CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Estate Planning

1. CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning Module 8 Estate Planning for Special Situations: Incapacity, Family Arrangements & Selecting Fiduciaries

2. Learning Objectives 8–1 Identify the characteristics or the advantages and disadvantages of specific estate planning techniques for managing an incompetent person’s personal and financial affairs. 8–2 Identify the characteristics or the advantages and disadvantages of specific estate planning techniques used to provide for an incompetent person’s medical and end-of-life needs.  8–3 Explain the estate planning issues associated with selected variations in traditional family arrangements or the advantages and disadvantages of specific estate planning techniques in addressing such issues. 8–4 Explain the estate planning issues associated with cohabitation or nontraditional family arrangements or the advantages and disadvantages of specific estate planning techniques in addressing such issues. 8–5 Identify factors that should be considered when selecting a fiduciary such as a trustee, guardian, conservator, or personal representative.

3. Questions to Get Us Warmed Up

4. Incompetency Planning Planning Techniques for a Non-Minor’s Financial Affairs • joint convenience checking account • durable power of attorney • funded revocable living trust • contingent (standby) revocable trust plus a springing durable power of attorney • special needs trust

5. Incompetency Planning Joint Convenience Checking Account • Additional cosigner is placed on account to help depositor pay bills. • State law may specifically authorize such accounts without giving new cosigner a right of survivorship in account or power to use funds for own benefit. • Only original depositor is taxed on account income . • No gift tax unless new cosigner uses funds for own benefit. • Account balance at death included in depositor’s gross estate. • Account balance disposed of by will or intestacy laws if no right of survivorship in new cosigner.

6. Incompetency Planning Durable Power of Attorney • execution of document by a competent person granting authority to another to perform stated acts on behalf of the principal; document is revocable while principal is competent • authority granted may be limited or general • authority of attorney-in-fact will survive incompetency of principal, but not principal’s death • authority of attorney-in-fact may be immediate or springing

7. Video Play Video • Hercules Power of Attorney • 1:05 minutes • Play video from Video Layout Text chat or other questions

8. Incompetency Planning Funded Revocable Living Trust • revocable trust is created by competent grantor • trust is funded with grantor’s property • grantor is often named as initial trustee • trust contains provisions for operation prior to grantor’s incompetency, and different provisions for operation after grantor becomes incompetent; trust remains revocable during incompetency to prevent completed gift and possible gift tax • trust must state how grantor can be found incompetent • grantor ceases to be trustee when he or she becomes incompetent

9. Incompetency Planning Contingent (Standby) Trust With Springing Durable Power of Attorney • grantor simultaneously executes revocable living trust and springing durable power of attorney • trust is not funded unless and until grantor becomes incompetent • trust and springing durable power of attorney must contain provisions stating conditions under which grantor will be deemed to be incompetent

10. Incompetency Planning Special Needs Trust • grantor executes and funds irrevocable trust for the benefit of someone else who is dependent on the grantor (children or elderly parents) • grantor is planning for continued care of such dependents if grantor becomes incompetent • funding of trust will subject grantor to gift tax • whether income is taxed to grantor and whether trust assets are included in grantor’s gross estate will depend on whether grantor has retained certain powers over or interests in trust assets (such as a right of reversion)

11. Incompetency Planning Planning for Medical Decisions • living will • do not resuscitate (DNR) orders • appointing another person: • proxy appointment • durable power of attorney for health care (DPOAHC) • general durable power of attorney

12. Incompetency Planning: Medical Decisions Living Wills • Must be executed in accord with state law while patient still competent. • Apply only when patient is terminally ill and incapable of giving informed consent to medical treatment. • State law may limit procedures that can be addressed. • Contents of living will must be communicated to medical services provider. • Effectiveness may vary from state to state.

13. Incompetency Planning: Medical Decisions Durable Power of Attorney for Health Care (DPOAHC) • While competent, patient appoints another to make medical decisions on patient’s behalf. • May be allowed under either state statute or common law. • Document must be executed according to formalities required by law. • Patient does not have to be in terminal or comatose condition; patient must simply be incapable of giving informed consent.

14. Incompetency Planning: Medical Decisions Do Not Resuscitate (DNR) Orders • May be a specific state statute that must be followed; if no state statute, each hospital may have its own protocol. • Allows patient, while competent, to make decision to refuse emergency resuscitation for pulmonary failure. • Patient’s living will may be used as DNR order in some states. • Order must be communicated to medical services provider.

15. Medicaid Planning Qualification Tests • Medical • over age 65 • blind, or • Disabled • Activities of daily living (ADL) • Need for supervision • Income • 300% of the maximum SSI benefit • Resource • $2,000 (may vary by state)

16. Medicaid Planning Exempt Resources • Primary Residence ($500,000) • spouse or dependent continues to reside • applicant or spouse intends to return • Personal Property • Vehicles • Life Insurance • Annuities (actuarially sound and immediate) • Burial Insurance Note: Maximum value limits are imposed by state law in most categories, although amounts vary by state.

