Lesson 1 of Estate Planning: Fundamentals of Estate Planning Flashcards
Introduction to Estate Planning!
Estate planning may be broadly defined as the process of:
- accumulation,
- management,
- conservation, and
- transfer of wealth considering legal, tax and personal objections.
Goals and Objectives
- Goals of Estate Planning Are the Effective and Efficient Transfer of Assets
An effective transfer:
- occurs when a person’s asset are transferred to the person or institution intended by that person.
An efficient transfer occurs when:
- transfer costs are minimized consistent with the greatest assurance of effectiveness.
Goals and Objectives
- Common Goals and Objectives of Estate Planning Include:
Fulfill client’s property transfer wishes
Minimize transfer taxes
Minimize transfer costs, including gift/estate taxes and and costs associated with the probate process, as well as the cost of documents, planning, trusts and other professional fees
Maximize net assets to heirs (those who inherit under state law) and legatees (those who inherit under a will)
Provide needed liquidity at death.
Fulfill client’s healthcare decisions
Risks
- Risks in Failing to Plan an Estate Include:
Client’s property transfer wishes go unfulfilled.
Transfer taxes are excessive.
Transfer costs are excessive
Client’s family not properly provided for financially.
Insufficient liquidity to cover client’s debt, taxes, and costs at death.
Estate Planning Process
- The Seven Basis Steps of the Estate Planning Process Are:
- Understanding the client’s current circumstances.
- Identify and select goals.
- Analyze their current path and any potential alternatives.
- Develop a comprehensive plan of transfer consistent with all information and objectives.
- Present your recommendation to the client.
- Implement the estate plan.
- Review the estate plan periodically and update the plan when necessary (especially for changes in family situations).
The Estate Planning Team usually includes:
- An Attorney
- Certified Public Accountant (CPA)
- Life Insurance Consultant
- A Trust Officer
- Financial Planner
A Professional who is not a licensed attorney should avoid offering legal advice on any matter as this is considered the unauthorized practice of law.
If a matter arises that requires legal advice, the planner should refer the client to a licensed attorney.
Exam Question - The Unauthorized Practice of Law
Anne is a financial planner in the state of Texas. Although she attended law school, she never passed the bar and is not a licensed attorney. Which of the following actions may cause Anne to be seen as “practicing law”?
a) Reviewing wills, trust documents, and powers of attorney.
b) Drafting wills, trust documents, and powers of attorney.
c) Directing a client to seek legal advice from a licensed attorney.
d) Acting as trustee for a client’s trust.
Answer: B
Drafting legal documents is considered practicing law. Any of the other actions would not be considered practicing law. (Note: This varies according to state law and could be different in some states.)
Exam Question - The Unauthorized Practice of Law
Tracey is a financial planner and just received his CFP certification. Tracey does not have any other designations or licenses. Although Tracey’s expertise is investment planning, he is anxious to expand his client base and is willing to assist clients with any area of financial planning. Over the last month Tracey engaged in the following activities with Troy, a new client.
- During the initial meeting, Tracey collected personal data about Troy including the estate planning documents Troy had previously executed.
- During the second meeting Tracey recommended the use of a trust to fulfill some of Troy’s estate planning goals.
- Troy called Tracey one afternoon and asked if Tracet could explain the probate process to him, which Tracey promptly did.
- Tracey downloaded a copy of a generic will from the Internet, filled in Troy’s information and gave the document to Troy to be executed
Of the activities above, which would be considered the unauthorized practice of law?
a) 4 only.
b) 2 and 3.
c) 3 and 4.
d) 2,3 and 4.
e) 1, 2, 3 and 4.
Answer: A
Only activity four is the unauthorized practice of law. Drafting legal documents is reserved for attorneys. Inquiring about estate planning documents should be completed by all practitioners. Recommending appropriate estate planning devices, such as trusts, can be done by financial planners. Explaining the probate process would not be the unauthorized practice of law, Tracey would cross the line if he gave legal advice regarding the probate process.
