Overview of Estate Planning

Question 1

Basic objectives of estate planning

Answer 1

Tax-reduction/tax-avoidance

Protection.

Control

Philanthropy

Privacy

Support

Care

Question 2

Tax-reduction/tax-avoidance

Answer 2

Tax-reduction/tax-avoidance. The client will want to minimize all expenses associated with death, including estate taxes and administration expenses, and pass on as much of the estate as possible.

Question 3

Protection

Answer 3

Protection. Through estate planning tools such as trusts, assets are protected from creditors and lawsuits.

Question 4

Support.

Answer 4

Support. Minors, spouses, or dependents with special needs can be offered sufficient support through an estate plan.

Question 5

Control

Answer 5

Control. The client controls who receives assets, how these assets are received, and when they are received.

Question 6

Philanthropy.

Answer 6

Philanthropy. Favorable tax-treatment is available for donations to qualified charities. In addition, a variety of charitable trusts exist to provide tax-efficient donations, while simultaneously reducing one’s estate.

Question 7

Care

Answer 7

Care. Advanced directives can be established which work to ensure that there are trusted representatives acting on behalf of a legally incapacitated individual.

Question 8

Privacy

Answer 8

Privacy. A properly constructed estate will direct assets to avoid the probate process, guaranteeing privacy over one’s estate matters.

Question 9

What should the estate planning process entail?

Answer 9

Reflect the client’s current financial condition

Project the client’s future economic needs

Assist the client in articulating the objectives

Utilize appropriate techniques to maximize the potential to achieve the client’s objectives

Provide flexibility to adjust for updates to tax laws, changes in family circumstances, and modifications to goals

Question 10

Estate planning decisions that a person may encounter at various life cycle stages

Answer 10

Wealth accumulation phase

Wealth preservation phase
Distribution phase

Question 11

Wealth accumulation phase

Answer 11

Wealth accumulation phase: Generally characterized as a time of setting goals, establishing savings, protecting oneself and one’s assets with insurance, increasing earning potential, and significant life milestones (e.g., marriage, first-home purchase, having children).

Estate Planning Action Items: Establishing guardian and conservator assignments within the provisions of a will. Executing powers of attorney over assets and health care matters.

Question 12

Wealth preservation phase

Answer 12

Wealth preservation phase: Typically occurs at or near retirement. Within the wealth preservation phase, clients are determining how accumulated assets will provide for themselves and/or their spouses during their lifetimes.
Estate Planning Action Item: Review and revision of will(s), advanced directive(s), and power of attorney appointment(s).

Question 13

Distribution phase

Answer 13

Distribution phase: Allows the client to control the distribution of those assets in a cost and time-efficient manner.

Estate Planning Action Item: The use of trusts within the distribution phase (e.g., Charitable Remainder Annuity Trust (CRAT)) to provide the client with an income stream, shelter assets from creditors, and achieve charitable giving goals upon death.

Question 14

Will

Answer 14

A will is a legal document allowing the person creating the will, the testator, to determine how assets will transfer upon death. It is only within the provisions of the will that the testator can name guardians, individuals appointed to act in the best interests and provide support for minor children (under the age of 18 in most states) with predeceased parents. In addition, executors of the estate, individuals appointed to carry out the provisions stated in the will, may only be appointed within the will. Since it is a legal document, a will should be executed by an attorney.

A will only transfers assets that were separately owned by the testator at death. These assets are called probate assets. All probate assets held in the testator’s name alone will transfer under the provisions of a will (e.g., bank accounts, brokerage accounts, and real estate). Assets owned individually, not otherwise controlled or directed by contract, deed, or operation of law are probate assets

If the testator owns property that transfers under a beneficiary designation (e.g., retirement plan assets or life insurance controlled by the terms of the insurance contract), and a beneficiary has been named, then these assets will transfer directly to the named beneficiary, according to the contract, regardless of provisions within the will. Additionally, if asset ownership is titled joint tenants with rights of survivorship (JTWROS), when the first owner dies their interest will automatically transfer to the surviving owner by law, regardless of the provisions within the will. Finally, assets within a trust pass to stated beneficiaries according to the terms outlined in the trust document. These assets transfer by trust, regardless of the provisions within the will..

