Estate Planning Final Review

Question 1

Goals of Estate Planning

Answer 1

Effective and efficient transfer of assets
Effective occurs when a person’s assets are transferred to the person or institution intended by that person
Efficient occurs when xfer costs are minimized consistent w/ the greatest assurance of effectiveness

Question 2

Estate Planning Process

Answer 2

1. Understanding the client’s current circumstances
2. Identify and Select goals
3. Analyze thier current path and any potential alternatives
4. Develop a comprehensive plan of transfers consistent with all information and objectives
5. Present your recommendations to the client
6. Implement the estate plan
7. Review the estate plan periodically and update the plan when necessary (especially for changes in family situations).

Question 3

Estate Planning Team

Answer 3

Attorney, CPA, Life insurance consultant, a Trust officer, and a financial planner.

Question 4

Basic Estate Planning Documents

Answer 4

1. Wills
2. Side Letters of Instruction
3. Powers of atty for property
4. Durable powers of atty for health care
5. Living wills or advance medical directives
6. Do-not-resuscitate-orders

Question 5

Wills

Answer 5

Legal document that provides testator (the will maker) opportunity to control distribution of his property at death and avoid state’s intestacy laws.

When one dies w/ a will, he dies “testate”

Question 6

Intestate

Answer 6

Dying without a will or with a will that does not dispose of all property- that is called “partially intestate”

Movable property is distributed according to will or state of domicle of decedent’s laws
Real property is distributed based on the state’s laws where property is located.

Question 7

Reciprocal Wills

Answer 7

sometimes called “sweetheart” or “I love you wills”
type where two individuals execute identical wills that leave all assets to the other persons.

Question 8

Common Clauses in a will

Answer 8

1. Introductory Clause
2. Declaration Clause
3. Bequest Clause
4. Residuary clause
5. a clause that identifies the executor and successor executor
6. Guardianship clause
7. Residuary clause - directs assets to bear payment of debts and estate taxes. It’s only called residuary clause when estate is subject to estate taxes and debts
8. Attestation clause - witnesses authenticate the document bearing testator’s signature saying they are competenet and not under duress.
9. Self-Proving clause - involves notary signing declaration that he witnessed testator signing.
10. Simultaneous Death clause - establishes presumption regarding which individual died first in event both die in the same event where its impossible to determine.
11. Survivorship Clause - an alternative to, and eliminates the need for simultaneous death clause.
12. Disclaimer Clause - remind heirs they can disclaim a bequest. To be effective, 1) disclaiming party cannot benefit from the property (except surviving spouse. 2) nor direct any future interest in property. 3) disclaiming party mus disclaim property w/in 9 months of decedents date of death. 4) disclaimer must be in writing.

Question 9

Contingent legatee clause

Answer 9

may use Per Capita or Per Stirpes to determine how proceeds will be divided w/ relation to deceased heirs and their descendants.

Question 10

No Contest Clause

Answer 10

AKA Terrorem Clause - attempts to discourage heirs from contesting will by substantially decreasing or eliminating bequest to them if they file a legal, format contest to the will.

Question 11

Codocil

Answer 11

Supplement to the will
May be executed like a statutory will, must be signed, witnessed, notarized.
Used to modify existing will.

Question 12

Side Instruction Letter

Answer 12

Details wishes reagarding dispostion of specific tangible possessions (household goods) as well as funeral / burial wishes.
Exists separately from the will.

Question 13

Ascertainable Standard

Answer 13

HEMS - Health, Education, Maintenance, Support.
These are ways a power of appt can be limited by an application of an ascertainable standard.
If power of appt is limited like this, it will not cause inclusion to the power holder.

Question 14

Durable Power of atty

Answer 14

Survives principal’s incapacity or disability

Question 15

Springing Power

Answer 15

A power of atty “springs” into existence upon some defined event or determination (disability)

Question 16

Tenancy in Common

Answer 16

Joint interest in property w/ two or more individuals
Owners can partition their interests without consent of other owners.
Each person holds undivided , BUT NOT NECESSARILY EQUAL, interest
Each tenant generally has a interest proportional to his financial contribution. If their share of ownership is greater than their pro rata contribution, a gift has been made.

