Bryant - Course 6. Estate Planning. 1. Overview of Estate Planning Flashcards
Module Introduction
Consider the case of Howard Hughes, who died in 1976, seemingly without a will and with an estate valued at $42 billion. Within five months, over 30 different wills appeared, all of which were eventually declared invalid. After 11 years, the estate was finally settled, with lawyers claiming about $8 million, Uncle Sam taking half, and the rest going to his 22 cousins!
Upon death, any property in which there was an interest constitutes an estate. In most cases, the estate, or those assets left to heirs, should be large enough to provide for the care and support of the surviving spouse and/or children. Other areas of financial planning are centered on accurately estimating the required support for survivors and how that support may be funded through accumulated savings and life insurance. Ultimately, all of this planning and saving may accomplish little if the estate is subject to significant legal costs or taxes, or is transferred to the wrong individuals. To prevent this, estate planning, the final component of financial planning, must take place to preserve accumulated wealth and to ensure its proper distribution.
Many of the strategies incorporated into the estate planning process are designed to minimize taxes, including gift, estate, generation-skipping transfer, and income taxes. However, not all clients will have estates large enough to be impacted by estate, gift, and GST taxes due to an exemption of $12.92 million for 2023. That does not mean there is no need for an estate plan. Aside from the tax-reduction strategies often associated with estate planning, all clients should consider that an effective estate plan allows the asset owner control over who gets what, when, and how. Incapacity preparations included in an estate plan ensure that in the event of a significant disability, trusted representatives will act on an individual’s behalf. Strategies for these priorities will be discussed in later sections.
The Overview of Estate Planning module, which should take approximately three hours to complete, will give you a broad overview of estate planning terminology, concepts, processes, and techniques.
Upon completion of this module you should be able to:
* Explain the purpose of estate planning.
* Define wills and trusts as estate planning tools.
* List ways to minimize estate taxes.
Module Overview
What is estate planning?
Estate planning is often defined as the lifetime process of financial planning, which deals with the accumulation, preservation and ultimate distribution of assets. The other sections of this financial planning program have covered the accumulation and preservation phases of this process. This course will focus on the last phase: distribution of assets.
To establish a foundational understanding of the estate planning process and tools, the following lessons will be covered in this module:
* Introduction to Estate Planning
* Introduction to Wills and Trusts
* Introduction to Estate Taxes
What are the basic objectives of estate planning?
Basic objectives of estate planning include:
* Tax-reduction/tax-avoidance. The client will want to minimize all expenses associated with death, including estate taxes and administration expenses, and pass on as much of the estate as possible.
* Protection. Through estate planning tools such as trusts, assets are protected from creditors and lawsuits.
* Support. Minors, spouses, or dependents with special needs can be offered sufficient support through an estate plan.
* Control. The client controls who receives assets, how these assets are received, and when they are received.
* Philanthropy. Favorable tax-treatment is available for donations to qualified charities. In addition, a variety of charitable trusts exist to provide tax-efficient donations, while simultaneously reducing one’s estate.
* Care. Advanced directives can be established which work to ensure that there are trusted representatives acting on behalf of a legally incapacitated individual.
* Privacy. A properly constructed estate will direct assets to avoid the probate process, guaranteeing privacy over one’s estate matters.
Section 1 - Introduction to Estate Planning
Prior to implementation, an estate plan requires diligent data gathering to provide the financial planner with a complete picture of the client’s current financial condition and relevant personal circumstances. Since certain domains of estate planning require specialized training, education, and professsional expertise, the financial planner often coordinates client work with attorneys, trust officers, accountants, life underwriters, and others. Together, the estate planning team designs and implements appropriate strategies to provide for the retention, distribution, and transfer of one’s property and assets in the event of incapacity or death.