Exam Question - Risks of Failing to Plan an Estate
Brent does not want to write a will. It upsets him to contemplate his own death and he wishes to avoid the estate planning process. Which of the following is not a risk Brent’s estate may face because of Brents inaction?
a) Brent’s property transfers contrary to his wishes.
b) Brent’s estate may face liquidity problems.
c) Brent’s estate faces increased estate administration fees.
d) Brent’s estate faces increased debt payments for outstanding debts at death.
Answer: D
Brent’s inaction will cause him to die intestate and be subject to the intestacy laws of his state. Brent’s inaction will also cause him to die without an estate plan. There is no risk that his estate will be subject to increased debt payments for outstanding debts at death simply because he dies intestate or without an estate plan. All of the other options are risks when someone dies intestate or without an estate Dian.
Exam Question - The Unauthorized Practice of Law
Elizabeth, who is not a licensed attorney, recently started her own financial planning practice. Which of the following activities would be considered the unauthorized practice of law?
a) Preparing a last will and testament for her first client.
b) Helping clients to identify their financial planning goals.
c) Preparing financial statements for prospective clients.
d) Referring clients to her brother, Jack, who happens to be a licensed attorney.
Answer: A
Only licensed attorneys should prepare last will and testaments for clients.
Basis Estate Planning Documents!
- What are the Basis Documents Used in Estate Planning?
- wills,
- side letters of instruction,
- powers of attorney for property,
- durable powers of attorney for health care
- living wills or advance medical directives, and
- do-not-resuscitate orders
Wills
- What is a Will?
A will is a legal document that provides the testator (the will maker) the opportunity to control the distribution of his property at death and thus avoid his state’s intestacy laws.
- May be amended or revoked by the testator at any time prior to his death.
- A decedent who has a valid will is said to die “testate.”
Wills
- Testate & Intestate
To die “intestate” is to die without a valid will or to die with a will that does not dispose of all property.
Dying with a will that does not dispose of all property is also known as dying “partially intestate.”
In the case of intestacy, the laws of the decedent’s state of domicile (where a person votes, lives, pays taxes, etc.) determines how the decedent’s personal property will be distributed.
Movable property is distributed according to the will or the laws of intestacy in the state of domicile of the decedent.
Real property, on the other hand, is distributed based on the laws of the state in which the property
is actually located (the situs).
A probate process in a state other than the state of domicile is called ancillary probate.
Domicile is referred to as where the person treats as their personal home, or most connecred with.
Exam Question - Intestacy
Under which of the following circumstances would a decedent be considered to have died intestate?
a) The decedent hand wrote a will, but did not sign or date it.
b) The decedent was not of “sound mind” when he signed his statutory will.
c) The decedent failed to prepare a last will and testament.
d) All of the above.
Answer: D
- Answer A describes an invalid holographic will.
- Answer B describes a situation in which the testator is not “of sound mind” and therefore cannot make a valid will.
- If the decedent dies without a valid will he is said to have died intestate
Wills
- The 3 Different Wills Including:
- Holographic Wills
- Nuncupative Wills
- Statutory Wills
3 Most Important Types of Wills
Holographic wills are handwritten (not typed) by the testator and include the material provisions of a will. The holographic will must be
- dated and signed by the testator,
- but most states do not require a witness.
- Holographic wills are valid in most states.
Nuncupative wills are oral, dying declarations made before a sufficient number of witnesses.
- In some states nuncupative wills may only be effective to pass tangible personalty, not real property, and
- the dollar amount transferred via this method may be limited.
- The use of nuncupative wills is fairly restricted and is not valid in most states.
Statutory wills are drawn by an attorney, and comply with the statutes for wills of the domiciliary state.
- Statutory wills are often referred to as witnessed or attested wills.
- Statutory wills must be typed or be in writing,
- be signed by the testator (generally in front of witnesses), and
- be signed by the witnesses
Wills
- The Other 2 Wills
- Mutual or Reciprocal Will
- Joint Will
Wills may also be identified based on the function or characteristics of the will. For example, two individuals may sometimes execute identical wills that leave all assets to the other person. This type of simple will may be referred to as a mutual or reciprocal will and if done between spouses it may be called a “sweetheart” will or an “I love you” will.
