Estate Planning

Question 1

What are the three contracts that pass outside of probate?

Answer 1

Life Insurance

Annuities Qualified Plans

IRAs Payable-on-death (POD) or Transfer-on-death (TOP) accounts

Question 2

What are the five reason a client might need a will?

Answer 2

• To direct the distribution of assets according to their wishes
• To appoint a guardian for minor children or family members with special needs
• To appoint an executor to manage their estate
• To establish trusts for spouse, children , or charities
• To take advantage of estate-tax saving strategies

Question 3

List six advantages of a Trust

Answer 3

-Provide asset management for heirs -Avoid probate in multiple states where client has property in more than one state -Avoid costs of a court-appointed custodians for minors or people not capable of managing assets -Keep the distribution of estate assets private -Ensure that assets go to the people intend -Keep life insurance proceeds outside of a taxable estate and provide liquidity for estate taxes and related costs

Question 4

What is a revocable trust?

Answer 4

Revocable trusts can be changed by the grantor of the trust, assets can be removed, or the trust can even be canceled at any time.Revocable trusts may be used to avoid probate expenses.

Question 5

TRUE or FALSE. Property passing to a non U.S. citizen spouse generally does not qualify for the martial deduction.

Answer 5

TRUE

Question 6

Only property passing in a special trust called _____ qualifies for the marital deduction, regarding non US spouses.

Answer 6

Qualified domestic trust (QDT)

Question 7

Will Taxable estates with a value equal to or less than the credit amount will liable or NOT liable for federal estate tax?

Answer 7

Not liable

Question 8

Define Portability

Answer 8

Executor of a deceased US citizen or resident may transfer the unused (DSUE amount) estate exemption to a surviving spouse DSUE-Deceased Spousal Unused Exclusion

Question 9

The DSUE applies where executor has timely filed an estate tax return (with extensions) and an ______ election is made.

Answer 9

Irrevicable

Question 10

Portability applies for federal estate and gift tax purposes, but not what?

Answer 10

Generation Skipping Tax (GST)

Question 11

Gift tax and estate tax rates are the same, but gift tax is ______ and estate tax is _______

Answer 11

Exclusive, Inclusive.

Exclusive, meaning assets used to pay tax are not subject to the tax and is not part of the tax base. Inclusive, meaning assets used to pay the tax are subject to the tax and part of the tax base.

Question 12

How long do you have to pay your estate tax?

Answer 12

Nine months

Question 13

What does a Irrevocable life insurance trust (ILIT) do?

Answer 13

to remove life insurance proceeds from the taxable estate so that the beneficiaries receive the entire amount, undiminished by estate taxes.

Question 14

what two ways can an ILIT be funded?

Answer 14

Funded either by transferring ownership of an existing life insurance policy to the trust, or by purchasing a new life insurance policy.

Question 15

Define a crummy

Answer 15

Gives the trust beneficiarty a noncumlative, annual right to demand withdrawal from a trust.

Question 16

What are the six steps in a ILIT

Answer 16

1. The grantor makes an annual gift to the irrevocable life insurance trust sufficient to pay the premiums on the life insurance policy owned by the trust.
2. The trustee provides a notice to the trust beneficiary(ies) of the annual trust contributions subject to withdrawal, qualifying the gift for the annual gift tax exclusion.
3. Assuming the trust beneficiary(ies) do not exercise their withdrawal right, the trustee then uses the gift to pay the life insurance premiums.
4. When the grantor/insured dies, the life insurance death benefit passes income and estate tax free to the trust.
5. If needed for estate liquidity purposes, the trustee can loan money to the estate or purchase assets from the estate.
6. Finally, the trust assets are distributed to the trust beneficiary(ies) according to the terms of the trust document.

Question 17

What are the five tax implications in an ILIT? (lol)

Answer 17

ØIf an existing life insurance policy is given to the trust, the value of the policy is subject to gift tax, but only if it exceeds the annual gift tax exclusion. The value of the policy is generally based on the policy’s interpolated terminal reserve value, a value that is usually close to the cash surrender value.
ØIf death occurs within three years of giving an existing life insurance policy to the trust, the value of the death proceeds will be brought back into the estate for federal estate tax purposes.
ØAnnual gifts made to the trust for premium payment purposes must be subject to the Crummey withdrawal powers in order to qualify for the annual gift tax exclusion ($13,000 in 2012). Alternatively, gifts will be subject to the unified federal gift and estate tax, but qualify for the lifetime exemption equivalent (currently $5,120,000).
ØThe death benefit payable to the trust will not be included in the insured’s taxable estate, assuming the insured held no incidents of ownership in the policy at death.
ØDeath benefits are generally received free of federal income tax.

Question 18

What are the six advantages of an ILIT?

Answer 18

1.If your estate is likely to face a federal estate tax liability, an irrevocable life insurance trust can replace funds used to pay the estate tax, without the death proceeds also being subject to the estate tax.

2. If your heirs are likely to need additional estate liquidity after your death, such as to continue a family business, an irrevocable life insurance trust can provide that liquidity, again without the insurance proceeds being subject to the federal estate tax.
3. If you want to control how death proceeds are distributed, you can do so through the provisions included in an irrevocable life insurance trust.
4. If you have children from a prior marriage, but want your current spouse to be the primary beneficiary of your estate, naming your children the beneficiaries of an irrevocable life insurance trust can provide them with a distribution at your death, rather than at your surviving spouse’s later death.
5. If you want to leave your loved ones a substantial life insurance estate, an irrevocable life insurance trust can be used to pass the full value of life insurance proceeds to your heirs estate tax free.
6. If you want to make a substantial bequest to a charity, either during your lifetime or at your death, an irrevocable life insurance trust can play a wealth replacement role, with the proceeds from the trust replacing for your heirs the value of assets given to charity.

Question 19

what are three disadvantages of an ILIT?

Answer 19

1. Since the trust is irrevocable, you relinquish control of the life insurance policy and annual gifts made to the trust. In addition, once the trust document is executed, you cannot change the terms or terminate the trust.
2. If the trust contains the Crummey withdrawal provision in order to qualify the gifts to the trust for the annual gift tax exclusion, a beneficiary may exercise his or her right to demand a withdrawal.
3. There is some expense involved. In addition to possible trustee fees, you should consult with an attorney experienced in estate planning in order to avoid unforeseen tax and distribution consequences.