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Certified Financial Planner prep > Overview of Estate Planning > Flashcards

Overview of Estate Planning Flashcards

Overview and basic terms

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1
Q

Pourover Will

A

1) Transfers assets owned at death to the revocable trust.
2) Names personal representative or executor to make the transfer
3) Names guardians for minor children
4) Will is required

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2
Q

Revocable trust is created when

A

Created during life

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3
Q

Irrevocable trust is created when

A

Created during life or at death

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4
Q

Testamentary trusts

A

Irrevocable trusts created under a will. Funded at death.

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5
Q

Intestacy statutes

A

Assets you own at death pass according to your will, or if you do not have a will, these assets pass according to state law. These transfers are always subject to probate.

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6
Q

Beneficiary designations

A

1) Can trans financial assets to revocable trust at death
2) Includes life insurance, retirement plans, annuities, and sometimes cash and investment accounts

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7
Q

Settlor / grantor / trustor / trustmaker

A

The person who creates a trust and transfers property to it.

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8
Q

Revocable trust

A

A trust which allows the settlor to take property back from the trustee on demand, and change the terms of the trust when desired. Not permanent transfers.

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9
Q

Irrevocable trust

A

A trust under which the settlor cannot take property back from the trustee without giving equal or greater value in return, and under which the terms cannot be changed by the settlor without the consent of the trustee and all beneficiaries. Permanent transfers.

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10
Q

Transfer tax to irrevocable trust

A

1) gifts during the settlor’s life may be subject to gift tax reporting, unless to an incomplete gift trust (ING)
2) gifts at the settlor’s death may be subject to estate taxes
3) gifts both during life, or at death, may also be subject to generation skipping transfer (GST) taxes or allocation of GST exemption

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11
Q

Spendthrift clause

A

protects beneficiaries

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12
Q

Basic objective of Estate Planning

A

1) tax-reduction/tax-avoidance
2) protection
3) support for minors or special needs
4) control who receives assets
5) philanthropy - favorable tax treatment for donations
6) care - advanced directives
7) privacy - avoid public probate

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13
Q

Estate planning process

A

1) gather data
2) establish objectives
3) identify influencing factors with such as wealth, health
4) identify weaknesses
5) select technique
6) implementation
7) monitor and revise plan

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14
Q

Non tax related estate planning documents

A

1) a valid will
2) letter of last instructions containing financial inventory
3) durable power of attorney
4) living will - wishes concerning life-sustaining health care
5) health care durable power of attorney - to grant a trusted person the power to make health care decisions for you

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15
Q

Will

A

1) A legal document to determine how assets will transfer/distribute upon death. 2) Should be executed by attorney.
3) Testamentary by nature - it takes effect only upon the death of the testator.
4) A revocable instrument - can be amended or revoked any number of times prior to testator’s death.

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16
Q

Testator

A

The person creating the will

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17
Q

Guardians

A

Individuals appointed to act in the best interests and provide support for minor children (under 18 years old in most states) with predeceased parents

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18
Q

Executors

A

Individual(s) appointed to carry out the provisions stated in the will, may only be appointed within the will. Will usually be paid a fee for services performed, but person selected may choose to do it for free.

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19
Q

Probate

A

A public court proceeding that determines whether the testator executed a valid will.

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20
Q

Trust

A

An arrangement where the title to property is held by one party, the trustee, for the benefit of another, the beneficiary.

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21
Q

Fiduciary responsibility

A

Trustee has a legal obligation to manage the trust in the best interest of the beneficiary according to the terms or instructions of the trust

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22
Q

Power of attorney

A

A written agreement that allows one individual, known as the agent, to act on behalf of another, known as the principal.

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23
Q

Power of attorney types

A

1) Durable power of attorney
2) Non-durable power of attorney
3) Springing power of attorney
4) General power of attorney
5) Special power of attorney

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24
Q

Durable power of attorney

A

The designated agent has the ability to act immediately on behalf of the principal. The agent’s power of attorney does NOT lapse even if the principal becomes incapacitated or disabled.

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25
Q

Non-durable power of attorney

A

the power of attorney remains active until specific task is fulfilled or up to incapacitation

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26
Q

Springing power of attorney

A

Does not become operative until the principal becomes legally incapacitated (should be confirmed medically). If decisions need to be made about property of the principal, it may be delayed due to medical confirmation taking time.

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27
Q

General power of attorney

A

authority to make a broad array of decisions included financial, legal, or business. It lapses/stops at disability of incapacitation

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28
Q

Special power of attorney

A

the agent only acts on behalf of the principal for a specific matter. Once the task or time period has passed, the authority expires.

