Bryant - Course 6. Estate Planning. 13. Estate Planning Process Flashcards
Module Introduction
Often, uncertainty and fear related to death lead people to forgo estate planning. As a result, a financial planner has a most unenviable task on their hands. They must convince the client of the necessity of an estate plan, explain its benefits, provide customized recommendations, and encourage the client to implement the plan.
Simply, if one does not have an estate plan, it is time. It is never too early to begin.
The Estate Planning Process module, which should take approximately three and a half hours to complete, will explain the need for a client to plan his estate and the estate planning process.
Upon completion of this module, you should be able to:
* Explain the role of the financial planner,
* Explain the seven steps of the estate planning process,
* Discuss how different state laws affect estate planning,
* Gather data from the client needed to begin the estate planning process,
* Explain the tax and non-tax consequences of estate plans,
* Point out the need to monitor estate plans,
* Explain the role of the financial planner in convincing the client,
* Explain the reasons why a client does not plan his estate,
* Emphasize reasons why a client should go for estate planning,
* Discuss why a client conceals information,
* Outline the questioning technique the planner employs to unearth information from a reluctant client, and
* Identify the different forms needed for estate planning.
Module Overview
When a client engages in the estate planning process, it is important to recognize that the financial planner plays a key role. It may be necessary to convince a reluctant client about the importance, both during lifetime and after death, of a properly executed estate plan.
In addition to counseling skills, the financial planner should be able to recommend alternative estate planning strategies.
There are seven steps in the estate planning process. These steps serve as a guideline for estate planning. As long as the planner has received complete and accurate information from the client, this process should enable the financial planner to assist in the estate planning process.
Prior to discussing the alternative estate planning techniques appropriate for any client, the planner must be aware of the client’s planning objectives. If the selected technique accomplishes the client’s objective in the light of all information given, then it may be considered appropriate. The tax and non-tax consequences of the selected technique must be considered to determine their impact on other estate planning objectives.
To ensure that you have an understanding of the estate planning process, the following lesson will be covered in this module:
* Estate Planning
Section 1 - Estate Planning
An estate planning process is a methodology that should be used to develop an estate plan for all clients, regardless of their income level, asset ownership, or economic sophistication.
The overall estate plan should be one that analyzes the client’s current financial condition and his or her projected future economic needs. The estate planning techniques selected should be appropriate to accomplish the client’s objectives. Finally, the estate plan should be flexible enough for amendments or revisions that are dictated by the client’s changing circumstances, as well as changes to the tax law.
To ensure that you have an understanding of the estate planning process, the following topics will be covered in this lesson:
* Client Interview
* Estate Planning Steps
Upon completion of this lesson, you should be able to:
* Outline the estate planning process,
* Explain the seven steps of estate planning,
* Identify factors that may impact the selection of estate planning techniques,
* State how property laws affect estate planning, and
* Discuss the need for periodic review of estate plans.
Describe the Client Interview
Whether or not the client realizes it, he or she has an estate plan. It is the responsibility of the financial planner to obtain an accurate picture of this estate plan, including its gaps as well as its strengths.
In order to ascertain what the client needs from an estate plan, the planner must formulate questions to elicit important information from the client.
The client may not understand why the questions are being asked and, therefore, may hesitate to provide the planner with the appropriate information. For this reason, the financial planner needs to understand the implications associated with each of the questions and why each of them is important to the estate planning process.
The following question may be added to the financial planner’s client interview form, or they may be asked in a separate interview with the client:
“What is the value of all of your assets?”
This seems like a simple question but it is quite complex. When most people think of what they own—their estate—they think of things such as their house, car, computer, or diamond necklace. These things are all part of the estate, but it also includes other assets, such as 401(k) plans, brokerage accounts, and the death benefit proceeds of a life insurance policy.
While discussing the issues associated with the creation of an estate plan, what 2 things should the planner focus on?
While discussing the issues associated with the creation of an estate plan, the planner must also focus on the following:
* The rate of inflation: It is a factor in reducing the actual value of future earnings.
* The estate liquidity: A properly executed estate plan should not result in the forced liquidation of the estate assets in order to discharge the liabilities and/or taxes associated with death.
