoing supervision => living probate

Question 14

Authority of Guardians and Conservators

Answer 14

-Guardians have authority to provide comprehensive care, limited guardians manage specific aspects of care
-Conservators have authority under Uniform Probate Code to manage ward’s property for the support, education, care, or benefit of the protected person and his dependents, limited conservatorships further restrict management of property

Question 15

Care of Dependents

Answer 15

Financial Guardians: required to file a formal accounting with the court every one to two years, to file a bond, and to obtain permission from the court to engage in any substantial financial transactions.
Discretionary Trusts: Parents who create testamentary or inter vivos trusts for their children name trustee/individuals to manage the trust assets for their children, and decide how long the trust should last

Question 16

3 types of Powers of Attorney over assets

Answer 16

Non-Durable POA: The agent’s authority is limited to terms dictated in the POA document and ceases when the principal becomes incapacitated or dies.
Springing Durable POA: Agent only has authority to act after the principal becomes incompetent as certified by physicians and stays in effect until it is revoked, or when the mentally incapacitated person dies.
Durable POA: When the POA is created, the agent has the authority to represent the principal before and after incapacity occurs. Any degree of legal power may be transferred to the agent to make business, financial or legal decisions for the principal.

Question 17

Advantages of POA

Answer 17

• Private document, inexpensive and simple to execute, only one document/no implied powers, power not revoked

Question 18

Disadvantages of POA

Answer 18

• Lack of flexibility in powers, lending institutions will not accept durable POA, can only be used after death to dispose property omitted from will, liable for using powers contrary to principal’s best interests

Question 19

Each of the following elements should be included in the powers of attorney EXCEPT:

-An outline of the general aspects of the covered principal’s affairs.
-A provision authorizing the agent to make elections with respect to retirement plan assets.
-Verbiage dealing with gifting powers such as annual exclusions and/or lifetime gifts.
-Authority to transfer assets into a trust created by the principal.

Answer 19

An outline of the general aspects of the covered principal’s affairs.

The powers of attorney should be very specific as to the aspects of the principal’s affairs that are covered.

Question 20

Standby trust

Answer 20

revocable inter-vivos trusts: grantor is also the trustee and beneficiary- Takes effect when the owner is no longer capable of managing his assets. grantor names a successor trustee to manage his assets if he were to become incapacitated

Question 21

Health Care POA

Answer 21

grant an agent the power to make health care decisions for the principal in the event of incapacity.

Question 22

The Living Will

Answer 22

not recognized in all states- may not be detailed enough to provide sufficient medical directives in particular situations, and it may not address all treatment options available to the individual

Question 23

Disability Planning

Answer 23

lasts 3 months

Question 24

Total Disability benefit levels

Answer 24

-Own occ
-Modified own occ
-any gainful occ

Question 25

Partial disability

Answer 25

50% of monthly indemnity for total disability and payable for up to 6 months/ if less, then the remainder of policy benefit period when insured has returned to work on limited basis after period of total disability

Question 26

Presumptive disability

Answer 26

considered totally disabled if sickness/injury results in loss of eyesight, hearing, speech, use of limbs. Benefits begin from beginning of loss and waives medical care requirement

Question 27

Recurrent periods of disability

Answer 27

from same cause considered if not spaced by >6months

Question 28

Disability benefit period

Answer 28

Longest period of time benefits will be paid for same sickness/injury 2-5yrs to 65 / life if disability began <55/60

Most recover <6months-1year

If>12 months, chances of return diminish rapidly esp if older

Question 29

Elimination/waiting period for disability

Answer 29

days from start of disability when benefits aren’t paid

Question 30

Monthly indemnity

Answer 30

coverage restricted to 60-70% gross income up to $3-4k

Question 31

Business disability insurance

Answer 31

Designed to replace lost revenue/shift ownership/control to o/ emp, including business overhead policies covering operational costs, key person insurance and business continuation agreements

Question 32

key person insurance

Answer 32

Business pays premium (not deductible) and receives death benefits (tax-free)

Question 33

Business Continuation Agreements

Answer 33

Arrangement for disposition of closely held business: Stock-redemption plans used by corporations
Cross-purchase agreements used by individual business owners as means of purchasing business owner’s interests if death/disability occurs