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29
Q

Donor

A

individual making a gift

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30
Q

Donee

A

individual receiving a gift

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31
Q

Annual gift exclusion

A

$17000 in 2023 gift free of tax

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32
Q

Gift-splitting strategy for spouses

A

combine their individual $17000 annual exclusions and double their total excluded gift amount

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33
Q

Form 709

A

Tax form for gifted amounts

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34
Q

Unlimited marital deduction

A

Spouses may gift unlimited amounts to one another. If one of the spouses is non-US citizen, a maximum of $175,000 (2023) in annual gifts may be excluded from gift tax.

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35
Q

Qualified transfer

A

payment for medical or educational tuition expenses directory to the educational institution or medical facilities have unlimited gift tax exclusion. Example: no tax on paying someone’s tuition or medical bill

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36
Q

Qualified charities

A

unlimited amount of assets may be gifted, not incurring gift tax. Quality for a below-the-line income tax deduction if individual is itemizing.

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37
Q

Reasons for invoking the laws of intestacy

A

If a will was declared invalid, the estate will be distributed by the courts under the state’s laws of intestacy.

38
Q

Reasons for declaring a will invalid

A

If will’s execution did not follow the guidelines or was improperly witnessed or signed

39
Q

Intestate

A

dying without a will. The state of residence divides the estate according to that state’s laws of intestacy

40
Q

Law of intestacy

A

Survivors - Division of Property
1) Spouse and one child - 50% each
2) Spouse and two or more children - Spouse receives one-third, the remainder divided equally among children
3) Spouse and parents surviving, no children - Spouse receives 50-75%, the remainder to surviving parents
4) Spouse, no children, and parents deceased - Spouse receives 50-100%, surviving siblings receive balance
5) Parents surviving, no spouse, and no children - Parents receive 100%
6) Siblings surviving, no spouse, no children, and parents deceased - Siblings receive equal shares

41
Q

Bequest

A

The property transferred based on the terms of the will

42
Q

Will execution requirements

A

1) sound mind
2) of age
3) in writing
4) signed
5) declared last will and testament
6) witnessed
7) attestation clause - states that the will was validly executed according to the state’s statutory execution requirements and has been validly witnessed

43
Q

Probate substitutes

A

Ways in which property may transfer outside of the probate process: 1) by law; 2) by trusts; 3) by contract i.e. beneficiary designation
Goal is to reduce the estate’s exposure to probably, however it is not designed to reduce estate tax liability.

44
Q

Reasons to have a will

A

1) transfer of property
2) guardianship
3) cost for administrator - without a will, the course will appoint an administrator.
In a properly executed will, the testator may select an individual functioning in the same capacity but called an executor.

45
Q

Administrator

A

The person appointed by court to represent the decedent in the probate process

46
Q

Disadvantages of probate

A

1) legal and administrative fees are paid from the estate, leaving less for beneficiaries
2) long process - 6 month to 2 years
3) out of state property must be probated in the state where it is located, which is more costs
4) all documents are a matter of public record, resulting in a lack of privacy
5) a will is effective at death, so if you are incapacitated, it does not help govern your estate

47
Q

Reasons for using trusts

A

1) avoid probate
2) trusts are more difficult to challenge in your than wills
3) shelter assets from estate taxes
4) allows for professional asset management
5) confidentiality
6) provide for a child with special needs
7) charitable gifting
8) hold assets until a child reaches maturity/designated age
9) ensure children from previous marriage can receive some inheritance
10) private instructions regarding management and disposition of assets consistent with client’s goals and family needs.

48
Q

Trustee

A

holds legal title to the assets placed in the trust, which he manages for all of the trust beneficiaries. Fiduciary fulfilling their duty in the best interests of the beneficiaries

49
Q

Trustee powers

A

1) collect trust property, settle claims, sue or be sued
2) sell/acquire/manage the trust property
3) vote corporate shares
4) borrow money and use the trust corpus as collateral, if approved by the court
5) enter into contracts and leases
6) Pay beneficiary
7) Make divisions and distributions of trust property
8) receive additional assets into the corpus of the trust

50
Q

Trustee duties

A

1) carry out the trust in accordance with the terms of th e trust agreement
2) not to delegate his duties
3) use skill and care
4) in the best interest of beneficiaries
5)possess, protect, and preserve the trust property
6) separate and earmark trust property
7) make the trust property productive
8) make distributions per trust agreement

51
Q

Inter Vivos Trust aka Living Trust

A

Trust established and funded during the grantor’s lifetime aka LIVING TRUST. Funds pass outside the will and the probate. Title to the property is held in the name of the trust.