No plan is ever fully complete and must be reviewed on a regular basis.
Describe Liquidity in Estate Planning
Liquidity issues are an important part of planning an estate. Although the estate may have sufficient assets with which to discharge all of its liabilities, to do so it may have to sell estate assets, possibly receiving only pennies on each dollar of asset value.
Therefore, estate liquidity needs are an important concern for the financial planner involved with the estate planning process.
Describe the need for Periodic Review
The financial planner and the client(s) need to be aware that the estate plan is never truly ”final” or ”complete.”
A number of changes can occur which can make the current plan outdated, inappropriate, or cause it to pay unneeded estate or gift taxes.
A periodic review of the estate plan is therefore extremely important.
What are the 7 steps in the Estate Planning Process?
Estate Planning Process
1. Gather significant data from the client.
2. Establish and prioritize estate planning objectives.
3. Identify the factors that limit or affect the selection of estate planning techniques.
4. Identify estate planning weaknesses before selecting a technique.
5. Select an appropriate estate planning technique.
6. Implement the estate planning technique.
7. Monitor the plan for revisions and modifications.
Describe Gather Significant Data
The financial planner initiates the estate planning process by gathering significant data from the client. The data collected affect the selection and implementation of a comprehensive estate plan.
An accurate and thorough data gathering form should be used to obtain most of the information needed to properly plan the client’s estate.
Choose items that can be considered ‘significant estate planning data’ from the list below. (Select all that apply)
* Presence of a valid will.
* Client’s wishes for property distribution upon death.
* Identity and relationship of heirs to the client’s property.
* The manner in which the title to the property is held.
* Current FMV of the client’s assets.
* The client’s debts and liabilities.
* Information on the health and life expectancy of the client and family.
Presence of a valid will.
Client’s wishes for property distribution upon death.
Identity and relationship of heirs to the client’s property.
The manner in which the title to the property is held.
Current FMV of the client’s assets.
The client’s debts and liabilities.
Information on the health and life expectancy of the client and family.
* Each of these items can be considered ‘significant estate planning data.’
Describe Establish and Prioritize Objectives
Once essential information has been gathered, the financial planner needs to assist the client in identifying and prioritizing his or her estate planning objectives. The greatest obstacle to this occurs when a client has many objectives to satisfy but has limited economic resources with which to do so.
A key role of the financial planner is to make the client aware that limited resources may make the fulfillment of all objectives unlikely or unrealistic, and that alternatives may need to be considered.
For example, the financial planner may suggest that the objectives be reordered in terms of their priority, or that one or more objectives be deferred until a later time.
After a thorough analysis of the client data, the financial planner should be able to suggest a course of action that permits one or two objectives to be accomplished immediately, with the remaining objectives accomplished at a future date.
Alternatively, the financial planner may suggest that, in light of limited client resources, the remaining objectives be discarded.
Describe Selection of Planning Strategies
Once objectives have been identified and prioritized, the financial planner identifies the factors which may limit or affect the selection of estate planning techniques.
List 9 Factors that Determine Selection of an Estate Plan
Factors that may impact the selection of an estate planning technique include:
* Value of the gross estate, FMV of the client’s assets
* Amount of estate or gift tax liability (before subtracting applicable deductions and credits)
* Health and life expectancy of the client
* Financial needs of the client during the lifetime
* Types of property owned by the client
* Title of property owned by the client, that is, individual, jointly with rights of survivorship, in trust
* Competency of the client’s beneficiaries
* The client’s marginal income tax bracket
* State law of the client’s domicile
Some of these factors may be more likely than others to influence the selection of an appropriate estate planning technique, but all nine affect the ultimate selection.
Factors that Determine Selection Example:
A client is 55 years old and in good health. His primary estate planning objective is to distribute his estate, valued at $5 million, to his wife and two children in three equal shares. He wants his wife and children to live at the standard of living to which they are accustomed. The factors that determine the selection of an appropriate estate planning technique for the client are the following:
Value of the gross estate: $5,000,000.