To ensure a thorough introduction to estate planning, the following topics will be covered in this lesson:
* Estate Planning Process
* Lifetime Planning
* Advantages of Estate Planning
* Elements of an Estate Plan
Upon completion of this lesson, you should be able to:
* Describe the estate planning process
* Understand estate planning strategies that can be applied within a given financial life cycle stage
* List advantages associated with estate planning
* Identify noteworthy tax-related elements and nontax matters within the estate planning process
List the steps of the Estate Planning Process
- Gather Data. Gather significant data from the client, such as whether or not the client already has a will.
- Establish Objectives. Establish and prioritize estate planning objectives.
- Identify Influencing Factors. Identify the factors that limit or affect the selection of estate planning techniques, such as the amount of wealth accumulated and the health and life expectancy.
- Identify Weaknesses. Identify estate planning weaknesses before selecting a technique, such as conflicting plans or objectives that are not legally feasible.
- Select Technique. Select an appropriate estate planning technique, such as gifting.
- Implementation. Implement the estate planning technique.
- Monitor and Revise Plan. Monitor the plan for revisions and modifications.
The estate planning process follows steps that are identical to the financial planning process.
What are some of the estate planning decisions that a person may encounter at various life cycle stages?
As part of the financial planning life cycle, estate planning is something that can begin as early as the wealth accumulation years.
Wealth accumulation phase: Generally characterized as a time of setting goals, establishing savings, protecting oneself and one’s assets with insurance, increasing earning potential, and significant life milestones (e.g., marriage, first-home purchase, having children).
* Estate Planning Action Items: Establishing guardian and conservator assignments within the provisions of a will. Executing powers of attorney over assets and health care matters.
Wealth preservation phase: Typically occurs at or near retirement. Within the wealth preservation phase, clients are determining how accumulated assets will provide for themselves and/or their spouses during their lifetimes.
* Estate Planning Action Item: Review and revision of will(s), advanced directive(s), and power of attorney appointment(s).
Distribution phase: This allows the client to control the distribution of those assets in a cost and time-efficient manner.
* Estate Planning Action Item: The use of trusts within the distribution phase (e.g., Charitable Remainder Annuity Trust (CRAT)) to provide the client with an income stream, shelter assets from creditors, and achieve charitable giving goals upon death.
What are the Advantages of Estate Planning?
There are a number of advantages associated with estate planning. This course will focus on the distribution phase of the process, which offers the ability to:
* Designate the person(s) who will manage affairs and assets in case of a legal incapacity or death
* Ensure that assets pass to desired heirs: spouse, children from previous marriages, charities, children from current marriage (in case spouse remarries), grandchildren, friends, charities, and so on
* Minimize taxes: income, estate, gift, and generation skipping transfer
* Minimize the time and expense associated with the probate process
* Appoint guardians for minors
* Provide for heirs with special needs
* Determine how and when heirs may use the assets left to them
* Change the plan as family circumstances and tax laws change
What are some of the drawbacks of estate planning?
Some drawbacks of estate planning include:
* The need to accept mortality or the possibility of becoming incapacitated
* The legal fees involved with creation of trust documents, power of attorney documents, the will, and other legal documents
* The fact that the plan needs to be reviewed on a regular basis
List 3 nontax matters documents and/or estate planning vehicles that all clients generally need regardless of the size of their estate.
Estate planning encompasses both nontax matters and tax-related elements of the planning process.
The nontax matters include the documents and/or estate planning vehicles that all clients generally need regardless of the size of their estate, such as:
* A will
* Powers of attorney
* Trust(s) [optional]
What are other documents or data a client may have pertaining to their financial resources, obligations, and personal situation that are pertinent to an estate planning review?
Other documents or data a client may have pertaining to their financial resources, obligations, and personal situation that are pertinent to an estate planning review may include:
* Deeds
* A summary of other assets and liabilities
* Insurance policies (life, health, LTC, disability, homeowners)
* Retirement plan and IRA information
* Government benefits (Social Security, Medicare)
* Tax documents
* Closely held business documents
* Information about inheritances, windfalls, and other large lump sums
This information may be obtained directly from the client or other sources such as interview(s), questionnaire(s), client records, and documents. Information regarding beneficiary designations and titling of assets is important to both the tax and nontax components of the estate planning process.
