Bryant - Course 6. Estate Planning. 1. Overview of Estate Planning Flashcards

Question

# Section 1 - Introduction to Estate Planning Summary Estate planning involves planning for the accumulation, preservation and distribution of wealth. This course will focus on the distribution phase of the process. Although the first two stages of the process are easy for clients to undertake, the distribution phase deals with death and planning for loved ones after death, a difficult topic for many. Estate planning needs to be part of the financial life cycle: to ensure that a person's affairs are properly managed in case of death or legal incapacity; to ensure that assets transfer to the intended heirs in the intended manner; to ensure that the expenses associated with death are minimized.

Answer 1

In this lesson, we have covered the following: * **Estate planning process**: Involves gathering data of the person's estate and determining estate objectives, identifying influencing factors and weaknesses, selecting and implementing appropriate techniques, and monitoring and adjusting the plan. * **Lifetime planning**: Various life situations can initiate the need for creating or adjusting an estate plan. The estate plan should include a stage for wealth accumulation, a stage for preservation of that wealth, and a stage where the wealth is ultimately distributed to the various beneficiaries. * A**dvantages of estate planning**: There are many reasons to create an estate plan, including the desire to ensure that one's estate is properly managed, preserved and distributed. Drawbacks may include the cost of expert advice and counsel, and legal fees. * **Elements of estate planning**: Include non-tax elements such as preparation of various legal documents and creation of the will and/or trusts, as well as tax elements such as gifting strategies.

Answer 2

Allow the court to determine the appropriate distribution of the estate. * Although courts attempt to be fair and equitable when distributing an estate, their decisions may or may not agree with the decedent's intentions. **If the decedent has not executed a will, the state's laws of intestacy will determine who the heirs of the assets are as well as the amount of their inheritance**. * The court distribution process can be lengthy and costly for the beneficiaries. * **One of the objectives of estate planning is to avoid probate court for as much of the estate assets as possible**.

Answer 3

False * Although it becomes more compelling later in life, **estate planning should begin when a client begins to accumulate assets**. * For example, a new parent may want to select who will become the guardian for the minor in the event that one or both parents should become incapacitated or die.

Answer 4

The estate is divided in accordance with the laws of intestacy. * If a will was declared invalid, the estate will be distributed by the courts under the state's laws of intestacy. * **A will may be determined to be invalid if its execution did not follow the guidelines under state law, or was improperly witnessed or signed**.

Answer 5

Lowers the size of the estate Lowers the amount of estate taxes * Gifting estate assets during lifetime reduces the amount of assets which will be included in the decedent's estate after death. * It is not advantageous for a donee to receive the donor's basis in property, since a future sale might result in a capital gain. * **Property that passes to a beneficiary upon the owner's death receives a step-up in basis to fair market value**.

Answer 6

Through the use of a will or a trust, an estate owner can apportion his or her estate assets in a manner that more appropriately and adequately serves the needs of the entire family unit. To ensure that you have a solid understanding of introduction to wills and trusts, the following topics will be covered in this lesson: * Defining Wills * Defining Trusts After completing this lesson, you should be able to: * Describe how a will relates to the probate process * Describe estate planning applications for trusts

Answer 7

Spouse and one child * 50% each Spouse and two or more children * Spouse receives one-third, the remainder divided equally among children Spouse and parents surviving, no children * Spouse receives 50-75%, the remainder to surviving parents Spouse, no children, and parents deceased * Spouse receives 50-100%, surviving siblings receive balance Parents surviving, no spouse, and no children * Parents receive 100% Siblings surviving, no spouse, no children, and parents deceased * Siblings receive equal shares

Answer 8

* As previously noted, a **will** is a legal document that distributes property (probate assets) of the decedent. * The will leaves assets to specifically named individuals, known as **heirs**. * The property transferred pursuant to the terms of the will is known as a **bequest**. * Though written during the lifetime of the maker, also known as the **testator**, the will is testamentary by nature, meaning it takes effect only upon the death of the testator. * Therefore, it is a **revocable instrument**, one which can be amended, altered, or revoked any number of times prior to the testator's death.

Answer 9

If the will is revoked prior to the testator's death and another valid will has not been executed, the decedent's **property will be transferred according to the laws of intestate succession**.