Amount of estate or gift tax liability (before subtracting applicable deductions and credits): In this case, the transfer tax on $5,000,000 is $1,945,800 before the unified credit of $5,113,800 (2023) is applied, therefore no estate tax is due.
Health and life expectancy of the client: Client is in good health (has a life expectancy of at least 19 years).
Financial needs of the client (living expenses and savings for retirement): Client needs $2,500 per month.
Types of property included in the estate: Client’s estate consists largely of a farming operation that has appreciated greatly since its acquisition 35 years ago. The farm is income-producing, though it would be difficult to find a buyer for the entire farming interest if the client were to die in the near future.
Title of property included in the estate: Most assets, including the farm, held solely by the client, which permits both lifetime control and testamentary disposition of the property.
Competency of the client’s beneficiaries: Client’s spouse and children are legally, mentally, and financially competent.
Client’s marginal income tax bracket: A 32% marginal tax bracket.
State law of the client’s domicile: Client is domiciled in a common-law state.
How does Value of the Gross Estate affect Selection of Estate Plan
The value of the client’s gross estate is a significant factor in the selection of an appropriate estate planning technique.
* If the client’s taxable estate exceeds the amount of the exemption equivalent, the client may be subject to estate tax liability if deductions and available credits are not used.
Unified Credit Offset Example:
Suppose that a client dies in 2023 with a gross estate valued at $12,920,000. The client was not married and made no charitable contributions that year. The client’s estate tax liability would be zero since the tax on $12,920,000, which is $5,113,800, is offset by the unified credit of $5,113,800.
If a client is concerned about reducing their estate tax liability there are techniques that can be utilized such as marital and charitable deductions, the creation of trusts, and the use of the unified credit to minimize or eliminate their estate tax liability.
How do Estate or Gift Tax Liability affect Selection of Estate Plan
The amount of potential estate or gift tax liability (also referred to as the transfer tax) is a significant factor in selecting an appropriate estate planning technique.
* If the client’s tax liability were to be significant, the value of assets passing to heirs could be substantially reduced.
Obviously, any savings in estate tax or gift tax liability means a greater amount of assets distributed to family members.
* Thus, if the client faces a projected estate tax liability, the client may wish to implement techniques to cost-effectively reduce this liability, thereby increasing the value of assets passing to heirs.
How does Health and Life Expectancy affect Selection of Estate Plan
Health and Life Expectancy
The client’s health and life expectancy can also affect the selection of an estate planning technique.
If a client is in excellent health with a long life expectancy, various techniques may be appropriate to achieve the client’s objectives.
* For example, a life insurance policy owned within an irrevocable trust may be considered as a strategy to deal with the liquidity needs of the estate.
In each of these cases, the financial planner may be trying to reduce estate tax liability and avoid probate.
* If the recommended technique does not remove the asset from the gross estate or does not avoid probate, then, in light of the client’s objectives, it may be inappropriate.
List Tax and Non-Tax Consequences of Estate Plans
Many people share similar financial and personal estate planning goals.
Financial goals that involve tax planning include:
* Minimizing gift and estate taxes when transferring property to others
* Shifting income to family members in lower tax brackets
* Obtaining a stepped-up basis in property to avoid future capital gains taxes
Non-tax personal estate planning goals often include:
* Caring for spouses and children
* Planning for incapacity
* Reducing estate administration costs
* Protecting property
* Controlling the transfer of property interests to others
List financial and personal factors that can affect an existing estate plan
Although people may share common estate planning goals, each person has distinctive financial, tax, and personal circumstances that require a customized estate plan. Estate plans need to be designed with built-in flexibility to accommodate changes if future circumstances, laws, and estate planning objectives change.
There are many personal factors that can affect an existing estate plan such as:
* Health
* Death or birth of family members
* Remarriage or divorce
Financial factors that may impact an estate plan include:
* Acquisitions or loss of property
* Changes in property values
* Taxes
* Investment performance
* Inheritances
Estate plans need to be reviewed every year or when personal or financial circumstances change to ensure that estate planning objectives continue to be met.
Describe Consequences of Transfer Tax Strategies
An important objective is to maximize and preserve wealth and to transfer property to loved ones in a proper manner at an appropriate time.