- Reciprocal wills, like all other wills, are not permanently binding on the individuals and can be changed at any time.
In some instances, two or more individuals, usually spouses, will execute one will, called a joint will,
that transfers their common interest in property to one individual.
- When the first party dies and the will probated, the will contractually binds the surviving party to dispose of their assets in the manner set forth in the joint will.
Wills
- In general, a Will is Valid When:
The will maker is the age of majority in his domiciliary state, or is an emancipated minor.
The will maker has legal testamentary capacity, which means that the will maker must understand the consequences of writing the will, including being able to:
- recognize and recollect the property being disposed of by the will; and
- recognize the relationships of those friends and relatives who have any claim to the testators assets.
Wills
- Certain Common Provisions or Clauses Appear in Most Wills. These Common Clauses Include:
Exam Tip: Make a Flashcard of the requirement to disclaim a bequest.
Introductory clause
Declaration clause
A bequest clause directs the distribution of specitic property, whether cash, tangible personal property, or real estate. If multple legatees are to inherit, then there may be multiple bequests clauses, generally grouped together in one section of the will.
A residuary clause directs the transfer of the balance of any assets not previously distributed to particular individuals or to charitable institutions through a bequest clause. Without a residuary clause a probate estate may have intestate assets, which Will pass under the laws of intestacy.
A clause which identities the executor and any successor executor and defines their powers
A guardianship clause allows the testator to identify the best person to raise an minor children or legal dependents.
A clause directing which assets will bear the payment of any debts and estate taxes. Often this clause is included as art of the residuary clause, but only when the residuary estate is directed to bear the
payment of the estate taxes and debts.
An attestation clause, or witness clause, is a provision at the end of the will that is signed by at least two qualified witnesses (some states require three witnesses who authenticate the document is the testator’s will bearing the testator’s signature and that the testator was competent and not under any kind of duress at the time the will was executed.
A self-proving clause involves the notary signing a declaration that he witnessed the testator and witnesses sign the will.
A simultaneous death clause establishes a presumption regarding which individual died first in the event that both individuals die in the same event (such as in a plane crash, car accident, fire, etc.) where it is impossible to determine which person died first.
A survivorship clause is an alternative to, and generally eliminates the need for a simultaneous death clause. Such a clause requires that a beneticiary/heir must actually survive the decedent for a specified period of time to receive the identified inheritance or bequest.
A disclaimer clause functions to remind any heirs that they can disclaim a bequest, while still allowing the testator to direct the distribution of disclaimed property. To be effective:
- (1) the disclaiming party cannot benefit from the property (with the exception, In certain circumstances, of the surviving spouse)
- (2) nor direct any future interest in the property,
- (3) the disclaiming party must disclaim the property within nine months of the decedent’s date of death and
- (4) the disclaimer must be in writing.
- No Benefit Rule: If someone decides to say “no” to inheriting property (except in certain cases involving a surviving spouse), they can’t later change their mind and try to get any benefits from that property.
- No Decision-Making Power: The person who refuses the inheritance can’t decide who should get the property in the future. The one who made the will (the person who passed away) already decided where it should go.
- 9 Month Deadline of when to decline
- Must be in writing
Wills
- Certain Common Provisions or Clauses Appear in Most Wills. These Common Clauses Include:
- Example of Disclaimer Clause
Cindy leaves $300,000 to Delia in her will. Cindy’s disclaimer clause directs that if Delia is unable or unwilling to take the $300,000, then the money goes to Delia’s daughter Ellen. When Cindy dies, Delia is still alive, but does not need the money and would prefer Ellen to have it. She properly disclaims her inheritance and Ellen receives the $300,000.
Because Delia properly disclaimed her inheritance, the money passes directly to Ellen and thus avoids any transfer tax (gift tax) from Delia to Ellen.
Wills
- Certain Common Provisions or Clauses Appear in Most Wills. These Common Clauses Include:
- Contingent Legatee Clause
A Contingent Legatee Clause may use one of two methods,
- to determine how the proceeds will be divided with relation to the deceased heirs and their descendants.