Answer 10

* **Sound Mind**. The maker must be of sound mind when executing the will. * **Of Age**. The maker must either be of age (no minors) or, if married, a minor who is considered to have reached the age of majority because of the marriage. * **In Writing**. The will must be in writing. This can either be typewritten (as is required by many states) or in the **maker’s handwriting (i.e., a holographic will)**. * **Signed**. The will must be signed by the maker, or, if the maker suffers a severe handicap and cannot sign, then it may be signed by someone other than the maker at the express command of the maker. * **Declared Last Will and Testament**. The will must be declared to be the last will and testament of the maker. * **Witnessed**. The will **must be witnessed by two (or three) competent individuals who serve as witnesses**. They **must be of age and sign at the request and in the presence of the maker**. * **Attestation Clause**. **States that the will was validly executed according to the state’s statutory execution requirements and has been validly witnessed**.

Answer 11

Not all property is distributed under the provisions of the will. Property may pass outside of the will. **Since probate costs are usually equal to a percentage of the assets transferred, even a partial transfer of assets outside the will may result in cost savings**. However, **this may not result in estate tax savings, since estate taxes are based on the value of the gross estate, which will include property transferred both under the provisions as well as outside of the will**. **One way of transferring property and avoiding probate is to give assets away during a lifetime**. However, this method isn't always desirable if the client wants to retain lifetime control over the property. **There are ways, known as probate substitutes, in which property may transfer outside of the probate process: by law, by trusts, and by contract, that is, beneficiary designation**. **Although property passing under one of the three methods listed above may reduce the estate's exposure to probate, these methods in and of themselves are not designed to reduce estate tax liability**.

Answer 12

Although assets transferring under the provisions of the will must be subject to the probate process, everyone needs a will. There are a number of reasons why you need to have a will, including the following: * **Transfer of property**: Property that is individually-owned is transferred according to the terms expressed in the will. * **Guardianship**: A legal guardian for children under the age of majority and a custodian or trustee of property can be appointed in the will. If not addressed in the will, the court will appoint individuals to serve in both roles. * **Cost for administrator**: **Without a will, the court will appoint an administrator, a person representing the decedent in the probate process to manage the distribution of assets from the estate**. In a properly executed will, the testator may select an individual functioning in the same capacity but called an **executor**. In short, if a client does not have a will, his or her separately-owned **assets will be distributed according to state laws**. **These laws determine who will gain custody of minor children, as well as how and to whom the property will be distributed**.

Answer 13

* Any disputes can be settled impartially through probate court. * The **probate process can shorten the time creditors can make claims against your estate**. * **Probate estates may use a fiscal year instead of a calendar year, which may be more favorable for income tax purposes**.

Answer 14

* If your estate is substantial, **the legal and administrative fees associated with probate can be high**. Your estate pays for all of these fees, leaving that much less for your beneficiaries. * Generally, probate **takes a minimum of 6-9 months for simple estates and 1-2 years for complex estates**. And if your will is challenged, the probate procedure can drag on for several years, freezing your beneficiaries' assets. * If you own **out-of-state property**, it **must be probated in the state where it is located**, resulting in multiple probate proceedings and additional costs. This is referred to as **auxiliary probate**. * **All documents filed with the probate court are a matter of public record, resulting in a lack of privacy**. * A **will is effective only at your death** and **does not help govern your estate if you become incapacitated**.

Answer 15

* For those who have minor children, a guardian for the child is named in the will in the event one or both parents die **to provide support and care**. * As in the case of the executor, the testator should make sure that the proposed guardian will accept the assigned role. * **If the testator dies without naming guardians for minor children, the court will appoint someone to this role**.

Answer 16

The **person named in the will who manages the estate until all the assets are distributed** is called the **executor or executrix**. * Since the executor is given extensive powers to handle the affairs of the estate, including distributing the property, special thought must be given to selecting an individual for this role. * If you die without a will, or the named executor and alternates (if any) **refuse to serve, the court chooses someone termed the administrator or administratrix to handle the estate**. This choice may not coincide with the desires of the testator. * An executor will **normally be paid a fee for services performed, but the person selected may agree to serve gratuitously**. * More importantly, unless the will specifically states otherwise, **the executor will be required to post a bond to cover any potential mismanagement of the estate**. * This is **expensive and will eventually be charged to the estate**. * **Assuming a trustworthy individual has been selected, the need for posting bond in the will may be waived**.