-allows for continuity without outside control, values business for estate tax purposes when policies are purchased and assures owner of guaranteed conversion of business interest into cash

Question 34

Taxation of benefits

Answer 34

Premiums paid by employer for disability insurances are tax -deductible as business expenses and not considered taxable income to employee; payment of benefits result in taxable income for employee

For stock redemption and cross-purchase plans, premiums are not deductible by owners. Premiums paid by corporation are not taxable to individual and company owns cash value

Question 35

Social Security Disability (SSDI)

Answer 35

<65, and have at least 20 credits during a 40-quarter period, ending with the quarter in which the individual is found disabled. Applicants cannot file disability claims if they continue to work at substantial gainful activity (SGA) levels earning more than $1,350 a month (net of impairment-related work expenses) in 2022.

Question 36

SSDI benefits for family members

Answer 36

• unmarried child as long as the child is under 18 or is under 19 and is a full-time high school student.
• unmarried child 18 or older can qualify if the child has a disability that started before age 22.
• spouse age 62 or older, or any age if caring for a child who is under 16 or is disabled.
• Surviving spouses if the disabled widow or widower is 50 or older, and the disability started before the wage earner’s death or within seven years after death.
• disabled ex-spouse who is 50 or older, if married to the wage earner for 10 years or longer

Question 37

Onset date of disability for SSA

Answer 37

-Affects computation of benefits
-5 month waiting period begins
-25 month waiting period for Medicare
SSA has work incentive programs that offer benefit protection for up to 3 years and 9 months from onset of work activity

Question 38

Special / Supplemental Needs Trust

Answer 38

Trust assets to enhance quality of disabled life while preserving eligibility for public assistance programs and insulating from government claims.

Needs to be coordinated with public assistance programs since trust corpus shouldn’t replace public benefits (distributions made to beneficiary are considered income)

Can be used for:
Medical expenses not covered by Medicaid,
Supplemental attendant care,
Additional therapies,
Custodial care, and
Respite care for family caregivers.
- travel and companion
-to improve living condition

Usually funded with permanent/term life insurance, including second-to-die policies

Question 39

Medicaid

Answer 39

Federal (established regulations and eligibility) and state (administer and establish services and standards) entitlement/medical assistance program for certain aged <6, disabled/recg SSI, blind individuals, low income families

Question 40

Transfer of Assets

Answer 40

Value of assets transferred to ind/trusts within 60 months considered avail resource for institutional and home based Medicaid services, may be penalized by dividing value by ave cost of one month’s nursing home care. 60 month look-back on assets transferred to donee also applies. Estate recovery= attempt to recover Medicaid payments from recipient estates

Question 41

Spousal share assessment

Answer 41

half of countable resources/ subtract PRA (Protected Resource Amount): greater of spousal share up to $148,620, $29,724, amount transferred to community spouse as directed by court order, amount designated by state hearing officer

Question 41

Qualifying for Medicaid

Answer 41

Can’t have > $2k in countable assets, but need to consider Deficit Reduction Act of 2005 limitations on transfer: up to $585k on home equity/878k in certain states: anything over must be liquidated; unless spouse/dependent still lives

Question 42

Income eligibility

Answer 42

Institutionalized spouse’s total income
- personal needs allowance of $60+
- community spouse’s income allowance if need $2,288.75+
- family monthly income allowance
- uncovered medical expenses and premiums

Remaining income => cost of medical facility care

Question 43

Annuity Trusts

Answer 43

Medicaid annuity trusts convert savings, which could disqualify an individual for Medicaid, to income. This type of trust helps to protect about half of the family’s savings from being depleted by the cost of nursing home care.

Testamentary trusts created by a deceased spouse for the benefit of the institutional spouse can receive favorable treatment under Medicaid rules.

Question 44

Penalty period

Answer 44

Transfers for < FMV within look back period incur penalty.

Not applied to:
Transfers to a spouse, or to a third party for the sole benefit of the spouse.
Transfers by a spouse to a third party, for the sole benefit of the spouse.
Transfers to a blind or disabled child, or to trusts established for them.
Transfers for a purpose other than to qualify for Medicaid (this is rare).
Where imposing a penalty would cause an undue hardship.

Question 45

Estate recovery

Answer 45

States can recover funds from the Medicaid recipient’s probate assets and have the option of recovering funds from some non-probate assets such as jointly held property, revocable trusts, and life estates.