Question 15

Probate

Answer 15

Assets transferring under the provisions of a will, that is, separately owned assets, are subject to the probate process. Probate is a court proceeding that determines whether the testator executed a valid will. Since probate is a court proceeding, it is a public proceeding. Additionally, it is during the probate process that will challenges may be brought. For this reason, many clients wanting to ensure privacy over the disposition of their assets prefer to transfer property in a fashion that is known as a probate substitute. However, a will is still essential for the naming of guardians and executors.

Question 16

Trust

Answer 16

A trust is an arrangement where the title to property is held by one party, the trustee, for the benefit of another, the beneficiary. The trustee is said to have a fiduciary responsibility to the beneficiary. This means that the trustee has a legal obligation to manage the trust in the best interests of the beneficiary according to the terms or instructions of the trust. If the trustee does not honor this obligation, he or she may be held liable for any damages suffered by the beneficiary.

The person who establishes and funds the trust is known as the grantor. The grantor may arrange for the trust to become operational either at death (testamentary trust) or during lifetime (inter vivos, or living trust). The type of trust selected has an impact on the estate planning process.

Question 17

Power of Attorney

Answer 17

A power of attorney is a written agreement that allows one individual, known as the agent, to act on behalf of another, known as the principal. If the principal becomes disabled or incapacitated, an agent with powers of attorney is granted authority to make key decisions and engage in a variety of actions for the principal.

Question 18

Types of POA’s

Answer 18

Durable power of attorney

Non-durable power of attorney

Springing power of attorney

General power of attorney

Special power of attorney

Question 19

Durable power of attorney

Answer 19

Durable power of attorney: The 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.

Question 20

Non-durable power of attorney

Answer 20

Non-durable power of attorney: The power of attorney remains active until incapacitation.

Question 21

Springing power of attorney

Answer 21

Springing power of attorney: Does not become operative until the principal becomes legally incapacitated. However, the principal’s state of incapacitation must be confirmed, which may take time. As a result, if decisions need to be made with respect to the property of the principal, with a springing power of attorney these decisions may be delayed.

Question 22

General power of attorney

Answer 22

General power of attorney: Authority to make a broad array of decisions. Includes financial, legal, or business matters. This type of power of attorney lapses at disability or incapacitation.

Question 23

Special power of attorney

Answer 23

Special power of attorney: The agent only acts on behalf of the principal for a specific matter. Once the task or action is completed, or a period of time has passed, the authority expires.

Question 24

Gifting Strategies

Answer 24

To achieve tax-reduction goals in an estate plan, client assets can be gifted to beneficiaries with the least amount of transfer and income taxes. One method by which this may be accomplished is through a lifetime gifting program. Under current law, every individual making gifts, or donor, has the opportunity to make gifts of $15,000 (2020) annually, to an unlimited number of recipients, or donees. This is known as the annual exclusion. If an estate planning objective is to minimize the amount of assets which will be included within a decedent client’s estate, and the client has discretionary assets which are not required for comfort during lifetime, the estate planner may suggest that the client engage in an annual gifting program utilizing the annual exclusion. Making gifts avoids probate, reduces the value of the taxable estate, and allows the estate owner to help out heirs while he or she is still alive. Additionally, the recipient of the gift, the donee, will not pay tax on the gift.

Spouses have the opportunity to use a gift-splitting strategy, which combines their individual $15,000 annual exclusions and doubles their total excluded gift amount to $30,000 ($15,000 x 2). Like the individual annual exclusion, the gifted amount is tax-free to the donors and not considered income to the donee. Form 709 must be submitted to the IRS with the couple’s annual tax return to indicate that a split-gift strategy is being used. If the split-gift election is made by a couple for a gift to one donee (recipient), the same strategy applies to all gifts throughout the year.