52
Q

Advantages of Revocable Trust

A

1) grantor, trustee, and the beneficiary may all be the same person.
2) grantor can alter or cancel trust
3) assets are professionally managed by the trustee in the even of incapacity
4) trustee can be replaced

53
Q

Disadvantages of Revocable Trust

A

1) pay income taxes and capital gains on the assets in the trust
2) assets are considered part of estate for estate tax purposes
3) if trust is unfunded, then probate and no estate tax reduction

54
Q

Advantages of Irrevocable Trust

A

1) avoid probate
2) appreciation on assets may be excluded from the estate, which reduces estate taxes
3) Income earned on assets can go to beneficiary, which is tax saving if beneficiary is in the lower tax bracket

55
Q

Disadvantages of Irrevocable Trust

A

1) loss of control over the assets
2) asset may be subject to gift taxes

56
Q

Purpose of testamentary trust

A

1) reduce estate taxes
2) provide professional investment management
3) making sure the estate ends in the right hands

57
Q

Spousal transfer trust

A

1) provide for the lifetime support of a surviving spouse
2) determine if assets for the spouse should included in an individual’s or their spouse’s taxable estate
3) determine the ultimate beneficiary after the death of the surviving spouse

58
Q

Bypass trust

Reduces estate taxes to wealthy married couples to want to provide for their children/heirs instead of surviving spouse

A

Non marital trust or B-trust.

1) Tax Planning: help married couples reduce or eliminate estate taxes by sheltering a portion of their assets from taxation.
2) Beneficiaries: The primary beneficiaries are setup by original grantor
3) Control: the surviving spouse does not have complete control over the assets. They receive income during their lifetime but do not have the power to decide who receives the assets when they pass away.
4) Tax Treatment: Assets are sheltered from estate taxes for both the first and second spouses’ deaths, up to the exemption limit.

59
Q

Marital trust

A

1) Spouse-Centric: benefit the surviving spouse first and foremost. They provide financial security and support to the surviving spouse.
2) Tax Deferral: delay the payment of estate taxes until the surviving spouse’s death. It does not reduce overall estate taxes but defers them.
3) Beneficiaries: The surviving spouse is the primary beneficiary of a marital trust. They have control over the trust assets and can use them for their needs.
4) Tax Treatment: Assets are typically included in the estate of the surviving spouse and may be subject to estate taxes when the surviving spouse passes away.

60
Q

Bypass vs marital trust

A

A bypass trust is focused on estate tax planning and benefits the couple’s heirs, while a marital trust is centered on providing for the surviving spouse and deferring estate taxes until their passing.

61
Q

General Power of Appointment Trust (GPA trust or A-trust)

A

1) Beneficiary control - the beneficiary (usually the surviving spouse) is granted the authority to decide who gets the assets upon their death. Includes the ability to give the assets to themselves, their estate, creditors, or other beneficiaries
2) Estate Tax Impact - included in beneficiary’s taxable assets, which means they may be estate taxed at death
3) Flexibility in asset distribution and allows the trust the adapt to family needs.

62
Q

QTIP trust (qualified terminable interest property trust)

A

1) Estate tax benefits - assets are not included in taxes estate of the surviving spouse. Estate taxes are deferred until after second spouse’s death
2) Spousal benefits - receive income from the trust during lifetime
3) Limited beneficiary control - do not fully control the final disposition of assets. Used for second marriages to ensure that children from previous marriage will receive an inheritance

63
Q

Intergenerational transfers

A

transfer of assets from one generation to the next one, includes skipping a generation

64
Q

Generation-Skipping Transfer Tax (GSTT)

A

Each grandparent can transfer up to $12,920,000 to grandchildren during their lifetime or at death before the tax is applied

65
Q

Sprinkle Trust

A

Trustee decides who needs what and when and then distributes assets according to needs instead of preset formula.

66
Q

(quiz) Which of the following allows the grantor to retain control and use of his or her assets?

A

(x) Joint Tenancy
Irrevocable Trust
(x) Revocable Trust
(x) Contracts

67
Q

(quiz) Harry would like to have his estate go to his wife Dorothy, and then to their children upon her death. He does not want Dorothy to be able to reassign the beneficiaries of the assets in case she remarries. Which of the following trusts would he want to establish?

A

(x) Bypass Trust
(x) Nonmarital Trust
Marital Trust
(x) Q-TIP

68
Q

(quiz) Which trust does not allow the beneficiary to be changed?