* A further objective is to transfer property during lifetime and at death in ways that will minimize or eliminate gift and estate tax liabilities.
* Tax planning strategies can be implemented that decrease the estate tax base, which reduces the amount of wealth subject to transfer taxes.
* Each dollar of value that is removed from a transferor’s tax base and is passed along to their beneficiaries represents money saved at their highest marginal transfer tax rate.
Taxation on Asset Transfer Example:
A gift of $10,000 to 10 donees reduces a wealthy donor’s estate tax base by $100,000, which lowers their estate tax by $37,000 if they are in the highest marginal transfer tax bracket at their death.
The selection and application of transfer tax strategies can result in lowering gift and estate taxes, but the strategies and techniques involved have both tax and non-tax consequences. The techniques selected to reduce gift and estate taxes must be examined for their impact on the client’s overall estate planning objectives.
Describe Consequences of Minimizing Estate Taxes
Estate planning techniques that reduce the estate tax base often involve the use of trusts.
* Irrevocable trusts can remove assets from a grantor’s estate as long as the grantor does not retain any rights or control over income or corpus.
* A non-tax consequence of establishing an irrevocable trust is that the grantor cannot benefit from the property, change the terms of the trust, or take the property back if circumstances change.
By-pass trusts funded with the exemption equivalent amount of $12,920,000 (2023) escape taxation in the decedent’s estate and the assets and any subsequent appreciation are not included in the surviving spouse’s estate at death.
* A consequence of funding a By-pass trust with the optimum exemption equivalent amount each year is that less funds may be available for direct transfers to the surviving spouse if the exemption equivalent amount increases each year.
* An estate planning goal to utilize the decedent’s full unified credit and marital deduction by transferring assets into a By-pass trust and a Power of Appointment trust for the surviving spouse cannot be accomplished if the couple lacks sufficient resources to fully fund the exemption equivalent amount.
* An estate plan that leaves the exemption equivalent amount outright to children with the remainder to the spouse could result in more money bequeathed to the children and less to the surviving spouse than was intended if the exemption equivalent amount increases over time. Keep in mind that spouses can transfer the unused portion of their unified credit to the surviving spouse, since the credit is portable.
Irrevocable life insurance trusts (ILITs) can be established to own a life insurance policy on the owner/insured’s life to remove the death benefit from the owner’s gross estate. This can be accomplished if policies are transferred more than 3 years prior to the owner’s death, or if the trust purchases a new policy on the insured’s life.
* A consequence of un-funded trusts owning these policies is that premium payments must be transferred into the trust every year that are subject to potential gift taxes, and the insured cannot change any policy provisions.
Practitioner Advice:
* ILITs can be drafted with Crummey powers to reduce or eliminate gift taxes.
* Crummey powers create present interest gifts of premium payments transferred into the trust.
* This allows the grantor and the grantor’s spouse to take annual exclusions for each trust beneficiary to offset any taxable gifts.
Practitioner Advice:
* ILITs can be drafted with Crummey powers to reduce or eliminate gift taxes.
* Crummey powers create present interest gifts of premium payments transferred into the trust.
* This allows the grantor and the grantor’s spouse to take annual exclusions for each trust beneficiary to offset any taxable gifts.
List consequences of the following techniques:
* The marital deduction
* The charitable deduction
* State death tax deduction
* The unified credit
* Special use valuation
* The alternate valuation date
Consequences of Selected Techniques
Additional methods for reducing the estate tax base at death involve the use of:
* The marital deduction
* The charitable deduction
* State death tax deduction
* The unified credit
* Special use valuation
* The alternate valuation date
The unlimited marital deduction is available to eliminate any gift or estate taxes on property transfers to spouses.
* A consequence of using this deduction is that a decedent’s estate may be “overqualified” if the decedent did not fully use their applicable credit to offset a potential estate tax liability.
* The property inherited by the surviving spouse is taxed at its fair market value, which includes appreciation, at that spouse’s death.
The charitable deduction is subtracted from the decedent’s adjusted gross estate to reduce the taxable estate. Gifts of property to charity at life or death may satisfy a donor’s estate planning objective with resulting income, gift, and estate tax benefits.