Spouses have an unlimited marital deduction and may gift unlimited amounts to one another throughout their lifetime. If one of the spouses is a non-U.S. citizen, a maximum of $157,000 (2020) in annual gifts may be excluded from gift-tax.

Engaging in a gifting program also allows the donor to transfer assets with appreciation potential, such as stocks or real estate. If your client owns a piece of real estate which appreciates in value, the appreciation will be included in the owner’s estate, thereby increasing the estate tax liability. By gifting the asset at today’s current market value, all of the appreciation on the asset will avoid inclusion in the owner’s estate.

There is also an unlimited gift tax exclusion for qualified transfers made on behalf of an individual for medical or educational tuition expenses. These payments may be made for anyone, regardless of relationship, as long as the payments are made directly to the educational institution or medical facility.

Finally, since there is an unlimited gift tax deduction available, an unlimited amount of assets may be gifted to qualified charities. Additionally, from an individual income tax perspective, these lifetime gifts also qualify for a below-the-line income tax deduction for taxpayers electing to itemize.

Question 25

Which of the following is NOT an objective of estate planning?

A. Allow the court to determine the appropriate distribution of the estate.

B. Appoint someone to manage the estate in case of death or incapacity.

C. Prevent challenges to the estate plan.

D. Ensure that desired beneficiaries of the estate will receive their share.

Answer 25

Correct Answer: A. Allow court to determine appropriate distribution of estate.

Explanation: Although courts attempt to be fair and equitable when distributing an estate, their decisions may or may not agree with the decedent’s intentions. If the decedent has not executed a will, the state’s laws of intestacy will determine who the heirs of the assets are as well as the amount of their inheritance. The court distribution process can be lengthy and costly for the beneficiaries. One of the objectives of estate planning is to avoid probate court for as much of the estate assets as possible.

Question 26

Estate planning does not need to begin until the later part of a person’s life.

A. True
B. False

Answer 26

Correct Answer: B. False.

Explanation: Although it becomes more compelling later in life, estate planning should begin when a client begins to accumulate assets. For example, a new parent may want to select who will become the guardian for the minor in the event that one or both parents should become incapacitated or die.

Question 27

What happens to an estate if a will is declared invalid?

A. A new one is drafted.

B. The estate is divided in accordance with a trust.

C. The estate is divided in accordance with the laws of intestacy.

D. A trust is created in its place.

Answer 27

Correct Answer: C. The estate is divided in accordance with laws of intestacy.

Explanation: If a will was declared invalid, the estate will be distributed by the courts under the state’s laws of intestacy. A will may be determined to be invalid if its execution did not follow the guidelines under state law, or was improperly witnessed or signed.

Question 28

Why is a lifetime gifting program beneficial for tax planning purposes?

A. Lowers the size of the estate
B. Lowers the amount of estate taxes
C. Increases the size of the estate
D. Passes the donor’s basis in the property to recipients

Answer 28

Correct Answers: A. and B.

Explanation: Gifting estate assets during lifetime reduces the amount of assets which will be included in the decedent’s estate after death. It is not advantageous for a donee to receive the donor’s basis in property, since a future sale might result in a capital gain. Property that passes to a beneficiary upon the owner’s death receives a step-up in basis to fair market value.

Question 29

Intestacy

Answer 29

An overwhelming number of Americans die each year without a valid will. In these situations, the deceased is said to have died intestate. When this occurs, the state of residence divides the estate according to that state’s laws of intestacy. In most cases, the state-mandated distribution of the assets will reflect the decedent’s own desires.

Under the laws of intestacy, a surviving spouse with children receives only one-half to one-third of the estate. The rest is distributed to the children of the deceased. For those who have not yet reached the age of majority, court-appointed custodians or trustees may have to manage these funds in the children’s interest. The surviving spouse may then be required to gain the agreement of the trustees on how and when these funds may be spent. For most families, this arrangement is undesirable and inconvenient. In addition, the associated administrative and legal costs may use up resources needed to support the surviving spouse and children.

