March 5 - ESTATE PLANNING
Objective of Estate Planning: Make sure the maximum value reaches the intended beneficiaries.
Estate: Everything solely or jointly owned (their portion) by a living person
Gross Estate: Includes all property subject to federal estate tax upon death.
Probate Estate: All items in gross estate which are transferred by the court. This excludes
items which bypass probate - (jointly owned with rights of survivorship, trusts)
The Probate Process
? Probate is the legal process that performs the function of changing title to those
properties that do not change title any other way – through court. Protects creditors to
insure valid debts of estate are paid
? Duties of executor – appointed by testator in will. Carries out wishes of will, sell assets, supervises orderly distribution of assets to heir.
? Advantages – protect creditors before assets leave estate, clean title to heirs, all
interested parties have notice
? Disadvantages – costly & complex, legal & court costs, executor, loss of privacy
The Uniform Probate Code has been adopted, at least in part, by 18 states. Although the
text of the uniform code is not per se available on the Internet, you can access a typical
state's version of the code (Montana). Montana has adopted the most recent version of the
full code without significant modifications.
Common Transfer Objectives
? Minimizing estate and transfer taxes to maximize the assets received by heirs
? Avoiding the probate process
? Using lifetime transfers – gifts ? Meeting liquidity needs at death
? Planning for children
? Planning for the incapacity of the transferor
? Providing for the needs of the surviving spouse of the transferror
? Fulfilling charitable intentions of the transferor
Four Ways to Plan Transfer of Estate
2. Joint Ownership
4. Lifetime Gifts
Basic Documents Included in an Estate Plan
? Power of Attorney
? Living Wills and Advanced Medical Directives
? A Side Instruction Letter (or Personal Instruction Letter) – details testator’s wished with
regard funeral arrangement, disposing with household items and the body
1. Will - It gives instructions on how to split estate. Items in the will are transferred by the
* Codicil - It is the document to change
instructions in the will.
* Executor - The person is in charge of
carrying out the instructions of the will.
Executor - locates and prove will, locates witnesses to will (advertising), receives letters of
testamentary – give power to executor to handle estate from court. May have to file tax
returns – estate tax form 706 within 9 months of death, 1040 for calendar year, 1041
taxable income from trusts or estates.
? Holographic – hand written will
? Oral (Nuncupative) – dying declaration in front of witnesses - illegal in some places ? Statutory – drawn up by lawyers with witnesses
Living Will – Outlines the medical situations and circumstances in which the maker of the
document no longer wants life-sustaining treatment. Narrow focus and must meet state
statutes. Many living wills are too vague – (Terry Shiavo)
Common Clauses ? “Last will and testament” – declaring this is it ? Revoke prior wills
? Payment of debts/taxes – directing executor on paying debts ? Selection of executor
? Disposition of property
? Residuary clause – general provision sending what isn’t mentioned to a particular party
? Appointment and powers clause – naming fiduciaries (trustees), guardians, tutors Possible Problems for Estate
? Ancillary Probate – Decedent owns property outside state that may increase cost
may cause delay
? A will including funeral instructions – cause a delay
? Attempting to disinherit spouse or child – Custom looks down on this and is
? Simultaneous death – if both spouses die at same time. This will provides assumption of
order of death
? Survivorship – beneficiary must live a required time to take ownership of assets
? Disclaimer – allow property to pass from one party to another w/o gift tax
? No-contest – contest will and receive nothing
? Codicil – addition to will – separate will and amends will
Power of Attorney
? General power – power to do anything giver would have done. Very broad powers. If
person with general power of attorney dies before giver does, their gross estate would
include giver’s assets. Powers cease at death of giver.
? Special/Limited Power – narrow powers – pay my bills. Power ceases at death of giver.
? Durable power for healthcare – written document power survives incapacity. Selected person is guardian for the giver of the powers - allows the principal to designate another
person to act as his or her attorney in fact – in deciding medical needs and treatments, as
well as doctors - durable feature. (some restrictions) - Revocable
? Durable power for property – same but for property * The principle (giver) must be 18 years old and competent
Intestate - Dying without a will
1. Courts handle estate
2. Courts have property sold to pay
3. Because the deceased did not plan
his estate, he may pay excessive
taxes and the property may not get
to the intended beneficiaries.
