Estate Planning Documents

Question 1

A Will

Answer 1

A will is the legal document that expresses an individual’s wishes as to the disposition of his or her property after death. A will is revocable during an individual’s lifetime. As a result, the provisions of a will do not become operative until the individual has died.

Although a will is the most basic estate-planning document (it serves the purpose of identifying the decedent’s heirs and which heirs will receive the decedent’s property), a will does not transfer all of the decedent’s assets.

A will only transfers those assets, which were separately owned by the decedent at the time of death.

A pour-over will is a will that has a previously established trust as its primary beneficiary, and is funded through the probate process. Therefore, assets transferring from the pour-over will into the trust are subject to probate.

Question 2

Precatory Language

Answer 2

Precatory language uses terms such as “hope, wish or desire” that property be distributed in a particular way, which may not be enforceable by the probate courts.

Question 3

Residuary Clause

Answer 3

A residuary clause directs the testator’s property that was not disposed of through other will clauses, to pass outright to others or to an existing trust. Property acquired after the will was executed is subject to intestacy if not disposed of through a residuary clause. Therefore, residuary clauses prevent partial intestacy of property after payment of debts, taxes, expenses and specific bequests are addressed.

Question 4

Dispositive Clause

Answer 4

A dispositive clause may name a class of beneficiaries to receive property, such as the testator’s “descendants” or “issue” who are lineal family members. Property that is given to his or her issue “per capita” means that all living family members would receive an equal share of the property at the testator’s death

Question 5

Fiduciary Appointment Clause

Answer 5

A fiduciary appointment clause in a will appoints primary and contingent executors, guardians, and trustees for testamentary trusts.

Question 6

Tax Apportionment Clause

Answer 6

A tax apportionment clause designates the source for payment of death taxes. Some states have tax apportionment statutes that direct that taxes will be paid from specific portions of the estate in an established order, unless otherwise stated in the will.

Question 7

Simultaneous Death Statute

Answer 7

A simultaneous death statute is adopted in some version by all states to determine the order of death, if it cannot be determined which spouse actually survived the other. The testator can direct in his will that some or all beneficiaries will survive the testator by a certain period of time. This avoids having two probate processes and death taxes levied on the same property, if the other spouse does not live long enough to enjoy the property.

Question 8

Divorce or Annulment statute

Answer 8

A divorce or annulment statute addresses how property in the will should be handled if it was bequeathed to a spouse, but the couple is no longer married at the time of an ex-spouse’s death.

Question 9

Codicil

Answer 9

A codicil is a legal instrument which allows the testator to revoke and/or change all or part of an existing will. As a result, in order for a codicil to be valid, it must be executed with the same execution requirements as a will.

Question 10

Advantages of a Codicil

Answer 10

Advantages of a Codicil

Convenient
Simple
Inexpensive

For these reasons, codicils are frequently used to make minor changes to a will at a lower cost.

Question 11

Thomas was a rich landowner. Upon his death, Thomas’s will failed to comply with all of the state’s execution requirements. What will happen to the assets owned by Thomas at his death?

A. The refusal must be in writing.

B. the property will be distributed among the immediate surviving family members.

C. the property will be distributed according to the laws of intestate succession.

D. the property is claimed by the state.

Answer 11

Correct Answer: C. the property will be distributed according to the laws of intestate succession.

Explanation: Failure to comply with all of the execution requirements causes the will to be treated as an invalid instrument. Therefore, the property distributions contained within the will are null and void. As a result, the state’s laws of intestacy will determine how and to whom Thomas’s property will be distributed

Question 12

A codicil is used to revoke all or a portion of a will. State true or false.

A. True

B. False

Answer 12

Correct Answer: A. True.

Explanation: A will is a revocable instrument. Therefore, it can be amended, altered, or revoked a number of times prior to the testator’s death. Many wills are revised by using codicils, which may make changes to all or a portion of the existing will.

Question 13

Witnesses

Answer 13

The witnesses must:

Sign the will at the request of the testator,

Sign in the presence of the testator

Sign as a witness in the presence of the other witness(es).