Question 30

General Guidelines for Division of Estate Under Intestate Provisions

Answer 30

Survivors Division of Property

Spouse and one child 50% each

Spouse and two or more children Spouse receives one-third, the remainder divided equally among children

Spouse and parents surviving, no children Spouse receives 50-75%, the remainder to surviving parents

Spouse, no children, and parents deceased Spouse receives 50-100%, surviving siblings receive balance

Parents surviving, no spouse, and no children Parents receive 100%

Siblings surviving, no spouse, no children, and parents deceased Siblings receive equal shares

Question 31

Defining a Will

Answer 31

As perviously noted, a will is a legal document that distributes property (probate assets) of the decedent. The will leaves assets to specifically named individuals, known as heirs. The property transferred pursuant to the terms of the will is known as a bequest. Though written during the lifetime of the maker, also known as the testator, the will is testamentary by nature, meaning it takes effect only upon the death of the testator. Therefore, it is a revocable instrument, one which can be amended, altered, or revoked any number of times prior to the testator’s death. If the will is revoked prior to the testator’s death and another valid will has not been executed, the decedent’s property will be transferred according to the laws of intestate succession.

Question 32

Executor

Answer 32

The person named in the will who manages the estate until all the assets are distributed is called the executor or executrix. Since the executor is given extensive powers to handle the affairs of the estate, including distributing the property, special thought must be given selecting an individual for this role. If you die without a will, or the named executor and alternates (if any) refuse to serve, the court chooses someone termed the administrator or administratrix to handle the estate. This choice may not coincide with the desires of the testator.

An executor will normally be paid a fee for services performed, but the person selected may agree to serve gratuitously. More importantly, unless the will specifically states otherwise, the executor will be required to post a bond to cover any potential mismanagement of the estate. This is expensive and will eventually be charged to the estate. Assuming a trustworthy individual has been selected, the need for posting bond in the will may be waived.

Question 33

Trust Definition

Answer 33

A trust is a legal entity that holds and manages assets for another person. A trust is created when an individual, called a grantor, transfers property to a trustee - which can be an individual, an investment firm, or a bank - for the benefit of one or more people, the beneficiaries. Virtually any asset can be transferred into a trust - money, securities, life insurance policies, or real property.

Question 34

Reasons for using trusts:

Answer 34

Reasons for using trusts:

Trusts avoid probate if funded with assets during lifetime. Retitling assets into the name of the trust is considered funding.

Trusts are much more difficult to challenge in court than are wills.

Trusts can be used to shelter assets from estate taxes.
Trusts allow for professional asset management. If a beneficiary doesn’t have the understanding or desire to manage money effectively, a trust can provide the necessary professional management.

Trusts provide for confidentiality. Whereas a will becomes a matter of public record, a trust does not.

Trusts can be used to provide for a child with special needs. A trust may be created to provide the necessary funds for a child with special needs. A special needs trust can provide funds for disabled children of majority age without eliminating government benefit programs like Medicaid.

Trusts can be used for philanthropic purposes or charitable gifting.

Trusts can be used to hold money until a child reaches maturity. A trust can be used to hold those funds until the children reach a designated age.

Trusts can ensure that children from a previous marriage will receive some inheritance.

Trusts can include private instructions regarding the management, control, and disposition of assets, consistent with a client’s goals and family needs.

Question 35

Trustee Definition

Answer 35

A trustee holds legal title to the assets placed in the trust, which the trustee manages for all of the trust beneficiaries. The trustee is a fiduciary who is held to the highest standards when fulfilling their duty to act in the best interests of the beneficiaries.

Question 36

Typical Trustee Powers

Answer 36

Collect trust property, settle claims, and sue or be sued.
Sell, acquire or manage trust property in a manner that is in the best interests of the beneficiaries.

Vote corporate shares.

Borrow money and use the trust corpus as collateral, if approved by the court.

Enter into contracts and leases that do not exceed the duration of the trust.