Question 46

LT Care Insurance

Answer 46

Covers:
-At home by paid caregivers such as home health aids,
-At home by unpaid caregivers such as spouses, family members or friends, or
- In a nursing home.
If unable to perform 2 of 6 ADLs/cognitive impairment

Question 47

Nursing Home Care levels

Answer 47

-Skilled nursing care is the highest level of nursing care (i.e., 24 hour care) ordered by an MD & provided by an RN, licensed practical nurse, or licensed therapist.
-Intermediate care is similar to skilled nursing care except that the patient neither receives nor needs 24 hr. attention. Intermittent/non-continuous skilled nursing care.
-Custodial care is the most basic level of nursing care, typically taking the form of assistance with ADLs. Individuals providing non-medical care usually are not medical personnel.

Question 48

Viatical settlements

Answer 48

requires certification from a physician that the individual’s condition can reasonably be expected to result in death within a certain time period
Viatical settlement firms purchase life insurance policies from individuals who have terminal illnesses for a lump sum cash payment, which is a discounted percentage of the policy’s face value.
If the offer is accepted, the policy owner transfers ownership to the viatical settlement firm, via an absolute assignment. The firm names itself as a beneficiary.

Question 49

The Viatical Settlements Model Act

Answer 49

disclosures include:
The impact of the transaction on eligibility for government benefits,
Possible tax implications,
Rescission rights, and
Alternatives to viatical settlements.

Licensing of viatical firms and brokers, as well as offer guidelines that establish minimum prices as a percentage of the policy death benefit.

Question 50

Disadvantages of a power of attorney are

Answer 50

limitations having third parties recognize an agent’s authority, and that the power ends at the principal’s death. It is a safeguard for the principal that the agent cannot exceed the powers contained in the power of attorney document, and is an advantage that the power cannot be revoked if the principal becomes incapacitated.

Question 51

Health care agents can confer with medical professionals to make decisions concerning:

Answer 51

The extent of medical treatment that should be provided
You correctly checked this.
Where an individual should receive treatment
Whether surgery should be performed
What if any medications should be administered

Question 52

Purpose of Trust Arrangements

Answer 52

• Reduction of estate tax liability after 2010 through several trusts (marital reduces with grantor’s marital deduction amount and non-marital uses grantor’s unified credit)
• Distribution of income from split interest trust to specified beneficiaries with remainder distributed to charity eg CRAT/CRUT
  -Professional management of assets
  -Provision of income to specified/1+ beneficiaries
  -Assistance to family member/special needs

Question 53

Living / inter vivos trust

Answer 53

Grantor creates and funds living trust, trustee carries out provisions for benefit of beneficiaries.

Question 54

Testamentary Trust

Answer 54

Provisions created during grantor’s lifetime through the will is funded after death. Property interests will be included in grantor’s gross estate at death and are subject to probate

Question 55

Revocable Trust

Answer 55

Assets placed within a revocable living trust during the lifetime of the grantor will avoid probate process, distributions to beneficiaries are subject to gift taxes if over annual exclusion amounts. Since assets placed in corpus are included in gross estate, there is no reduction in Grantor’s estate/income tax liability

Question 56

Irrevocable Trust

Answer 56

Value of assets will not be included in gross estate of Grantor with the exceptions of:
LI policies, property transfers within 3 yrs of death; transfer of assets into an irrevocable trust is a completed gift and there may be gift tax liability. Needs special court order to revoke the trust since it cannot be altered/terminated by the grantor

Question 57

Split-interest trusts

Answer 57

Irrevocable trusts such as GRATs and GRUTs, which provide Grantor with certain lifetime benefits
GRAT: payments received by Grantor structured as annuity, based on value of assets when transferred to trust
GRUT: payments to Grantor vary based on annual value of trust assets

Question 58

Marital and Non-marital trusts

Answer 58

A-B /A-B-Q trust gives surviving spouse full use of family’s economic wealth, while minimizing total federal estate tax payable

Question 59

Identify the major types of trusts used in estate planning for married couples.