A

A Q-TIP, bypass trust or non marital trust does not allow the beneficiary to be changed

69
Q

(quiz) Which trust can help reduce estate taxes?

A

Will
Revocable Trust
(x) Irrevocable Trusts
Power of attorney

The grantor gives up control and right to the assets of an irrevocable trust, thus the assets are not included in the estate taxes.

70
Q

Death tax

A

A tax on the property transferred or received upon death of the owner.
Two types:
1) Estate Tax
2) Inheritance Tax

71
Q

Estate tax

A

Imposed on the property of the deceased before it is transferred. Exists on the federal level and some states.

72
Q

Inheritance tax

A

Levied on the property when it is received by the beneficiary. State specific tax in 18 states.

73
Q

Taxable Estate

A

Gross estate MINUS funeral and administrative expenses, debts, liabilities, or mortgages, certain taxes, and any marital or charitable deductions

74
Q

Gross Estate Value

A

Sum of all decedent’s assets and property, including life insurance proceeds, pensions, collectibles, investments, real estate, and other assets owned at death

75
Q

Gift adjusted taxable estate

A

Add lifetime taxable gifts to gross estate

76
Q

Lifetime application gift tax exclusion

A

$12,920,000 (2023) gifted is not taxed.

77
Q

Lifetime applicable credit

A

$5,311,800 (2023) represents the gift tax that would be payable on the lifetime annual exclusion amount of $12,9200,000 if it was not credited

78
Q

Unlimited marital deduction

A

No limit to the amount of tax-free transfers between spouses. When one of the them dies, the estate is transferred to the other without any estate tax.

79
Q

Unified transfer tax rate

A

Tax code allows a surviving spouse to get deceased spouse’s unused exclusion amount in addition to their own. Useful for assets more than once or double the $12.9M (2023) lifetime applicable credit

80
Q

Using bypass trust with estates > lifetime applicable credit

A

First spouse dies -> create a bypass trust funded with the unified credit amount of $12.9M (2023) -> property is subject to estate tax, but no estate tax is due since it <= unified credit amount.

Surviving spouse gets income from the bypass trust, but for estate tax purposes the assets are not owned by the surviving spouse. When last spouse dies -> assets in the bypass trust including appreciate pass to the heirs free of estate tax liability.

81
Q

Optimum marital deduction plan

A

For married couples with assets more than two times $12.9M (2023) -> create bypass trust on first death with $12.9M -> transfer other assets to spouse is unlimited -> on second death exclude $12.9 from decedent’s assets, to calculate estate tax. Bypass trust is passed without estate tax. Surviving spouse’s taxable estate would not increase.

82
Q

Irrevocable Life Insurance Trust (ILIT)

A

The owner gifts an existing life insurance policy. If the owner survives the transfer of the property by at least three years, death benefit of this insurance policy will not be included in the owner’s estate.
Grantor can specify through provisions of this trust how the proceeds will e used: cash for the estate, care for a spouse/children, etc.

83
Q

Minimize Estate Tax

A

1) spend it
2) pre-fund it - buy ILIT that would pay out enough of the policy proceeds to pay for all the estate’s taxes
3) give it away - maximize gift tax exemption and give directly for education tuition or health care.

84
Q

Inheritance tax (in 18 states)

A

1) segregates beneficiaries into classes that represent distance of the relationship to the deceased. Less tax for closer relatives.
2) Incentive to leave property to closer relatives
3) Incentive for lifetime gifts

85
Q

Testate

A

Dying with a valid will

86
Q

Nuncupative will

A

A oral or verbal will, is a type of will that’s delivered verbally to witnesses (instead of being written down). Nuncupative wills are usually given by people who are on their deathbed.

87
Q

Alternative valuation date (re stock)

A

Alternative valuation date (AVD) cannot be elected if there is no estate tax due. It can’t be elected to get a higher step-up in bases.

88
Q

Holographic will

A

Handwritten and signed document by the testator. Uniform Probate Code allows courts to accept such documents.

89
Q

(quiz) What avoids probate?

A

1) named beneficiary for life insurance death benefit proceeds
2) annuity or IRA, or any bank account with a named beneficiary will avoid the probate process and pass directly to the beneficiary by contract
3) Real estate titled joint tenants with rights of survivorship (JTWROS)

90
Q

(quiz) Who appoints a guardian?

A

A guardian is appointed by the court and guardian is charged with the responsibility of caring for the ward. Parents can name a guardian of their minor children in a will.

91
Q
A

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