Answer 17

* A trust is a **legal entity that holds and manages assets for another person**. * A trust is created when an individual, called a **grantor**, transfers property to a **trustee** - which can be an individual, an investment firm, or a bank - for the benefit of one or more people, the **beneficiaries**. * Virtually any asset can be transferred into a trust - money, securities, life insurance policies, or real property.

Answer 18

* Trusts **avoid probate if funded with assets during lifetime**. **Retitling assets into the name of the trust is considered funding**. * Trusts are **much more difficult to challenge in court** than are wills. * Trusts **can be used to shelter assets from estate taxes**. * Trusts allow for **professional asset management**. If a beneficiary doesn't have the understanding or desire to manage money effectively, a trust can provide the necessary professional management. * Trusts provide for **confidentiality**. Whereas a will becomes a matter of public record, a trust does not. * Trusts **can be used to provide for a child with special needs**. A special needs trust can provide funds for disabled children of majority age without eliminating government benefit programs like Medicaid. * Trusts **can be used for philanthropic purposes or charitable gifting**. * Trusts **can be used to hold money until a child reaches maturity**. * Trusts can ensure that children from a previous marriage will receive some inheritance. * **Trusts can include private instructions regarding the management, control, and disposition of assets, consistent with a client's goals and family needs**.

Answer 19

* A trustee **holds legal title to the assets placed in the trust, which the trustee manages for all of the trust beneficiaries**. * The trustee is a **fiduciary who is held to the highest standards when fulfilling their duty to act in the best interests of the beneficiaries**. * Ordinarily, the duties and powers of a trustee are specified in the instructions, or terms, of the trust document and determined by state law (these vary from state to state).

Answer 20

* **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.

Answer 21

* **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**.

Answer 22

An **inter vivos trust** is one **established and funded during the grantor's lifetime**. * An inter vivos trust is also known as a **living trust**. * **Funds in a living trust pass outside the will and the probate process, saving probate costs**. * Title to property in a living trust is held in the name of the trust. * **The actual funding of a living trust will require assets to be retitled into the name of the living trust**.

Answer 23

There are two types of living trusts: * Revocable * Irrevocable In a **revocable living trust**, the grantor, the trustee, and the beneficiary may all be the same person. Popular financial literature often suggests setting up a revocable living trust which provides for the lifetime welfare of the grantor, as well as the welfare of family members and other beneficiaries after death. * **Although funds in a living trust escape probate, they still may be taxable as part of the decedent's estate**. * **The deciding factor for estate tax liability is whether the trust is revocable or irrevocable**.

Answer 24

Although funds in a living trust escape probate, they still may be taxable as part of the decedent's estate. * **The deciding factor for estate tax liability is whether the trust is revocable or irrevocable**.

Answer 25

* A revocable trust **can be changed or revoked by the grantor at any time**. * In reality, the property still remains under the control of the person who established the trust and is, therefore, part of the decedent's gross estate. * With a revocable living trust, **assets are transferred into the trust during the grantor's lifetime**. * Since the trust is revocable, the grantor not only has full control over the assets within the trust but also may change or terminate the provisions of the trust. * **Since the grantor has never given up control over the assets placed within the revocable living trust, all tax liabilities, including income tax, will be borne by the grantor or the grantor's estate**.

Answer 26

* The assets in the trust **avoid probate** upon death. * Grantor **maintains the power to alter or cancel the trust**. * Assets continue to be professionally managed by the trustee in the event of incapacity. * The trustee can be replaced if his or her skills do not meet expectations.

Answer 27

* There are **no income tax advantages** - you **pay taxes on any income, and capital gains on the assets, in the trust**. * The **assets in the revocable living trust are considered part of your estate for estate tax purposes**. * **Trusts that are unfunded typically fail to achieve probate avoidance or estate tax reduction**.

Answer 28

The same is not true for an irrevocable trust. * **Once created, the terms of an irrevocable trust cannot be changed**. * Thus, the **grantor loses control of the property placed in the trust**. * Although this **may reduce the value of the grantor's estate**, * **assets transferred into an irrevocable living trust may be subject to gift tax liability**. **The irrevocable trust becomes a separate legal entity**. * It **may pay taxes, at the trust's tax rates, on the income and capital gains earned by the assets within the trust**. * Assets within an irrevocable living trust also avoid the probate process.

Answer 29

* The assets in the trust **avoid probate** upon death. * **Any appreciation on assets in the trust may be excluded from the estate**; **estate taxes may be minimized at death**. * **Income earned on assets in the trust can be directed to the beneficiary**, which can result in tax savings if the beneficiary is in a lower tax bracket.