Make payments to a beneficiary of the trust.
Make required divisions and distributions of trust property.

Receive additional assets into the corpus of the trust.

Question 37

Typical Trustee Duties

Answer 37

Carry out the trust in accordance with the terms of the trust agreement or will.

Not to delegate the trustee’s duties to another individual. Any duty that calls on the trustee to exercise skill and judgment may not be delegated, unless the trust agreement provides otherwise.

Administer the trust with the degree of skill and care that would be required if the trustee were dealing with his or her own assets.

Administer the trust solely in the best interests of the beneficiaries.

Possess, protect, and preserve the trust property.

Separate and earmark trust property.

Make the trust property productive.

Make distributions in accordance with the trust agreement and the best interests of the beneficiaries.

Question 38

Inter Vivos Trust

Answer 38

Inter Vivos Trust

An inter vivos trust is one established and funded during the grantor’s lifetime. An inter vivos trust is also known as a living trust. Funds in a living trust pass outside the will and the probate process, saving probate costs. Title to property in a living trust is held in the name of the trust.

A living trust is one that is funded and takes effect during the grantor’s lifetime. Actual funding of a living trust will require assets to be retitled into the name of the living trust.

There are two types of living trusts:

Revocable

Irrevocable

In a revocable living trust, the grantor, the trustee, and the beneficiary may all be the same person. Popular financial literature often suggests setting up a revocable living trust which provides for the lifetime welfare of the grantor, as well as the welfare of family members and other beneficiaries after death. Although funds in a living trust escape probate, they still may be taxable as part of the decedent’s estate. The deciding factor for estate tax liability is whether the trust is revocable or irrevocable.

Question 39

Revocable Trust

Answer 39

A revocable trust can be changed or revoked by the grantor at any time. In reality the property still remains under the control of the person who established the trust and is therefore part of the decedent’s gross estate. With a revocable living trust, assets are transferred into the trust during the grantor’s lifetime. Since the trust is revocable, the grantor not only has full control over the assets within the trust but also may change or terminate the provisions of the trust. Since the grantor has never given up control over the assets placed within the revocable living trust, all tax liabilities, including income tax, will be borne by the grantor or the grantor’s estate.

Question 40

Irrevocable Trust

Answer 40

Irrevocable Trust

The same is not true for an irrevocable trust. Once created, the terms of an irrevocable trust cannot be changed. Thus, the grantor loses control of the property placed in the trust. Although this may reduce the value of the grantor’s estate, assets transferred into an irrevocable living trust may be subject to gift tax liability.

The irrevocable trust becomes a separate legal entity. It may pay taxes, at the trust’s tax rates, on the income and capital gains earned by the assets within the trust. Assets within an irrevocable living trust also avoid the probate process.

Question 41

Testamentary Trust

Answer 41

A testamentary trust is funded with assets after death.

Question 42

There are a number of different purposes for testamentary trusts, including:

Answer 42

There are a number of different purposes for testamentary trusts, including:

Reducing estate taxes

Providing professional investment management

Making sure the estate ends up in the right hands

Question 43

What can be accomplished through Spousal Transfer Trusts

Answer 43

Provide for the lifetime support of a surviving spouse
Determine whether the property used to provide the lifetime support should be included in an individual’s or their spouse’s taxable estate
Determine who chooses the ultimate beneficiary of the estate at the death of the surviving spouse

Question 44

Bypass Trust

Answer 44

A bypass trust (nonmarital trust or B-trust) may also provide for the lifetime support of the surviving spouse. At the death of the surviving spouse, the assets remaining within this trust are distributed to its ultimate beneficiaries. These beneficiaries were selected by the original grantor of the trust. If the surviving spouse does not have total control over who will ultimately receive the remaining value of these trust assets, the value of this trust should avoid inclusion in the estate of the surviving spouse.