* A non-tax consequence of gifting or bequeathing property to charity is that there are fewer assets to pass to heirs, which may be an estate planning concern.
* Often life insurance is purchased for wealth replacement to ensure that heirs receive an equitable value at the insured’s death.
The unified credit is used to offset a person’s gift and estate tax liabilities. The unified credit can shelter up to $12,060,000 (2022) in lifetime gifts and estate taxes.
* There are no negative tax or non-tax consequences to using the unified credit, which is not optional to use, and each person should incorporate its use into their estate plan.
Special use valuation is applied to the real property valuation of farms and closely-held businesses to reduce the value included in the owner’s gross estate.
* The maximum amount of the reduction in 2022 is $1,230,000.
* Certain qualifications must be met and two ratio tests must be applied to potentially deduct the value of qualifying real estate from an owner’s estate.
* The consequence of using this technique is that a recapture tax is imposed if the heir disposes of the real property, or if it ceases to be used as “qualified use property” within ten years of the decedent’s death.
The alternate valuation date is used if there is a net decrease in the value of the decedent’s gross estate and estate tax liability six months after death.
* The FMV of the property at the alternate valuation date is included in the decedent’s estate rather than the FMV at death.
* Property that naturally decreases in value such as a joint and survivor annuity is valued at the date of death.
* A consequence of choosing an alternate valuation date is that it cannot be used if estate taxes are eliminated through the marital deduction.
* The surviving spouse could disclaim a portion of the decedent’s estate to utilize the alternate valuation date, which also avoids over-qualifying the estate for the marital deduction.
What are the best methods for reducing the gift tax value?
An effective method for reducing the value of a person’s gross estate is to gift property to others.
* Gifts that do not exceed the annual exclusion are not taxed, but the value of a taxable gift is included in the decedent’s estate tax calculation as an adjusted taxable gift.
* The decedent’s applicable credit is available to offset any estate tax payable, which further reduces the tax or even eliminates the decedent’s estate tax liability.
The best methods for reducing the gift tax value of the property are to:
* Use leveraging
* Use qualified transfers
* Use discounts
* Use the GSTT exemption
These strategies can greatly reduce the value of the gifted property, which ultimately reduces the donor’s estate tax liability.
Describe Leveraging in Gifting
An example of leveraged gifting occurs when gifting a life insurance policy since policies have a high death benefit amount relative to their low gift tax value.
* The death benefit is removed from the insured’s gross estate if the transfer occurs more than three years before death.
* Another example of leveraging is used when transferring limited partnership shares in family limited partnerships. General partners, who are usually parents, gift limited partnership shares to children or other family members that are discounted for minority interests and lack of marketability. The fair market value of these present interest gifts are significantly reduced by annual exclusions and discounts, so that property is transferred at a greatly reduced transfer tax cost.
* Properly structured FLPs can shift taxable income to junior partners in lower tax brackets and can remove limited partnership interests and any future appreciation from the general partner’s gross estate.
Other techniques that make use of leveraging are:
* grantor retained annuity or unitrusts (GRAT/GRUT) and qualified personal residence trusts (QPRT).
* GRATs and GRUTs can pass appreciated remainder interests in trusts to family members for a discounted gift tax value, which also removes the property from the grantor’s estate.
* Homeowners can transfer primary and vacation homes into QPRTs to remove the value of the property from their gross estate, and pass the appreciation of the home to family members at a low gift tax value.
Individuals can make contributions to college prepaid tuition plans (529 plans) that qualify for annual exclusions since they are present interest gifts.
* In 2023, the contributor can elect to spread the gift out over five years by contributing up to $85,000 ($17,000 x 5) for each beneficiary without subjecting the contribution to gift taxes.
* The use of this technique is a very beneficial way to leverage an annual exclusion and completely remove the gift from the contributor’s estate after five years.
The non-tax consequence of using leveraged gifting techniques is that completed, irrevocable gifts are made to others. The donor forfeits ownership and control of the property, loses investment income, and cannot reclaim assets in the future if needed.