Some states may have a minimum age requirement for a person serving as a witness. For example, some states require that an individual must be at least 16 years old in order to serve as a competent witness. States that have recognized holographic wills as valid may not have a witness requirement.

Question 14

Basis for contested Wills

Answer 14

Will contests are usually brought on the following basis:

The testator of the will was not of sound mind at the time the will was executed.

The testator was unduly influenced by another individual at the time the will was executed, and this undue influence had a direct impact on the distribution of the estate.

The testator was fraudulently deceived, and as a result of the fraud, disinherited a person who ordinarily would have taken a greater share of the estate.

The testator suffered from an insane delusion at the time the will was drafted.

Question 15

Matt suffers from schizophrenia and thinks that his wife Dona is out to kill him. Therefore, in his will he bequeaths all property to his two sons and a daughter, leaving very little to Dona. Dona wants to contest the will. Under what basis should she contest the will?

A. That the maker of the will was not of sound mind at the time the will was drafted.

B. That the maker suffered from an insane delusion at the time the will was drafted.

Answer 15

Correct Answer: B. That the maker suffered from an insane delusion at the time the will was drafted.

Explanation: An insane delusion differs from an unsound state of mind. To be of unsound mind, the Testator must not know who he or she is, or the extent of his or her property ownership, or who the natural objects of his or her affection are, or that he or she is making a will and giving away his or her property. In the case of Matt, he is fully aware of his identity that he is making a will, and giving away his property. He knows that Dona is his wife but disinherits her because he suffers from an insane delusion (delusional schizophrenia) that she is trying to kill him

Question 16

The three types of guardianship are:

Answer 16

Guardianship of the person provides for the ward’s personal care.

Guardianship or conservatorship of the estate manages the ward’s property and financial affairs.

Plenary guardianship manages both the ward’s property and personal affairs.

Question 17

Process of Becoming a Guardian or Conservator

Answer 17

Petition Filed A petition is filed with the court indicating that a person has become incompetent.

Appointment of Guardian Ad Litem A guardian ad litem is appointed to represent the ward during the court proceedings and to protect his or her rights.

Submission of Testimony During a public court hearing, oral and written testimony is submitted recounting the individual’s physical and mental competency.

Court Appointment of Guardian The court makes a determination of the individual’s competence. If the court declares the individual incompetent, a guardian or conservator may be appointed.

Ongoing Supervision by Court The court exercises ongoing supervision and control.

Question 18

Financial Guardians

Answer 18

When parents die, their children may inherit substantial amounts of property from life insurance policies, IRAs, investments, and real property interests. The probate courts appoint financial guardians for children with expertise in financial management. Financial guardians may not be the same parental guardian selected by the court. Financial guardians are usually required to file a formal accounting with the court every one to two years, to file a bond, and to obtain permission from the court to engage in any substantial financial transactions.

Question 19

There are 3 types of Powers of Attorney over assets:

Answer 19

There are 3 types of Powers of Attorney over assets:

Non-durable POA: The agent’s authority is limited to terms dictated in the POA document and ceases when the principal becomes incapacitated or dies.

Durable POA: When the POA is created, the agent has authority to represent the principal before and after incapacity occurs. Therefore, it is not revoked when the principal becomes incapacitated. Any degree of legal power may be transferred to the agent to make business, financial or legal decisions for the principal .

Springing durable POA: Agent has no authority to act on behalf of the principal until the principal becomes incompetent as certified by physicians. It stays into effect until it is revoked, or when the mentally incapacitated person dies.

Question 20

Advantages of the power of attorney

Answer 20

Unlike a guardianship, which requires a court declaration that the disabled person is both legally and mentally incompetent, a durable power of attorney is a private document that becomes effective immediately, without the public stigma of a declaration of incompetence.

The power of attorney is relatively inexpensive and simple to execute. The document can be revoked and amended by the principal, if desired.

Generally, only one document needs to be drafted, and the agent may only exercise those powers expressly contained in the document.