Answer 30

* **Loss of control over the assets in the trust**. * Assets transferred into the trust **may be subject to gift taxes**.

Answer 31

Revocable Trust * Grantor control * Living trust * Included in grantor's estate * Bank CDs Irrevocable Trust * Living trust * Gains and income taxable to trust * Bank CDs

Answer 32

**A testamentary trust is funded with assets after death**.

Answer 33

There are a number of different purposes for testamentary trusts, including: * **Reducing estate taxes** * **Providing professional investment management** * Making sure the **estate ends up in the right hands**

Answer 34

Through the use of spousal transfer trusts, several important estate planning concerning spouses can be accomplished: * Provide for the lifetime support of a surviving spouse * **Determine whether the property used to provide the lifetime support should be included in an individual's or their spouse's taxable estate** * **Determine who chooses the ultimate beneficiary of the estate at the death of the surviving spouse**

Answer 35

A **bypass trust (nonmarital trust or B-trust)** may also provide for the lifetime support of the surviving spouse. * At the death of the surviving spouse, the **assets remaining within this trust are distributed to its ultimate beneficiaries** selected by the original grantor of the trust. * **If the surviving spouse does not have total control over who will ultimately receive the remaining value of these trust assets, the value of this trust should avoid inclusion in the estate of the surviving spouse**. In other words, **the property within this trust bypasses the estate of the surviving spouse**. Even though the property transferred into the bypass trust is included in the taxable estate of the creator, **the unified tax credit will eliminate any tax liability**.

Answer 36

* Alternatively, a trust which gives the surviving spouse a lifetime interest in the income and/or principal within the trust and qualifies for the unlimited marital deduction is a **marital trust**. * **Although the assets transferring into the marital trust will be included in the creator's estate, the unlimited marital deduction postpones the payment of the estate tax until the death of the surviving spouse**.

Answer 37

Certain marital trusts qualify for the unlimited marital deduction. * If the creator wanted the **surviving spouse to have full control over all income and principal within the trust, including naming the ultimate beneficiaries** of the trust assets, a **general power of appointment trust (GPA trust or A-trust)** might be used. * If the **creator wanted to limit the surviving spouse's access to the principal, as well as control who the ultimate beneficiaries** of the trust would be, a **QTIP trust (Qualified Terminable Interest Property trust)** might be utilized. * QTIP trusts are often used in situations involving second marriages to **ensure that children from the previous marriage will receive an inheritance**.

Answer 38

A-trust * Qualifies for Marital Deduction * Surviving Spouse has Power of Appointment * Included in Surviving Spouse's Estate QTIP * Qualifies for Marital Deduction * Included in Surviving Spouse's Estate B-trust * Included in Decedent's Estate

Answer 39

An intergenerational transfer is **any transfer of property from one generation to another**. * **Making direct transfers and creating trusts that skip a generation is possible**. For example, a transfer from a grandparent to grandchildren while the grandchildren's parents were living would skip a generation. * **Such transfers would also avoid inclusion in the grandchildren's parents' estate and, therefore, avoid a whole generation of estate taxes**. **The Generation-Skipping Transfer Tax (GSTT)** is meant to close this loophole partially by **levying a special tax on generation-skipping transfers**. * **In 2023, each grandparent can transfer up to $12,920,000 to their grandchildren during their lifetime or at their death before the tax is applied**.

Answer 40

A **sprinkle trust distributes income according to need instead of a preset formula**. * The **trustee is given the discretion to determine who needs what among a designated group of beneficiaries and then "sprinkles" the income among them**.

Answer 41

**Trust**: A **legal entity that holds money or other assets**. Some of the common uses of trusts include: * Avoiding probate * Deterring legal challenges by disgruntled heirs * Reducing estate taxes * Providing for professional management of assets * Offering privacy and confidentiality * Supporting heirs with special needs * Holding money until a child reaches maturity * Ensure that children from a previous marriage will receive an inheritance With a **revocable living trust**, assets are transferred into the trust during a lifetime, with the grantor retaining the right to use and withdraw the assets at any time. An **irrevocable living trust** is permanent. A **testamentary trust** is one that is funded after death. If a testamentary trust is created within the provisions of a will, **funding of the trust will only occur after the estate has been probated**.

Answer 42

Joint Tenancy Revocable Trust Contracts * 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**.