Tax-focused estate planning strategies will invariably utilize trusts and lifetime gifting strategies to minimize estate taxes.
What are the documents that every family should have current and readily accessible?
-
A Valid Will
Purpose: To attain a desirable distribution of your estate and establish care for your dependent survivors. It is only within the provisions of the will that the Executor for the estate can be named and guardians for minor children appointed. Needs to be reviewed whenever there is a change in family status or a significant change in financial resources.
Location: Your lawyer’s safe, or in some states with the Probate or Surrogate Court. A copy may be kept at home or in a safe deposit box as long as the Executor, or another family member has access in the event of death. -
Letter of Last Instructions
Purpose: To provide information on the management and location of your assets. It should contain a financial inventory.
Location: A copy should be kept with the will or other safe accessible place. Other copies may be distributed to those who must locate and manage your death estate. -
Durable Power of Attorney
Purpose: To grant a trusted person, called the agent, the power to handle your financial affairs. A durable power of attorney will remain effective should you become incapacitated. Document older than seven years may need to be updated.
Location: A copy may be held by the person granted the durable power of attorney. Retain the original in a safe place that your agent will have access to when needed. -
Living Will
Purpose: To express your wishes concerning life-sustaining health care if you were terminally ill or permanently unconscious.
Location: Copies should be held by your physician, your attorney, health care agent and close relations. -
Health Care Durable Power of Attorney
Purpose: To grant a trusted person the power to make health care decisions for you should you become incapacitated. It allows you to more fully specify your health care wishes than a living will. Document older than seven years may need to be updated.
Location: A copy held by the person granted the health care power of attorney. Retain the original in a safe place that your agent will have access to.
Describe Wills and their purpose
A will is a legal document allowing the person creating the will, the testator, to determine how assets will transfer upon death. It is only within the provisions of the will that the testator can name guardians, individuals appointed to act in the best interests and provide support for minor children (under the age of 18 in most states) with predeceased parents. In addition, executors of the estate, individuals appointed to carry out the provisions stated in the will, may only be appointed within the will. Since it is a legal document, a will should be executed by an attorney.
A will only transfers assets that were separately owned by the testator at death. These assets are called probate assets. All probate assets held in the testator’s name alone will transfer under the provisions of a will (e.g., bank accounts, brokerage accounts, and real estate). Assets owned individually, not otherwise controlled or directed by contract, deed, or operation of law are probate assets.
If the testator owns property that transfers under a beneficiary designation (e.g., retirement plan assets or life insurance controlled by the terms of the insurance contract), and a beneficiary has been named, then these assets will transfer directly to the named beneficiary, according to the contract, regardless of provisions within the will.
Additionally, if asset ownership is titled joint tenants with rights of survivorship (JTWROS), when the first owner dies their interest will automatically transfer to the surviving owner by law, regardless of the provisions within the will.
Finally, assets within a trust pass to stated beneficiaries according to the terms outlined in the trust document. These assets transfer by trust, regardless of the provisions within the will.
What are assets transferring under the provisions of a will subject to?
Assets transferring under the provisions of a will, that is, separately owned assets, are subject to the probate process.
Probate is a court proceeding that determines whether the testator executed a valid will.
Since probate is a court proceeding, it is a public proceeding.
Additionally, it is during the probate process that will challenges may be brought.
For this reason, many clients wanting to ensure privacy over the disposition of their assets prefer to transfer property in a fashion that is known as a probate substitute.
However, a will is still essential for the naming of guardians and executors.
Describe Trusts and Responsibility of the Trustee
A trust is an arrangement where the title to property is held by one party, the trustee, for the benefit of another, the beneficiary.
The trustee is said to have a fiduciary responsibility to the beneficiary. This means that the trustee has a legal obligation to manage the trust in the best interests of the beneficiary according to the terms or instructions of the trust.
If the trustee does not honor this obligation, he or she may be held liable for any damages suffered by the beneficiary.