There are no implied powers that may be inferred from the fiduciary role that the agent undertakes. This can be an advantage for the disabled principal, since the agent cannot undertake additional powers without the consent of the principal. However, state law can expand or contract powers which are not clearly articulated or delineated within the power of attorney.

If the power of attorney is durable, then the agent has the power to act if the principal becomes incapacitated. Therefore, the power is not revoked in the event the principal becomes incapacitated.

Question 21

Disadvantages of the power of attorney

Answer 21

The disadvantages of the power of attorney are as follows:

An agent may undertake only those powers expressly conferred by the document. The lack of flexibility within the document may prevent the agent from exercising a power that needs to be exercised, since it is not one of those powers contained within the document. For example, if the document is drafted so that the agent may enter into certain contracts relating only to personal property, but the needs of the disabled principal require that his real estate holdings be liquidated, the power of attorney may be of no benefit to the principal.

In many states, the power of attorney is referred to as being durable, meaning that the document is binding at the time it is executed, even if the principal is not incapacitated at that time. The durable power of attorney will remain in effect in the event the principal were to become mentally incapacitated in the future, but a non-durable power will not.

Many lending institutions will not accept a durable power of attorney. Furthermore, those institutions that do accept them may only do so if the power meets certain specific guidelines established by the institution itself.

A bank or a brokerage firm may not accept a durable power of attorney because it is not current enough according to their standards. The principal should re-execute these powers periodically to keep them current while the principal is legally competent, since the power is not effective if the person signing it is mentally incompetent.

Durable powers of attorney cannot be used after death to dispose of property omitted from a will.

An agent or attorney-in-fact has a fiduciary duty to act in the principal’s best interests, but is not held to the same fiduciary standards as a trustee, since he or she does not hold legal title to the principal’s property. However, the agent can be held liable for using the powers contrary to the principal’s best interests.

Question 22

Definitions of Disability

Answer 22

An own occupation clause deems the insured to be totally disabled when they cannot perform the major duties of their regular occupations. The insured can be at work in some other capacity and still be entitled to policy benefits. This is the best definition to have.

Modified own occupation, with a time limit (e.g. two years) on “own occ” protection.

Any gainful occupation definition, means that insureds are considered totally disabled when they cannot perform the major duties of any gainful occupation for which they are reasonably suited because of education, training or experience.

Question 23

Business Continuation Agreement

Answer 23

A business continuation agreement is an arrangement for the disposition of a closely-held business interest if the owner dies, becomes disabled, retires or withdraws from the business. Stock Redemption Plans are used by corporations and Cross Purchase Agreements are used by individual business owners as a means of purchasing the business owner’s interests if death or disability occurs.

In a business continuation agreement, the company or individual owners buy life insurance and disability insurance on a business owner’s life. When an owner dies or becomes disabled, the insurance proceeds are paid to the company or to the other business owners, who now have the necessary funds to buy the business owner’s stock or partnership interests. If the owner retires, the cash value of the policy is used to purchase the owner’s interest.

Question 24

Advantages of a Business Continuation Agreement

Answer 24

Continuity of the business without outsider control,

Values the business for estate tax purposes when the policies are purchased,

Assures the owner of a guaranteed conversion of his business interest into cash.

Insurance proceeds are not included in the insured’s estate unless the proceeds are paid to the shareholder’s beneficiary. However, the owner’s business interest, stock or partnership interest is included in his estate at death.

Question 25

Viatical Settlement Firms

Answer 25

Viatical settlement firms purchase life insurance from individuals who have terminal illnesses in exchange for an immediate lump sum cash payment, which is a discounted percentage of the policy’s face value. This cash settlement represents the present-day value of the policy and is determined by considering the insured’s estimated mortality (life expectancy) and the associated cost of premiums to keep the policy in force for that period of time. By selling a policy, many of these policyholders can provide the individual with needed funds to ease the financial burdens brought on by increased medical costs, and compensate for their loss of income due to illness.

Question 26

Disadvantages of a power of attorney are:

A. Lending institutions may not recognize the authority of an agent under a durable power of attorney.

B. The agent may only exercise those powers expressly contained in the power of attorney document.

C. Durable powers of attorney cannot be used after death to dispose of property omitted from a will.

D. A durable power of attorney cannot be revoked in the event the principal becomes incapacitated.

Answer 26

Correct Answers: A. and C.