Answer 43

Bypass Trust Nonmarital Trust Q-TIP * A Q-TIP, bypass trust or nonmarital trust does not allow the beneficiary to be changed.

Answer 44

Irrevocable Trusts * The grantor gives up control and right to the assets of an irrevocable trust. Therefore, the assets are not included in the estate taxes.

Answer 45

* Inter-vivos Trust - During the lifetime of the grantor * Will - Activated once the person dies * Testamentary Trust - Activated once probate is completed

Answer 46

To ensure that you have an understanding of tax laws as they relate to estate planning, the following topics will be covered in this lesson: * Defining Tax Laws * Tax Rate * Exclusions * Deductions * Simple Will * Optimum Marital Will Plans * Eliminating All Estate Tax After completing this lesson, you will be able to: * Describe how tax laws affect estate planning * List tax rates for gifts and estates * List exclusions from gift and estate taxes * List deductions available for estate planning * Describe taxation of transfer by a simple will * Describe taxation of transfer by optimum marital will plan * List methods to minimize estate taxes

Answer 47

* If she sold the shares today, she would have to pay tax on the $10,000 gain. * However, if she died and Arnold received these shares from her estate and then subsequently sold the stock for $15,000, **there would be no capital gains tax to pay.** This is **because the property receives a stepped-up cost basis for income tax purposes. Thus, if the shares are valued at $15,000 at the time of the death and later sold for the same amount, no capital gains taxes would be due**. * If Sharon had made a gift to Arnold of the stock before her death, **Sharon's basis of $5,000 would carry over to Arnold**. If appreciated property is gifted, the donor's basis in the property carries over to the donee. Therefore, if the FMV of the stock is $15,000 on the date of the gift, the value of the gift is $15,000. * Since Sharon had a basis of $5,000, when Arnold sold the stock for $15,000, he would have to **recognize a gain of $10,000**.

Answer 48

* **A tax on the property transferred or received upon the death of the owner** is known as a **death tax**. * There are two types of death taxes: an estate tax and an inheritance tax. * An **estate tax** is **imposed on the property of the deceased before it is transferred** * An **inheritance tax** is **levied on the property when it is received by the beneficiary**. **At the federal level, only an estate tax exists**. However, **state governments impose either estate or inheritance taxes and sometimes both**. **Most discussions of death taxes also include an examination of gift taxes**. Without a gift tax, estate taxes could be avoided by simply giving property away during a lifetime.

Answer 49

* **Calculate Gross Estate Value**. The **value of all of the decedent’s assets and property, including life insurance proceeds, pensions, collectibles, investments, real estate, and any other assets owned at the time of death**. * **Calculate Taxable Estate**. Gross estate **less funeral and administrative expenses, debts, liabilities, or mortgages, certain taxes, and any marital or charitable deductions**. * **Calculate Gift Adjusted Taxable Estate**. **Add cumulative lifetime gifts**. * **Determine Estate Tax**. **Subtract applicable gift and estate tax credit to determine the estate tax base**, then **multiply by estate tax rate schedule to determine estate tax amount**.

Answer 50

* Prior to 2005 the federal government provided a maximum credit for state estate taxes that were paid. This credit allowed decedents to reduce their federal estate tax bill on a dollar-for dollar basis with the amount of money they paid in state estate taxes. States used this maximum federal credit level as their estate tax rate, which brought in additional income to the state. Now, there is no longer a federal state death tax credit, but there is a state death tax deduction instead. **For this reason, many states have adopted new state death tax laws to make up for this loss of revenue.** * **The federal government does not impose an inheritance tax**. * However, **18 states tax inheritances**. * In all of them, **the rates are structured so that the larger the estate and the more distant the relationship to the deceased, the higher is the tax rate**. * The exact tax rate and the exemption accorded each beneficiary from the tax differ from state to state.