Methods are:
- per capita or
- per stripes,
- Per Capita at Each Generation
Wills
- Certain Common Provisions or Clauses Appear in Most Wills. These Common Clauses Include:
- Contingent Legatee Clause:
- Per Stripes - “By Representation” or “By the Roots”
- Per Capita - “By the Head”
- Per Capita at Each Generation
- Contingent Legatee Clause:
Per Stripes:
- Directs that the grandchildren stand in for their deceased parent and get that share to split among themselves.
Per Capita:
- Equal share based upon the number of living beneficiaries. Heirs of the same generation get an equal share IF they are the only heirs.
Per Capita at Each Generation:
- Heirs of the same generation ALWAYS get an equal share. Typically one of the most preferred methods of leaving assets to heirs.
Sometimes the various methods yield similar results, but other times they yield dramtically different results.
Example 1 of Contingent Legatee Clause
Example 2 Variation 1 of Contingent Legatee Clause
Consider a family in which A is the intestate decedent A has three children, B, C and D.
B has three children (B1, B2 and B3),
C has one child (C1), and
D has two children (D1 and D2).
Variation 1: All three children (B, C and D) survive A
Example 2 Variation 2 of Contingent Legatee Clause
Consider a family in which A is the intestate decedent A has three children, B, C and D.
B has three children (B1, B2 and B3),
C has one child (C1), and
D has two children (D1 and D2).
Variation 2: B predeceases A (C and D survive A).
Example 2 Variation 3 of Contingent Legatee Clause
Consider a family in which A is the intestate decedent A has three children, B, C and D.
B has three children (B1, B2 and B3),
C has one child (C1), and
D has two children (D1 and D2).
Variation 3: B and C predecease A (D survives A).
Example 2 Variation 4 of Contingent Legatee Clause
Consider a family in which A is the intestate decedent A has three children, B, C and D.
B has three children (B1, B2 and B3),
C has one child (C1), and
D has two children (D1 and D2).
Variation 4: All three children predecease A.
Wills
- Certain Common Provisions or Clauses Appear in Most Wills. These Common Clauses Include:
- A No-Contest Clause
A No Contest clause (sometimes called an in terrorem clause)
- attempts to discourage disappointed heirs from contesting the will by:
- substantially decreasing or
- eliminating a bequest to them
- if they file a formal, legal contest to the will.
Exam Question Contingent Legatee Clause
Jose recently died with a probate estate of $900,000. He was predeceased by his wife, Guadalupe, and his daughter, Lucy. He has two surviving children, Pete and Fred. Jose was also survived by several grandchildren: Pete’s three children, Naomi, Daniel, Nick, Fred’s three children, Heather, Chris, and Steve; and Lucy’s two children, David and Rachel. Jose’s will states the following “I leave everything to my three children. If any of my children shall predecease me then I leave their share to their heirs, per stirpes.” Which of the following statements is correct?
a) Under Jose’s will David will receive $225,000.
b) Under Jose’s will Chris will receive $150,000.
c) Under Jose’s will Nick will receive $100,000.
d) Under Jose’s will Fred will receive $300,000.
Answer: D
Under the will Pete and Fred will each receive 1/3 shares. Lucy’s 1/3 share will flow to her children, with each of them receiving 1/2 of the 1/3 share.
Wills
- Revoking and Changing Wills
Revocation:
- The testator can destroy the will, either by shredding it or burning it.
- The testator can also create a new will specifically revoking the previous will.
- In some states, the testator can revoke the will by writing “cancel” across the will.
Codicil:
- Supplement to a will.
- May be executed like a statutory will, which must be signed, properly witnessed, and notarized as discussed previously.
- Used to modify, explain, or amend a will.
Wills
- Side Instruction Letter
Details the testator’s wishes regarding the disposition of specific tangible possessions:
- (such as household goods), as well as funeral and burial wishes.
- Exists separately from the will.
Wills
- Statutes Affecting Wills
- Marital Portion
- Felonious Homicide Statutes
- Divorce Statutes
- Anti-Lapse Statutes
Marital Portion:
- State laws concerning the marital portion require the decedent to provide for his surviving spouse under certain circumstances.