Question 17

Joint Tenancy with Rights of Survivorship

Answer 17

Owned by two or more related or unrelated parties
Each owns an undivided, EQUAL INTEREST.
At death of one tenant, interest automatically passes to surviving owners - so NOT INCLUDED in probate estate.
Individuals can choose to partition their interest w/o consent of other tenants, even when jt tenant is a spouse. After property is partitioned, each owner owns share “fee simple”.

Spouses in jt tenants are deemed to have contributed 50%.
Property included in gross estate to extent of original contribution percentage.

Question 18

Actual Contribution Rule

Answer 18

Ex . If someone purchases real estate and names it JTWROS w/ son. They gift the son 50%. But 100% will go into their gross estate due to the actual contribution rule.
Does not apply to married couples.

Question 19

Value of property left to surviving spouse for Unlimited Marital Deduction

Answer 19

Is the NET VALUE - not the total or gross that is excluded from the taxable estate.
This is the gross value LESS any taxes, debts, or estate administration expenses payable out of the spousal interest.

Question 20

Terminable Interest

Answer 20

An interest that terminates at a specific time or event (like death)

Question 21

Reverse Gift

Answer 21

A gift is given with the intention that the donor receive it back with a step up in basis

Question 22

Assets that cannot use Alternative Valuation Date

Answer 22

“Wasting Assets” cannot.
They are any assets that will naturally decline in value as time passes.
Copyrights become less valuable as they come closer to expiration.
Annuitized annuities will decline due to payouts
These assets cannot use AVD, they must use Date of Death Value.

Also any assets sold between DOD and AVD will use the sale price.

Question 23

SCIN - self cancelling Installment note

Answer 23

It is a self-cancelling premium payment attached so that the note will cancel at the transferor’s death.
If properly used, a person can transfer property without paying gift tax or utilizing their lifetime gift exclusion and not result in a taxable gift.

Question 24

QPRT - Qualified Personal Residence Trusts

Answer 24

it is a GRAT in which the grantor contributes a personal residence to the trust and the retained income interest is the grantor’s right to “use” the personal residence.
If grantor does not outlive the term of the QPRT, the entire value of the property at date of death is included in their gross estate.

Question 25

Survivorship clauses

Answer 25

In order to still qualify for the unlimited marital deduction, property transferred in a will with a survivorship clause cannot exceed 6 month survival clause.

Question 27

Crummey Powers

Answer 27

A Crummey Power makes it possible to qualify a transfer to an irrevocable trust for the gift tax annual exclusion.
3 Ways of dealing with the lapsing issue from estate planning perspective:
1) Some grantors will state that the w/d right of each beneficiary shall be no more than lesser of: 1) gift tax annual exclusion or 2_ Greater of $5,000 or five percent of the trust corpus. When this approach is taken, th ebeneficiary will not be subject to any estate tax consequences, provided that he allows the general power of apptmt to lapse.
2) The second method is to create a hanging power. A hanging power states that, to the extent that a demand beneficiary has a right to w/d that does not lapse ( the portion of the 5-and5 amount), the nonlapsing portion will hang over to a subsequent year, when it can lapse under the 5-and-5 standard
3) A 3rd way of dealing with the lapsing issue to give the demand beneficiary is a continuing righ tot appoint a portion of the trust equal to the nonlapsing amount. This is simpler solution

Question 28

Installment Sale

Answer 28

A sale of property in which the buyer makes a series of installment payments to the seller
Effect of this transaction is that the buyer pays the seller the purchase price of the property over a specified term plus interest at the current market rate
Installment payments are paid in cash over the term of the note, and at seller’s death any outstanding principal of the installment note, including any accrued interest, is included in the seller’s gross estate
May be entered into by a related buyer and seller with the intention of accomplishing a planning objective. The agreed-upon sales price for the property in the installment sale may be the property’s fair market value, but the interest rate charged on the note may be lower than the current market rate of interest or may equal zero

In either case, buyer benefits b/c lower int payment req’d and the seller benefits b/c he will get less interest income and will, therefore, reduce gross estate
If rate is below applicable federal rate, gift loan treatment and adverse income tax consequences.