Answer 51

* The process of calculating your estate taxes starts by calculating the value of the gross estate, which is simply the value of all your assets and property at the time of your death. Remember, you’ll have to include the death benefits of any insurance policy or retirement plan you have. The example assumes you have a gross estate of $13.4 million. * In Step 2, you calculate your taxable estate by subtracting the funeral and estate administrative expenses, along with any debts and taxes you owe, from the gross estate calculated in Step 1. Keep in mind that in Step 2 you need to subtract any and all liabilities or mortgages existing at the time of death. In addition, you subtract any allowable deductions, such as the unlimited marital deduction, any charitable deductions, and state death taxes you owe. Remember, gifts to charity are tax-deductible, and there’s no limit on the size of charitable gifts. Our example assumes that your expenses, debt, income, and other taxes owed totaled $100,000. * To calculate the adjusted taxable gifts in Step 3, the Step 2 value must be adjusted for any taxable lifetime gifts that you've made. Remember that the annual gift tax exclusion allows for only one $17,000 (2023) gift per year per individual, and annual exclusion gifts are not included on this line. Let's assume over your life you have given heavily to your children, and one of your gifts exceeded the allowable gift tax annual exclusion by $200,000. Thus, the gift-adjusted taxable estate is $13.5 million, which results in net estate taxes of $34,000 after applying an applicable credit of $5,311,800 (2023) to offset the tax.

Answer 52

Inheritance tax statutes generally segregate beneficiaries into classes similar to the following: * Class 1: Spouse * Class 2: Parents, children, grandparents, lineal descendants * Class 3: Brothers and sisters, aunts and uncles * Class 4: Children of brothers and sisters, children of aunts and uncles * Class 5: All others **Inheritance taxes should play an important role in estate planning by providing an incentive to leave property to closer relatives**. Furthermore, **because exemptions are low - in one state $5,000 for a spouse - and because rates can be high on large estates, approaching 30 percent**, * **inheritance taxes also provide an incentive for lifetime gifts**.

Answer 53

**To determine the federal gift tax and the federal estate tax, you need to calculate the amount of taxable gifts**. * **Taxable gifts equal the total value of gifts made during the year less the annual exclusion per recipient, gifts to charitable institutions, amounts paid to medical and educational institutions for services provided to the recipient, and amounts given to a spouse**. * The **annual exclusion per recipient is $17,000** (2023). **The taxable gift is the amount that remains after subtracting the annual exclusion from the value of the gift**. However, the taxable gift is not necessarily subject to a gift tax. * **A person can make lifetime gifts that total $12,920,000 (2023) without paying any gift tax**. The tax code **allows a surviving spouse to transfer a deceased spouse's unused exclusion amount**. * The used amount is available to the surviving spouse and the survivor's lifetime exclusion amount.

Answer 54

Tom wrote a check to his son for $15.2 million then only $2,263,000 would be subject to gift tax after subtracting Tom's $17,000 (2023) annual exclusion. * The first $12,920,000 (2023) is not taxed because there is a **gift tax unified credit** of $5,311,800 (2023) to offset the tax. * The $12,920,000 is referred to as the **lifetime applicable exclusion**. * The $5,311,800 amount is referred to as the **lifetime applicable credit**, and represents the gift tax that would be payable on the lifetime annual exclusion amount of $12,920,000, if not for the credit.

Answer 55

* Estate and lifetime gift exemption: $12.96 million * GSTT exemption: $12.96 million * Highest estate and gift tax rates: 40%

Answer 56

There are three common deductions that estate planners use to minimize estate taxes: * Marital * Charitable * State death tax deduction The Internal Revenue Code **allows an unlimited marital deduction for gift and estate tax purposes**. * This means there's **no limit to the amount of tax-free transfers between spouses**. * **In other words, when a husband or wife dies, the estate, regardless of size, can be transferred to the survivor without any estate tax**. * This assumes that the donor spouse or the decedent spouse is not transferring terminable interest property to the donee spouse or to the surviving spouse. * **On the other hand, if the beneficiary is someone other than the surviving spouse or a non-U.S. citizen spouse, the maximum amount of assets that can transfer without an estate tax liability is $12,920,000 in 2023**. Additionally, the **Internal Revenue Code allows an unlimited gift and estate tax deduction for a transfer to charities**. Therefore, transferring assets to charities may be **another method to reduce the taxable estate**. The **final deduction can be taken for state death taxes paid in the decedent's state of domicile**.

Answer 57

* Although a simple will itself does not have tax implications, how assets are distributed under your will can have a significant impact on the taxation of those assets. * Individuals are allowed by law to leave an amount that is equal to the exemption equivalent amount free of federal estate tax.

Answer 58

A husband and a wife each own assets of $14 million. Assume that in 2023 the husband dies. * His $14 million shall automatically transfer to his wife, and no estate tax will be imposed due to the **unlimited marital deduction**. * This inheritance will increase the wife’s estate by $14 million. * If she dies later in 2023, her estate will be taxed at **$28 million**. * However, she can apply her unified credit on $5,311,800, which offsets the tax on **$12,920,000**. * She can use the unused portion of her husband’s exclusion to offset an additional $**12,920,000** in taxable estate. * Therefore, her estate will be taxed on **$2,160,000** ($2,160,000 x 0.40 = $864,000) * **$864,000 is due 9 months after her death**.