Answer 59

Power of Appointment
Non-Marital Trust
QTIP
QPRT
Estate Trust
Marital Trust

Question 60

Marital / A trust

Answer 60

Consists of property that qualifies for marital deduction.
With GPA, general power of apptment marital trust, surviving spouse has lifetime /testamentary general POA and must be its only lifetime beneficiary
-provides stream of income to surviving spouse who is able to use corpus for his/her needs and cannot be split with any other individual and must be distributed at least once per year
- value of assets will be included in decedent’s gross estate, unlimited marital deduction will preclude payment of tax
- property transferred into marital trust is included in gross estate of surviving spouse, tax is postponed until death of surviving spouse, unless consumed/transferred to charity

Question 61

Qualified Domestic Trust (QDOT)

Answer 61

ensures that assets will not ultimately leave the US without being taxed.
Requirements:
The requirements for establishing a QDOT are:
The trustee must be a US citizen or a domestic corporation, or a US bank if trust assets exceed $2 million,
The trust must retain sufficient assets to cover the non-citizen’s spouse’s estate taxes,
The trust must be set up as a QTIP trust or an Estate Trust, and
The trustee must approve all distributions of principal, and withhold estate taxes from principal distributions that are not subject to an ascertainable standard (HEMS).

Question 62

Q-TIP Trust/Qualified Terminable Interest Property trust / current income interest trust.

Answer 62

used when the decedent wishes to provide the surviving spouse with a stream of income for life, qualify for the marital deduction, yet ultimately control who will receive the trust property upon the death of the surviving spouse.

Question 63

Q-TIP features

Answer 63

The Q-TIP trust must provide a stream of income to the surviving spouse.
The income stream on this trust must be distributed at least annually.
The income from this trust must be paid only to the surviving spouse and to no one else.
The surviving spouse can be the Trustee of the QTIP and have control, for example, convert non-income-producing assets into income, change the investments to generate a greater income stream, and have limited principal distributions for health, education, maintenance, and support (HEMS).
The surviving spouse may be given a limited power of invasion over the corpus of a Q-TIP trust. This power of invasion is similar to that provided to the surviving spouse in a nonmarital trust. Therefore, the surviving spouse may withdraw the greater of $5,000 or 5% of the trust corpus annually if the trust gives the spouse this power of withdrawal. It should be noted that this power of invasion is not cumulative and is lost if not exercised in the current year.

Question 64

Estate Trust

Answer 64

Established by the decedent which accumulates its income rather than distributing it to the spouse, similar to marital trust that does not provide surviving spouse with income stream. Full value of assets included in estate of surviving spouse

Question 65

Non-marital/bypass trust/credit shelter trust

Answer 65

funded with the decedent’s exemption equivalent amount, assets in this trust will “by-pass” the surviving spouse’s estate and will not qualify for marital deductions in decedent’s estate since spouse does not have full control over trust assets.

Surviving spouse can utilize unused portion of decedent spouse’s exclusion -DSUEA + BEA

Question 66

Suppose Ralph wants to provide his wife Clara with a stream of income (after his death) that terminates upon her death. Ralph also wants to determine who the ultimate beneficiaries of the property will be upon the death of his wife. Which type of trust will be appropriate in order for Ralph to fulfill his wishes?

Answer 66

A nonmarital trust or Q-Tip trust is appropriate when the decedent (in this case, Ralph) wants to provide the surviving spouse (Clara) with a stream of income that terminates upon the survivor’s death and if the decedent wants to determine who the ultimate beneficiaries of the property will be upon the death of the surviving spouse.

Question 67

Each of the following elements should be included in the powers of attorney EXCEPT:
-Authority to transfer assets into a trust created by the principal.
-An outline of the general aspects of the covered principal’s affairs.
-Verbiage dealing with gifting powers such as annual exclusions and/or lifetime gifts.
-A provision authorizing the agent to make elections with respect to retirement plan assets.

Answer 67

An outline of the general aspects of the covered principal’s affairs.- should be v specific

Question 68

To qualify for Medicaid, the Deficit Reduction Act provides for a ______ look-back period to determine if any income and assets were transferred to individuals, charities, or trusts for less than fair market value.

Answer 68

five-year “look-back” period to determine if any income and assets were transferred to individuals, charities, or trusts for less than fair market value

Transfers made to trusts within 60 months, which use at least some of the Medicaid applicant’s funds, are considered available resources.

Question 69

Most standby trusts are revocable inter-vivos trusts, in which the grantor is also

Answer 69

the trustee & the beneficiary