Question 29

Adjusted Gross Estate

Answer 29

From Gross Estate -
Deduct Funeral Expenses
Admin expenses
Death taxes
Casualty losses
This gets you to the Adjusted Gross Estate

After Adjusted Gross Estate comes
*State tax deduction
*Marital Deduction
*Charitable Deduction

To then arrive at
Taxable Estate

Question 30

Filing Estate Tax return

Answer 30

Usually personal representative must pay estate taxes w/in 9 months of date of death
*Up to $12,920,000 in transfers are exempt from GST in 2023 plus any annual exclusion
*Previous Cumulative lifetime gifts are reported on each gift tax return filed.
*An extension of time to file the income tax return automatically extends the time for filing gift tax returns, no separate form required.

Question 31

Testamentary Trust

Answer 31

A testamentary trust does not take effect (funded) until the will is administered. The trust funding is established by the will through the probate process (process validating the will).
The trust itself is typically set up to be funded prior to death.
The assets in the trust will come from the will and therefore were generally included in the probate estate.

Question 32

Irrevocable Life Insurance Trust

Answer 32

*Creates a vehicle to avoid GSTT
*Make proceeds available to surviving spouse
*Ensure that proceeds will be excluded from the probate of both spouses
*Shelters cash contributed for premiums from gift taxation up to the annual exclusion amount.

Question 33

Tenancy By Entirety

Answer 33

residency held Tenancy by Entirety or JTWROS will not require probate

Question 34

Special Needs Trust

Answer 34

allows disabled person to qualify for Medicaid assistance to provide them with long term care. The trust cannot be setup to make distributions to disabled person, b/c they would then be disqualified from Medicaid.

The trustee must be given discretion to make purchases of services and goods. Money from the special needs trust can be used to pay for education and rehabilitation.

Question 35

GRUT vs GRATs

Answer 35

GRATs are better if there are hard-to -value assets. The reason is that GRUTS are valued annually and a percentage is distributed. Because of this, they do allow additional contributions.
GRATs do not allow additional contributions.

GRATS do not have to stick to the rule of CRATS which says the remainder interest needs to be 10% of the fair market value.

So if there is going to be substantially appreciating property, A GRAT is a better choice than a GRUT, b/c it does not get reevaulated annually.

Question 36

Section 6166

Answer 36

Allows an estate to pay federal estate taxes in 10 equal annual installments beginning within 5 years of the date of the estate tax return is due.
To be eligible, when at least 36% of the client’s adjusted gross estate consists of a closely held business interest.

Any taxes paid under Section 6166, will qualify for a 303 redemption.

Taxes owed on the first 1 Million of value of the business above the exemption amount will be eligible for the low interest rate of only 2%. Estate taxes on the value of the business over thi samount will be eligible for a reduced interest rate that is 45% of the usual underpayment rate.

Interest payments at reduced rates are not deductible.

Question 37

Release of a Power

Answer 37

Release of a General Power is treated as a gift

But the release of a special power (like one subject to ascertainable standard) is not.

Question 38

CLUT

Answer 38

The longer the term of the CLUT, means the present value of the payments is greater and the present deduction will be larger.
The grantor does get taxed annually on income from the CLUT and for that reason, they are usually funded with tax-exempt assets like muni bonds.

Question 39

NIMCRUT - Net Income makeup CRUT

Answer 39

allows Grantor to defer income taxes on cap gains. Trustees can sell investments in trust and take advantage of the net income makeup provision by investing to generate realitively little income