Answer 59

To avoid wasting the estate tax credit available at the death of the first spouse (because of an overuse of the unlimited marital deduction), most planners now recommend that couples create a **bypass trust (also known as a "credit shelter trust") funded with the value of assets sheltered by the unified credit amount ($12,920,000 in 2023)**. * **Property transferred into this trust is subject to estate tax at the first death. However, no estate tax is due since the estate tax equals the unified credit amount**. Even though the surviving spouse receives income and other benefits from the bypass trust, **for estate tax purposes the IRS treats the property in this trust as not owned by the surviving spouse**. * Therefore, **the assets in the bypass trust and the appreciation on these assets pass to the heirs at the survivor's death free of estate tax liability**. This type of trust is known as a "bypass" trust because it **bypasses the imposition of estate tax at the death of the surviving spouse**. * These trusts are **also called " B ", credit shelter, and family trusts**.

Answer 60

If we are working with a married couple, the value of whose estate exceeds two times the estate tax exclusion amount, with an estate planning objective of minimizing total estate tax, this is what planning will allow them to accomplish. On the first spouse's death, the value of the estate tax exclusion amount transfers to the "B" trust. To the extent the value of the decedent spouse's estate is greater than $12,920,000, the excess will transfer under the unlimited marital deduction. No estate tax will be paid on the first death. On the death of the surviving spouse, none of the assets in the "B" trust will be included in the estate, but all of the marital assets plus individually owned assets will be included. Therefore, estate tax will be due to the extent the value of the surviving spouse's estate exceeds the estate tax exclusion amount of $12,920,000. Remember, the marital deduction eliminates estate tax on the death of the first spouse, postponing it until the death of the surviving spouse. **This type of plan is often referred to as an optimum marital deduction plan because at the first spouse's death, the marital deduction is used only to the extent that it reduces the net estate taxes payable at that time to zero**.

Answer 61

The **aim of an irrevocable life insurance trust (ILIT) is to remove from the insured's estate the death benefit proceeds of the life insurance policy**. * Remember, on the date of death, estate assets include the value of any life insurance policy over which the decedent has incidents of ownership. * Therefore, if the objective is to reduce the value of the estate, removing the insurance may make sense. * **One method by which this can be accomplished is by creating an ILIT into which the owner would gift an existing life insurance policy**. * **Assuming the owner survives the transfer of the policy by at least three years, no portion of the death benefit proceeds will be included in the owner's estate**. * Additionally, **it is through the provisions of this trust that the grantor can specify how the proceeds will be used**: made available to provide cash for the estate, care for a spouse, care for children, and so on.

Answer 62

In summary, there are several ways to minimize estate taxes this year and beyond: * **Spend It**: Use up all your money before passing away. However, spending it means that you cannot buy things that can become part of the estate, such as a summer home or a car. * **Pre-fund It**: **Purchase an irrevocable life insurance trust that would pay out enough of the policy proceeds to pay for all the estate's taxes**. * **Give It Away**: Give away your entire estate by **maximizing your gift tax exemptions** and give the rest as direct payments for education tuition or health care. * **Annual Exclusion Gifts**: **Gift a maximum of $17,000 (2023) (adjusted for inflation) per person per year**. * **Charitable Gifts**: Unlimited amounts can be given to federally approved charities.

Answer 63

The federal government does not impose an inheritance tax. However, 18 states tax inheritances. In all of them, the rates are structured so that the larger the estate and the more distant the relationship to the deceased, the higher is the tax rate. The exact tax rate and the exemption accorded to each beneficiary from the tax differ from state to state. Inheritance tax statutes generally segregate beneficiaries into classes similar to the following: Class 1: Spouse Class 2: Parents, children, grandparents, lineal descendants Class 3: Brothers and sisters, aunts and uncles Class 4: Children of brothers and sisters, children of aunts and uncles Class 5: All others Inheritance taxes should play an important role in estate planning by **providing an incentive to leave property to closer relatives**. Furthermore, because exemptions are low - in one state $5,000 for a spouse - and because rates can be high on large estates, approaching 30 percent, **inheritance taxes also provide an incentive for lifetime gifts**.