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

Question 27

Disability contracts typically define disability in three ways. Choose the best definition to have in a disability policy.

A. Any gainful occupation definition

B. Own occupation definition

C. Modified own occupation with a time limit

Answer 27

Correct Answer: B. Own occupation definition

Explanation: An own occupation clause deems the insured to be totally disabled when they cannot perform the duties of their regular occupations. The insured can be at work in some other capacity and still be entitled to benefits. Any gainful occupation definition means that insureds are totally disabled when they cannot perform the duties of any gainful occupation for which they are reasonably suited because of education, training or experience.

Question 28

Social Security Disability defines disability as:

A. The inability to perform an individual’s customary employment due to a medical or mental impairment that is expected to last for 12 months

B. An inability to engage in any strenuous work activity by reason of a medically determinable impairment that is expected to last for a period of 12 months or end in death

C. An inability to engage in any substantial gainful activity by reason of a physical impairment that has lasted for 12 consecutive months

D. An inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that has lasted or can be expected to last for a continuous period of 12 months, or result in death.

Answer 28

Correct Answer: D. An inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that has lasted or can be expected to last for a continuous period of 12 months, or result in death.

Explanation: Social Security Disability defines disability as an inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that has lasted or can be expected to last for a continuous period of 12 months, or result in death.

Question 29

Some Activities of Daily Living (ADLs) found in LTC policies include:

A. Bathing

B. Walking

C. Toileting

D. Lifting

E. Writing

Answer 29

Correct Answers: A., B. and C.

Explanation: LTC insurance policies are not standardized, but most contain ADLs such as eating, bathing, dressing, walking, toileting, continence, transferring and taking medicine.

Question 30

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

A. the extent of medical treatment that should be provided

B. where an individual should receive treatment

C. whether surgery should be performed

D. what if any medications should be administered

Answer 30

Correct Answers: A., B., C. and D.

Explanation: Health care agents can confer with medical professionals to make decisions concerning the extent of medical treatment that should be provided, where an individual should receive treatment, whether surgery should be performed and what, if any, medications should be administered.

Question 31

Living Trust

Answer 31

A trust which takes effect during the grantor’s lifetime is called a living trust.

A trust which takes effect during lifetime is one which is created and funded with assets by the Grantor. During the Grantor’s lifetime, the Trustee is then charged with carrying out the provisions of the trust for the benefit of the trust beneficiaries. A living, or inter vivos, trust may be either revocable or irrevocable. Whether the client utilizes a revocable or irrevocable living trust depends on all of the client’s estate planning objectives.

Question 32

Testamentary Trust

Answer 32

A trust which takes effect upon the death of the Grantor is called a testamentary trust.

In other words, testamentary trusts are trusts whose provisions are created during the Grantor’s lifetime through the will, but only become funded with assets after the Grantor has died. The property interests will be included in the grantor’s gross estate at death, and are subject to probate.

Question 33

Revocable Trust

Answer 33

A trust which can be terminated by the Grantor during his or her lifetime is known as a revocable trust.

Question 34

Advantages of a Revocable Trust

Answer 34

The advantages of a revocable trust are given below:

No gift is made when property is transferred into a revocable trust. However, distributions made from the trust to beneficiaries are subject to gift taxes if they exceed the annual exclusion amounts.
It is flexible. The Grantor retains control over the terms of the trust and can amend, alter or revoke it in its entirety.
It provides the Grantor with the flexibility to retain full control over all of the assets within the trust. This is especially important if the assets within the trust are needed either by the Grantor or his family members.
Any assets placed within a revocable living trust during the lifetime of the Grantor will avoid the probate process.

Question 35

Disadvantages of a Revocable Trust

Answer 35

The disadvantage of a revocable trust is that the assets placed into the corpus of such a trust are included in the gross estate of the Grantor. As a result, there is no reduction in either the Grantor’s estate or income tax liability.