Question 45

Marital Trust

Answer 45

Alternatively, a trust which gives the surviving spouse a lifetime interest in the income and/or principal within the trust and qualifies for the unlimited marital deduction, is a marital trust. Although the assets transferring into the marital trust will be included in the creator’s estate, the unlimited marital deduction postpones the payment of the estate tax until the death of the surviving spouse.

Question 46

Types of Marital Trusts

Answer 46

Certain marital trusts qualify for the unlimited marital deduction. For example, if the creator wanted the surviving spouse to have full control over all income and principal within the trust, including naming the ultimate beneficiaries of the trust assets, a general power of appointment trust (GPA trust or A-trust) might be used. On the other hand, if the creator wanted to limit the surviving spouse’s access to the principal, as well as control who the ultimate beneficiaries of the trust would be, a QTIP trust (Qualified Terminable Interest Property trust) might be utilized. QTIP trusts are often used in situations involving second marriages to ensure that children the previous marriage will receive an inheritance.

Question 47

Intergenerational Transfers

Answer 47

An intergenerational transfer is any transfer of property from one generation to another. A transfer of money from parents to children or from grandparents to grandchildren would be an intergenerational transfer.

Question 48

Generational Skipping Transfer Tax

Answer 48

It is possible to make direct transfers and create trusts that skip a generation. For example, a transfer from a grandparent to grandchildren while the grandchildren’s parents were living would skip a generation. Such transfers would also avoid inclusion in the grandchildren’s parents’ estate and, therefore, avoid a whole generation of estate taxes. The Generation-Skipping Transfer Tax (GSTT) is meant to close this loophole partially by levying a special tax on generation-skipping transfers. In 2020, each grandparent can transfer up to $11,580,000 to their grandchildren during their lifetime or at their death before the tax is applied.

Question 49

Sprinkle Trust

Answer 49

A sprinkle trust distributes income according to need instead of a preset formula. The trustee is given discretion to determine who needs what among a designated group of beneficiaries, and then “sprinkles” the income among them.

Question 50

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

A. Joint Tenancy

B. Irrevocable Trust

C. Revocable Trust

D. Contracts

Answer 50

Correct Answers: A., C. and D.

Explanation: Joint tenancy means that the owner’s interest is not passed to the surviving owner until his or her death. Funds of a revocable trust are still controlled and used by the grantor. Use of contracts such as IRAs to pass assets to beneficiaries does not give any interest of the assets to the beneficiaries until the owner passes away.

Question 51

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. Bypass Trust

B. Nonmarital Trust

C. Marital Trust

D. Q-TIP

Answer 51

Correct Answers: A., B. and D.

Explanation: A Q-TIP, bypass trust or nonmarital trust does not allow the beneficiary to be changed.

Question 52

4. Which of the following can help reduce estate taxes?

A. Will

B. Revocable Trusts

C. Irrevocable Trusts

D. Power of Attorney

Answer 52

Correct Answer: C. Irrevocable Trusts

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

Question 53

What happens to an estate if a will is declared invalid?

A. A new one is drafted.
B. The estate is divided in accordance with a trust.
C. The estate is divided in accordance with laws of intestacy.
D. A trust is created in its place.

Answer 53

Correct Answer: C. The estate is divided in accordance with laws of intestacy.

Explanation: If a will was declared invalid, the estate will be distributed by the courts under the state’s laws of intestacy. A will may be determined to be invalid if its execution did not follow the guidelines under state law, or was improperly witnessed or signed.

Question 54

Estate Tax

Answer 54

An estate tax is imposed on the property of the deceased before it is transferred;

Question 55

Inheritance Tax

Answer 55

An inheritance tax is levied on the property when it is received by the beneficiary.

Question 56

Taxable Gif

Answer 56

Taxable gifts equal the total value of gifts made during the year less the annual exclusion per recipient, gifts to charitable institutions, amounts paid to medical and educational institutions for services provided the recipient, and amounts given to a spouse. The annual exclusion per recipient is $15,000 (2020).

The taxable gift is the amount that remains after subtracting the annual exclusion from the value of the gift. However, the taxable gift is not necessarily subject to a gift tax. A person can make lifetime gifts that total $11,580,000 (2020) without paying any gift tax.