Answer 64

* **Annual Exclusions**: Annual present interest gifts can be made, tax-free up to $17,000 (2023) per person per year. * **Deductions**: **All transfers to spouses and charities can be deducted from federal taxes**. * **Simple Will**: Use of a simple will can move the estate from the deceased spouse to the surviving spouse tax-free, due to the unlimited marital deduction. Consequently, the **estate taxes are due upon the surviving spouse's death**. * **Optimum Marital Will Plans**: If the estate were **transferred to a bypass trust instead, then the surviving spouse’s taxable estate would not increase**. * **Eliminating All Estate Tax**: To minimize estate taxes, a person could reduce the estate by giving it away, by spending it all, or by having a trust purchase an insurance policy to pay any estate taxes due.

Answer 65

$30,000 * $12,950,000 - $12,920,000 = $30,000

Answer 66

Spend it all. Give it away to charity. Give it all to his spouse. Transfer an insurance policy to a trust more than 3 years from the date of his death. Have an irrevocable life insurance trust purchase a new policy. * Sean can lower his estate taxes by spending it all (but not investing in assets that will count towards his estate), giving it away, or prefunding the estate taxes with insurance. Sean could also opt to transfer an insurance policy to a trust more than 3 years from the date of his death or have an irrevocable life insurance trust purchase a new policy.

Answer 67

100% * Marital and charitable transfers are 100% deductible.

Answer 68

The following are the key concepts to remember: * **Introduction to Estate Planning**: The purpose of estate planning is to ensure that the desired parties are administrating the decedent’s affairs, proceeds of the estate are properly distributed to designated beneficiaries, and measures are in place to prevent taxes from depleting the estate. * **Introduction to Wills and Trusts**: Wills are important for designating what happens to one’s estate. Without a will, one’s estate would be distributed by the court under the rules of intestacy. **Trusts may be used to provide for beneficiaries while lowering taxes on the estate**. * **Introduction to Estate Taxes**: **Estate taxes are tied to gift taxes**. **The tax is applied on the gross estate less tax exemptions and exclusions**. **Part of the goal of estate planning is to minimize estate taxes through strategies such as trusts, insurance, and gifting**.

Answer 69

I, II, III * Dramatic changes in cash demands or investment risk tolerance could indicate that someone is mis-using the elder client. It is normal for account transactions to be sent to the client’s attorney.

Answer 70

Inherit the stock and receive the dividends * At a $7 million (approximately) date of death estate tax base, there is no estate tax due. * The AVD cannot be elected if there is no estate tax due. * It can’t be elected to get a higher step-up in basis. Because of that, IRD rules do not apply. * Lastly, **gains due to inheritance are always LTCGs**. * His daughter can keep the stock or sell it.

Answer 71

Gifts to a charity are not tax deductible if the gifts exceed the annual exclusion amount in one tax year. * **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.

Answer 72

Dying with a valid will

Answer 73

Durable power of attorney * A durable power of attorney is effective immediately and continues through incapacity or disability.

Answer 74

Sell it, take the loss, and invest in CDs. * Your mother may need income liquidity if her health is poor. * The CDs carry more safety of principal than do the REITs. * "Gift the stock to her favorite charity" is incorrect. **The tax deduction would be based on the stock’s value today**. * **"Gift the stock to you" is also incorrect, the loss (50%) cannot be deducted**.

Answer 75

Trustee * The trustee has a fiduciary duty to the beneficiary under a trust.

Answer 76

Life insurance death benefit proceeds payable to the insured’s estate. * There must be a named beneficiary for life insurance death benefit proceeds to escape probate. * An annuity or IRA with a named beneficiary will avoid the probate process and pass directly to the beneficiary by contract. * Real estate titled joint tenants with rights of survivorship (JTWROS) will also avoid the probate process and pass from the mother by law to the surviving daughter.

Answer 77

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.

Answer 78

The court * A guardian is appointed 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.)

Answer 79

Because a valid will is a legal document, provisions in the will override beneficiary designations in life insurance contracts and annuities. * A will is a legal document, but does not override named beneficiary designations in life insurance and annuity contracts. * A will only transfers assets that were separately owned by the testator at death. These assets are called probate assets. * It is only within the provisions of the will that the testator can name guardians for minor children. In addition executors of the estate may only be appointed within the will. * The validity of a will is determined through the probate process.