2. Joint Ownership
* Joint Ownership With Rights of
* Joint Ownership With Rights of
- own equal shares
- can sell their part without consent of others
- If one dies, property bypasses
probate (but is included in gross
estate) and other joint owners split
* Tenants in Common
- Joint ownership but upon death goes
- Will directs who receives property
- Business partner nightmare
TENANCY BY THE ENTIRETY
Tenancy by the Entirety - Joint tenancy through marriage
* Bypasses Probate
* Cannot dispose of property without
* Shares pass to surviving spouse upon
? Pay-on-Death (POD) bank account, Transfer-on-Death (TOD) investment accounts – in
47 states – if has named beneficiary will avoid probate
Less Than Complete Ownership Interests
? Life Estate – interest in property while alive – goes to remainder interest
? Interest for Term – interest for definite term
3. Trusts - Legal entity which manages and distributes assets to beneficiaries
* Managed by a Trustee - to carry out
* Trustee controls and manages trust
Types of Trusts
* Grantor Trust – transfers property into trust but still has right to income from it.
* Credit Equivalency Trust (Bypass Trust) - The will creates it and up to $3.5 million
is placed in it. The $3.5 million is not taxed because the grantor can use his exemption of
up to $3.5 million. Surviving spouse receives income and at death of surviving spouse the
children are remaindermen. Does not enter the gross estate of spouse. Bypass Trust –
-Testamentary Trust - comes into
existence upon death of grantor
- Used to transfer property and
- Avoids estate taxes for beneficiary
POA Trust - Power of Appointment Trust – created by will where income goes to spouse and spouse can invade the principal – qualifies for unlimited marital deduction –
Sometimes called Marital Trust - Trust which helps the spouse manage money and assets of deceased spouse
- Subject to marital deduction
- Surviving spouse controls property
at his or her death
* QTIP - Qualified Terminal Interest
- Subject to marital deduction
- All income must go to surviving
- Property is in the estate of surviving
spouse upon death
- Grantor controls property at death
of surviving spouse.
Life Insurance Trust - This trust shelters life insurance proceeds from estate taxes.
But the follows conditions must be met
1. Grantor must sacrifice ownership
2. Cannot borrow against cash value
3. The trust must be in existence for
more than three years prior to death if life insurance policy
moved out of grantor’s estate.
4. Grantor cannot cancel policy.
This is an irrevocable transfer of ownership. It is an irrevocable trust. Other living trusts
which can be dissolved by the grantor are revocable trust.
Irrevocable Living Trust - Avoids gross estate but must give up any right to income and principal or right to change beneficiary. And it must be in existence three years to avoid
One way out of this dilemma is to set up an irrevocable life insurance trust, which takes
over ownership of the insurance policy, says Mandell Winter, CLU, ChFC, a senior
?academic at the College for Financial Planning , a division of the National Endowment for ??Financial Education (NEFE ). "One of the big advantages of a life insurance trust is that it removes the life insurance from the estate of the insured." The trust also may serve other
ends. For example, at the death of the insured, the policy proceeds may remain in trust to
provide regular income for the surviving spouse (while keeping the assets out of the
spouse's estate). Or the trust may be used to distribute proceeds to children from a
previous marriage. "A life insurance trust can be set up with a great deal of flexibility,"
says Winter. "For example, the trust can distribute a limited amount of the insurance
proceeds over a period of time to a financially irresponsible child. Yet should that child
suddenly have need of extra money, the trust can provide additional funds at the discretion
of the trustee."
Revocable Living Trust- No tax advantage because it is part of gross estate. It does
bypass probate. Trustee manages property while grantor is alive.
GIFTING Gift and Estate Tax - Gifts given away are subject to tax by the person doing the giving.
* The gift tax annual exclusion for each donee is increased as follows:
$ 13,000 for 2010 $26,000 for split gift