Describe Qualified Transfers in relationship with Gifting
Qualified transfers are not subject to gift taxes. They are payments made directly to:
* educational institutions for tuition and fees, or,
* medical facilities to cover hospital, doctor, and medical expenses.
Direct payments circumvent the need to make taxable gifts to others, to have them pay for their own medical or educational expenses.
Qualified transfers have no impact on a donor’s applicable credit, and direct payments can be made to benefit relatives and non-relatives alike.
Describe Generation-Skipping Transfer Exemptions in Gifting
Gifts can be made to persons who are two or more generations below the transferor and not be subject to this additional GST tax.
* The top gift tax rate is only 40% in 2023.
* Gift tax liability can be reduced by using annual exclusions and gift splitting when appropriate, and transfers up to $12,920,000 (2023) are not taxed.
* Transferors should consider making direct skip gifts and taxable terminations or distributions outright to skip persons from existing nonexempt generation-skipping trusts.
The gift tax exemption equivalent amount of $12,920,000 and the GSTT exemption equivalent amount are the same in 2023. These amounts double if spouses consent to gift-splitting. Future GSTT exemptions can be leveraged by allocations to direct skip trusts if trust assets are expected to appreciate over time. This would reduce or eliminate GST taxes paid by the beneficiaries when trust assets are eventually distributed.
* The tax consequence of a transfer subject to GST tax is that the transferor’s gross estate is reduced by the amount of the gift and any gift or GST taxes paid.
* However, ownership, control, and income are irretrievably lost in the transfer.
Practitioner Advice:
* The GSTT exemption equivalent amount follows the estate tax exclusion of $12,920,000 (2023).
* This provides tremendous planning opportunities to transfer assets to grandchildren.
* On a cautionary note, an estate plan that creates a testamentary trust to benefit grandchildren funded with the decedent’s maximum generation-skipping exemption may find that there is much less in their estate to pass on to their children if the exemption amount increases over time.
Practitioner Advice:
* The GSTT exemption equivalent amount follows the estate tax exclusion of $12,920,000 (2023).
* This provides tremendous planning opportunities to transfer assets to grandchildren.
* On a cautionary note, an estate plan that creates a testamentary trust to benefit grandchildren funded with the decedent’s maximum generation-skipping exemption may find that there is much less in their estate to pass on to their children if the exemption amount increases over time.
Practitioner Advice:
* An appropriate estate planning technique would be one that would allow the client to achieve estate planning objectives while permitting him to live within his means.
Practitioner Advice:
* It is important to assist the client in articulating his planning goals and objectives. Armed with this information, the planner can provide an estate analysis for the client that coordinates the data with the client’s objectives.
How Can a Client in a High Income Tax Bracket reduce their tax liability
A client may wish to reduce his or her income tax liability through the use of one or more estate planning techniques.
For example, if a client is in a high-marginal income tax bracket and wishes to reduce his or her tax liability, an outright gift of income-producing property, or in the case of a closely held business interest, a family partnership, might be appropriate.
Describe Non-Tax Issues in Estate Plans
Most estate plans are structured to give individuals control over their personal and financial affairs while providing them with great flexibility to meet their changing needs, circumstances, and objectives. Planning for dependents such as spouses, partners, children, other family members, and perhaps even pets are essential to:
* Provide for their welfare
* Care for their special needs
* Maintain or improve their standards of living
* Pay for current and future living expenses
Sometimes planning may favor certain individuals over others possibly when remarriages occur or in non-traditional relationships. Therefore, the consequences of various tax and non-tax estate planning techniques should be examined to ensure that dependents are planned for in the ways that they are intended to be.
Many tax-advantaged estate planning strategies involve the transfer of assets to individuals or to trusts.
* The consequence of these transfers is that the owner loses ownership and ultimate control of their property interests to accomplish their goal of reducing transfer taxes.
* The trade-offs inherent in tax-saving strategies need to be carefully reviewed to ensure that the pursuit of these strategies makes good sense, and can meet the client’s tax and non-tax objectives.
Techniques employed to save on transfer taxes may actually result in unwanted consequences.