- Who is the grantor?
- What is the difference between testamentary trust and inter vivos/living trust?
- The person who establishes and funds the trust is known as the grantor.
- The grantor may arrange for the trust to become operational either at death (testamentary trust) or during lifetime (inter vivos, or living trust). The type of trust selected has an impact on the estate planning process.
Match the following terms with the correct descriptions:
Trustee
Grantor
Beneficiary
* One who establishes and funds the trust.
* Fiduciary responsibility to manage the trust.
* One who receives funds from the trust.
- Grantor - One who establishes and funds the trust.
- Trustee - Fiduciary responsibility to manage the trust.
- Beneficiary - One who receives funds from the trust.
What is a Power of Attorney?
A power of attorney is a written agreement that allows one individual, known as the agent, to act on behalf of another, known as the principal.
If the principal becomes disabled or incapacitated, an agent with powers of attorney is granted authority to make key decisions and engage in a variety of actions for the principal.
List Types of Power of Attorney
- Durable power of attorney: The agent has the ability to act immediately on behalf of the principal. The agent’s power of attorney does not lapse even if the principal becomes incapacitated or disabled.
- Non-durable power of attorney: The power of attorney remains active until a specific task is fulfilled or up to incapacitation.
- Springing power of attorney: Does not become operative until the principal becomes legally incapacitated. However, the principal’s state of incapacitation must be confirmed, which may take time. As a result, if decisions need to be made with respect to the property of the principal, with a springing power of attorney these decisions may be delayed.
- General power of attorney: Authority to make a broad array of decisions. Includes financial, legal, or business matters. This type of power of attorney lapses at disability or incapacitation.
- Special power of attorney: The agent only acts on behalf of the principal for a specific matter. Once the task or action is completed, or a period of time has passed, the authority expires.
Select the type of power of attorney that grants the agent authority to make a broad array of decisions, including financial, legal, or business matters. This appointment lapses at disability or incapacitation.
* General Power of Attorney
* Non-Durable Power of Attorney
* Durable Power of Attorney
* Special Power of Attorney
General Power of Attorney
- General power of attorney: Authority to make a broad array of decisions. Includes financial, legal, or business matters. Lapses at disability or incapacitation.
Describe Gifting Strategies in general
To achieve tax-reduction goals in an estate plan, client assets can be gifted to beneficiaries with the least amount of transfer and income taxes. One method by which this may be accomplished is through a lifetime gifting program.
Under current law, every individual making gifts, or donor, has the opportunity to make gifts of $17,000 (2023) annually, to an unlimited number of recipients, or donees. This is known as the annual exclusion.
If an estate planning objective is to minimize the amount of assets that will be included within a decedent client’s estate, and the client has discretionary assets which are not required for comfort during a lifetime, the estate planner may suggest that the client engages in an annual gifting program utilizing the annual exclusion.
Making gifts avoids probate, reduces the value of the taxable estate, and allows the estate owner to help out heirs while he or she is still alive. Additionally, the recipient of the gift, the donee, will not pay tax on the gift.
Describe Gifting Strategies that spouses can use
Spouses have the opportunity to use a gift-splitting strategy, which combines their individual $17,000 annual exclusions and doubles their total excluded gift amount to $34,000 ($17,000 x 2). Like the individual annual exclusion, the gifted amount is tax-free to the donors and not considered income to the donee. Form 709 must be submitted to the IRS with the couple’s annual tax return to indicate that a split-gift strategy is being used. If the split-gift election is made by a couple for a gift to one donee (recipient), the same strategy applies to all gifts throughout the year.
Spouses have an unlimited marital deduction and may gift unlimited amounts to one another throughout their lifetime.
If one of the spouses is a non-U.S. citizen, a maximum of $175,000 (2023) in annual gifts may be excluded from gift tax.
Describe Gifting Strategies for assets with appreciation potential
Engaging in a gifting program also allows the donor to transfer assets with appreciation potential, such as stocks or real estate.