Felonious Homicide Statutes:
- Many states now have felonious homicide statutes that prevent legatees and heirs who have been convicted of intentionally killing the decedent from inheriting from the decedent’s will or through the intestate process.
Divorce Statutes:
- Many states now have statues that invalidate any provisions in a will that leave assets to a former spouse.
Anti-Lapse Statutes:
- Some states have statutes that will presume that if a close relative, like a child or sibling, is not alive when the testator dies the testator would have wanted bequests to those individuals to pass directly to their heirs.
Power of Attorney and Power of Appointment
- A Power of Attorney
A power of attorney is a legal document that authorizes a trusted person to act on one’s behalf.
It gives the right to one person, the attorney-In-fact (sometimes called the power holder or agent), to act in the place of the other person, the principal (power giver).
Generally, any person who is legally capable to act for himself may act as an attorney-in-fact for another.
***Person is not Necessarily a ACTUAL Attorney.
Power of Attorney and Power of Appointment
- General Power of Attorney / General Powers of Appointment
The broadest power a person can give another is a general power of attorney. The person who is given the power of attorney will be able to act in the principals place as though he is the principal.
- Essentially the general power of attorney gives the agent the power to do anything that the principal
could do. - The general power of attorney may be revoked by the principal by giving notice, usually with à revocation form, to the agent and is automatically revoked at the principal’s death.
- The ability for the agent to appoint assets to himself, to his estate, his creditors, or his estate’s creditors is considered a general power of appointment over the property covered by the power of attorney.
***Person is not Necessarily a ACTUAL Attorney.
Exam Question - General Powers of Appointment
Nellie recently executed a power of attorney giving Jessie the power to perform certain tasks. Which of the following powers given to Jessie would cause the power to be deemed a general power of appointment?
a) Nellie gave Jessie the power to use Nellie’s money to pay Nellie’s creditors.
b) Nellie gave Jessie the power to sell and buy property on Nellie’s behalf.
C) Nellie gave Jessie the power to use Nellie’s money to pay Jessie’s creditors.
d) Nellie gave Jessie the power to make gifts to Nellie’s heirs and charities.
Answer: C
Giving Jessie the power to pay his own creditors creates a general power of appointment over the assets. The other powers do not benefit Jessie and, thus, do not create a general power of appointment.
Power of Attorney and Power of Appointment
- Chart Comparing - Power of Attorney v.s. Power of Appointment
EXAM TIP: Know the difference betweeb a power of attorney and a power of appointment.
Power of Attorney and Power of Appointment
- Powers of Attorney Graphic
The following graphic shows the differences between a special or limited power of attorney and a
general power of attorney.
Power of Attorney and Power of Appointment
- Powers of Attorney Appointment
The following graphic shows the differences between a special or limited power of appointment and a general power of appointment
Forms of Property Interests
- Joint Tenancy with Rights and Survivorships Examples
Pay attention to the third example.
Example of Community Property
Forms of Property Interests
- Summary of Chart of Key Features of Various Types of Property Ownerships
EXAM TIP: Make a Flashcard of this Chart
Forms of Property Interests
- Examples of Property Ownership Key Features
Shannon and Boone had been married for six years. Three years ago, after having their only son, Sawyer, they bought their first home for $250,000. Last year, Boone was killed in a car accident. His will left everything to his son. The value of the home at Boone’s death was $400,000.
Property Passing Through Probate
- Probate Process
Exam Tip: Know this diagram completely.
Property Passing Through Probate
- Advantages + Disadvantages of the Probate Process
Steps in the Probate Process
- Personal Represenative
When the probate process begins, a personal representative will be appointed to administer the probate estate.
- Depending on whether the decedent had a will or not, the personal representative is called the executor or administrator.
- The following chart outlines the common duties of an executor and/or administrator.
Calculating the Probate Estate
- Example & Explanation
For Life Insurance 1 & 2 it will be included in decendent’s gross probate because it was not transferable to Nancy. Because Nancy is not listed as a beneficiary it can’t be excluded in the probate. This is a sole ownership.
IRA is also a sole ownership but Peter