* For example, gifting has many lifetime advantages since annual exclusions and unified credits can offset taxes, and the property is removed from the owner’s estate.
* However, the donee receives a basis in the property that is not stepped-up at death. This can be an important consideration if the donee intends to sell the property in the future.
* Another situation involves gifting property outright to a donee vs. transferring the property into a trust. Donors may prefer the ease of gifting property in this manner, however outright gifts of significant property interests should not be made to minors, individuals who receive government benefits, or persons who are unable or unwilling to manage the property on their own. The gift may benefit the donor’s estate tax situation but may not be suitable for the donee.
Estate planning advisers need to review the estate plan in conjunction with the client’s overall financial situation to make sure it coordinates with other financial planning objectives.
* For example, gifting highly appreciated property that produces income may make perfect sense from an estate planning perspective, yet may cause an individual to lose the income they depend upon to maintain their standard of living.
* Financial planners and attorneys need to work together throughout the estate planning process to provide their clients with good service and advice and educate them on the particulars and consequences of their selected estate planning strategies.
Describe financial needs in selection of estate plan technique
Financial Needs
The financial needs of the client may determine, to some extent, whether a particular estate planning technique is appropriate.
Financial Needs Example:
Assume a client has living expenses of $30,000 annually and additional projected savings needs of $12,000 annually for retirement purposes. Any estate planning technique which would require the transfer of assets in excess of this amount would seriously disrupt the client’s current financial needs. The need for retirement income, coupled with the need to match current living expenses, could prevent certain estate planning techniques from being selected. If a client has financial needs of $42,000 annually, these needs might, for example, prevent funding an irrevocable living trust.
Practitioner Advice: An appropriate estate planning technique would be one that would allow the client to achieve estate planning objectives while permitting him to live within his means.
List Property Considerations
Property considerations that can play an important part in the selection of an appropriate estate planning technique include whether or not the property:
* Is difficult to value.
* Can be easily divided (For example, can the property be partitioned so that a portion could be sold to pay debts and taxes?).
* Is liquid and has a market in the event it must be sold.
* Is appreciating or depreciating in value.
* Has a value that will be impaired or reduced by the death of the client-owner.
Describe how the Title of Property affects Selection of Estate Plan
The title of the property also influences the selection of an appropriate estate planning technique. Sole ownership of the property provides the client with the greatest flexibility, as well as postmortem control.
Title of Property Example:
When a client wishes to transfer property to his son, yet the property is owned jointly with rights of survivorship with the spouse, the decedent’s interest in the property will automatically transfer to the surviving spouse. Therefore, the son may have to wait until the death of the surviving spouse to receive this property.
Since the client exercises no postmortem control should he predecease his spouse and his objective is to transfer the property to his son, he may, during his lifetime, want to change the ownership of this property to his name alone.
* In other words, some other form of property ownership may be necessary to achieve the specific estate planning objectives of the client.
Describe Competency of the Beneficiaries in Selection of an Estate Plan
The competency of the client’s beneficiaries can be an important factor in the selection of an appropriate estate planning technique.
A beneficiary can be said to be legally competent if he is not a minor. Thus, all adults are legally competent.
A beneficiary can be said to be mentally competent if he has not been adjudicated to be mentally incompetent by a court, has not been confined to a mental institution, or has not undertaken any other conduct that would raise questions about his competence.
Describe Financial Competence in Selection of an Estate Plan
From a financial planning point of view, the beneficiary’s financial competence is most important. A beneficiary is not legally competent if he or she has not attained the age of majority. A beneficiary can be said to be mentally competent if they have not been adjudicated to be mentally incompetent by a court, have not been confined to a mental institution, or has not undertaken any other conduct that would raise questions about this competence.
The most significant type of competence from a financial planning point of view is a beneficiary’s financial competence.
Financial competence includes the ability of the beneficiary to invest in and manage assets, provide for other family members, and supervise and administer assets.
If the beneficiary possesses financial competency, it may be appropriate for him to serve as the executor of the estate, or as a co-trustee or trustee of a trust, or as a guardian or conservator on behalf of minors and other incompetent family members.