If your client owns a piece of real estate that appreciates, the appreciation will be included in the owner’s estate, thereby increasing the estate tax liability.
By gifting the asset at today’s current market value, all of the appreciation on the asset will avoid inclusion in the owner’s estate.
List instances of unlimited gift tax exclusion
There is also an unlimited gift tax exclusion for qualified transfers made on behalf of an individual for medical or educational tuition expenses. These payments may be made for anyone, regardless of relationship, as long as the payments are made directly to the educational institution or medical facility.
Finally, since there is an unlimited gift tax deduction available, an unlimited amount of assets may be gifted to qualified charities. Additionally, from an individual income tax perspective, these lifetime gifts also qualify for a below-the-line income tax deduction for taxpayers electing to itemize.
Gifting and the Taxable Estate Example:
A couple with two children and an estate valued at $8 million. In 2023, the annual exclusion per person is $17,000, and the maximum transfer tax rate is 40%.
* Over a 10-year period, how much could the could transfer total?
* How much would these gifts reduce the couple’s taxable estate to?
- Over a 10-year period, the couple could transfer to each of their children a total of $34,000 per year tax-free - $17,000 from the husband and $17,000 from the wife - for a total of $340,000 ($34,000 x 10 years) to each child.
- These gifts would reduce the couple’s taxable estate from $8 million to $7,660,000 ($8,000,000 - $340,000 = $7,660,000) and result in significantly lower estate tax liability.
- If the parents had not given away the $340,000, the amount could have also been appreciated over the 10-year period, making the estate worth even more. Remember that the exclusion for annual gifts applies to each spouse. That is, the husband and wife can each give up to $17,000 to each of their children, or to whomever they wish, without paying any taxes.
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.
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.
* Advantages 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.
Which of the following is NOT an objective of estate planning?
* Allow the court to determine the appropriate distribution of the estate.
* Appoint someone to manage the estate in case of death or incapacity.
* Prevent challenges to the estate plan.
* Ensure that desired beneficiaries of the estate will receive their share.
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.
Estate planning does not need to begin until the later part of a person’s life.
* False
* True
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.
What happens to an estate if a will is declared invalid?
* A new one is drafted.
* The estate is divided in accordance with a trust.
* The estate is divided in accordance with the laws of intestacy.
* A trust is created in its place.
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.
Why is a lifetime gifting program beneficial for tax planning purposes? (Select all that apply)
* Lowers the size of the estate
* Lowers the amount of estate taxes
* Increases the size of the estate
* Passes the donor’s basis in the property to recipients
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.
Section 2 - Introduction to Wills and Trusts
An overwhelming number of Americans die each year without a valid will. In these situations, the deceased is said to have died intestate. When this occurs, the state of residence divides the estate according to that state’s laws of intestacy. In most cases, the state-mandated distribution of the assets will reflect the decedent’s own desires.
Under the laws of intestacy, a surviving spouse with children receives only one-half to one-third of the estate. The rest is distributed to the children of the deceased. For those who have not yet reached the age of majority, court-appointed custodians or trustees may have to manage these funds in the children’s interest. The surviving spouse may then be required to gain the agreement of the trustees on how and when these funds may be spent. For most families, this arrangement is undesirable and inconvenient. In addition, the associated administrative and legal costs may use up resources needed to support the surviving spouse and children.
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
What are the general guidelines on how the law of intestacy divides an estate?
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
Define:
* Will
* Heirs
* Bequest
* Testator
- 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.
If the will is revoked prior to the testator’s death and another valid will has not been executed, how will the decedent’s property be transferred?
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.
What are the Requirements of Will Execution?
- 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.
Describe Separate Property Disposition/Probate Property
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.
What are the reasons you need to have a will?
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.
What are the advantages of probate?
- 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.
What are the disadvantages?
- 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.
Define Guardian
- 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.
Define and describe the Executor’s role
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.
Define:
* Trusts
* Grantor
* Trustee
* Beneficiaries
- 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.