Question 57

There are three common deductions that estate planners use to minimize estate taxes:

Answer 57

Marital

Charitable

State death tax deduction

Question 58

Unlimited Marital Deduction for Gift & Estate Taxes

Answer 58

The Internal Revenue Code allows an unlimited marital deduction for gift and estate tax purposes. This means that there’s no limit to the amount of tax-free transfers between spouses. In other words, when a husband or wife dies, the estate, regardless of size, can be transferred to the survivor without any estate tax. This assumes that the donor spouse or the decedent spouse is not transferring terminable interest property to the donee spouse or to the surviving spouse. On the other hand, if the beneficiary is someone other than the surviving spouse or a non-U.S. citizen spouse, the maximum amount of assets that can transfer without an estate tax liability is $11,580,000 in 2020.

Additionally, the Internal Revenue Code allows an unlimited gift and estate tax deduction for transfer to charities. Therefore, transferring assets to charities may be another method to reduce the taxable estate.

The final deduction can be taken for state death taxes paid in the decedent’s state of domicile.

Question 59

Irrevocable Life Insurance Trust

Answer 59

The aim of an irrevocable life insurance trust (ILIT) is to remove from the insured’s estate the death benefit proceeds of the life insurance policy. Remember, on the date of death, estate assets include the value of any life insurance policy over which the decedent has incidents of ownership. Therefore, if the objective is to reduce the value of the estate, removing the insurance may make sense. One method by which this can be accomplished is by creating an ILIT into which the owner would gift an existing life insurance policy. Assuming the owner survives the transfer of the policy by at least three years, no portion of the death benefit proceeds will be included in the owner’s estate.

Question 60

How to Minimize Estate Taxes

Answer 60

Spend It: Use up all your money before passing away. However, spending it means that you cannot buy things that can become part of the estate, such as a summer home or a car.

Pre-fund It: Purchase an irrevocable life insurance trust that would pay out enough of the policy proceeds to pay for all the estate’s taxes.

Give It Away: Give away your entire estate by maximizing your gift tax exemptions and give the rest as direct payments for education tuition or health care.

Annual Exclusion Gifts: Gift a maximum of $15,000 (adjusted for inflation) per person per year.
Charitable Gifts: Unlimited amounts can be given to federally approved charities.

Question 61

Assume the estate tax exemption in 2020 is $11.58 million and the gift tax exemption is $15,000 per person per year. If Sean’s gross estate is $11,680,000 and his lifetime non-tax-exempt gifts amount is $30,000, how much of his estate is taxable?

A. $30,000

B. $1,030,000

C. $500,000

D. $70,000

Answer 61

Correct Answer: D. $70,000

Explanation: $11,680,000 - $11,580,000 - $30,000 = $70,000

Question 62

In order to minimize estate taxes, what can Sean do with his estate in 2020?

A. Spend it all.

B. Give it away to charity.

C. Give it all to his spouse.

D. Transfer an insurance policy to a trust more than 3 years from the date of his death.

E. Have an irrevocable life insurance trust purchase a new policy.

Answer 62

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

Explanation: Sean can lower his estate taxes by spending it all (but not investing in assets that will count towards his estate), giving it away, or prefunding the estate taxes with insurance. Sean could also opt to transfer an insurance policy to a trust more than 3 years from the date of his death or have an irrevocable life insurance trust purchase a new policy.

Question 63

If Sean left 50% of his estate to his spouse Karen and 50% to charity, how much of it would be deductible in 2020?

A. 50%

B. 25%

C. 34%

D. 100%

Answer 63

Correct Answer: D. 100%

Explanation: Marital and charitable transfers are 100% deductible.

Question 64

Steps in the Estate Planning Process

Answer 64

G E I I S I M

Gather Data

Establish Objectives

Identify Influencing Factors

Identify Weaknesses

Select Technique

Implementation

Monitor & Revise Plan