17. Medicaid Planning Transfer of Assets to Become Eligible • five-year look back period for income or resources that were transferred for less than FMV • transfers result in period of ineligibility measured by the amount of the transfer divided by the average monthly cost of nursing home care in the region in which application is made as of the application date • ineligibility begins at the later of the first day of the month in which the transfer was made, or the first day the applicant is receiving services in a nursing home and the applicant is eligible for Medicaid but for the transfer

18. Medicaid Planning Exempt Transfers • between spouses • to a Medicaid exempt trust • transfer of a home to • the applicant’s child who is blind, or permanently and totally disabled, or to a sibling who has an equity interest in the home and who resided in the home for at least one year immediately before the applicant enters the nursing home; or • a son or daughter who had resided in the home for at least two years immediately before the applicant enters the nursing home and who provided care that enabled the applicant to reside at home rather than going to a nursing facility, which must be established by a written statement from the applicant’s doctor • transfers to purchase an actuarially sound, irrevocable and non-assignable, immediate annuity • transfers to purchase a life estate in another person’s home if the purchaser actually lives in the home for one year after the purchase

19. Medicaid Planning Medicaid Exempt Annuities • The annuity must have been purchased from a life insurance company or other commercial company. • The annuity must begin payments immediately. • The annuity must be designed to pay out completely during the recipient’s life expectancy. • The annuity must make substantially equal payments over the life of the annuity. • The annuity must name the state as the first death beneficiary (at least up to the Medicaid benefits paid during the recipient’s life) unless the recipient has a spouse or minor or disabled child, when the spouse or child may be named the first death beneficiary with the state taking second position.

20. Trusts Used in Medicaid Planning • special needs trust, supplemental needs trust, or a disability trust • contains the assets of an individual who is disabled as defined in §1382c(a)(3) SSA • trust must be established for the benefit of the individual by a parent, grandparent, or legal guardian of the applicant • state will receive amounts remaining in the trust upon death of applicant • “Miller trust” or a “Utah gap trust” • funded with pension, Social Security, and other income of the applicant • individual’s income exceeds the income cap, but does not exceed the average cost of nursing home care in the applicable region • state receives all amounts remaining in the trust upon death of applicant • “pooled trust” • contains the assets of an individual who is disabled as defined in §1382c(a)(3) SSA • established and managed by a non-profit association • a separate account is maintained for each beneficiary of the trust • accounts are established solely for the benefit of a named individual by the individual’s parent, grandparent, legal guardian, or by a court • at a beneficiary’s death, amounts remaining in his or her account are either retained by the trust, or are paid to the state in an amount that does not exceed the medical assistance paid for the benefit of the individual by the state

21. Question 1 Which one of the following statements regarding a conservatorship is not true? • The conservator is subject to the jurisdiction of a court. • The conservator has authority to decide where the ward will live. • The conservator may have to post a bond. • The conservator will likely have to file reports with a court.

22. Question 2 All of the following are parties that may be involved in a court-ordered guardianship except • a ward or protected person. • a guardian or conservator. • a trustee. • the state.

23. Question 3 All of the following are techniques commonly used to preplan for management of a non-minor’s assets except • a funded revocable living trust. • a living will. • a durable power of attorney.

24. Question 4 Which one of the following statements regarding powers of attorney is incorrect? • The authority of the attorney-in-fact will survive the principal’s incompetency. • Actions taken by the attorney-in-fact pursuant to the terms of the instrument creating the power are legally binding on the principal. • The authority of the attorney-in-fact can vest immediately, upon execution of the power of attorney, or it may not vest until certain circumstances occur.

25. Question 5 Which one of the following statements regarding durable powers of attorney for health care (DPOAHC) is incorrect? • The decisions of the attorney-in-fact must be followed by health care providers even if such decisions differ from those expressed by the principal while competent. • The authority of the attorney-in-fact can be exercised even when the principal is not in a terminal or chronic condition. • The attorney-in-fact may be authorized to do more than simply make decisions regarding medical treatment.

26. Question 6 Suppose a patient has not made his or her wishes regarding medical treatment known before he or she is no longer capable of giving informed consent to receive or withhold medical treatment. Which one of the following statements is not correct? • State statutes may authorize someone to make medical decisions for the patient. • State statutes require all medical decisions to be made by the patient’s doctor. • If someone other than the patient’s doctor makes decisions, they must be made according to what the patient would have desired.

27. Question 7 Living wills are usually applicable only when the declarant is in a terminal or similar condition. True False

28. Question 8 All of the following are ways that a person who desires to preplan for medical decisions can appoint someone to make medical decisions for him or her in the event he or she becomes incompetent except • appoint a health care proxy in a document allowed by state law. • appoint a health care proxy in an independent durable power of attorney for health care document. • appoint a health care proxy in a durable power of attorney that gives the attorney-in-fact authority to make medical decisions. • appoint a health care proxy in a last will and testament.

29. Variations of Traditional Families Documents to be reviewed during a divorce: • will • trusts (revocable or irrevocable) • financial powers of attorney • medical powers of attorney • property titled in joint tenancy with right of survivorship • beneficiary designations on: life insurance, IRAs, pensions, annuities, bank and brokerage accounts

30. Variations of Traditional Families Protecting rights to another person’s pension benefits: • former spouse, child, or other dependent of the plan participant can secure a qualified domestic relations order (QDRO) • QDRO requires state court to find and order that receipt of all or part of participant’s plan benefits is necessary to secure his obligation to pay child support, alimony, or marital property rights • distributions are subject to income tax; if distributed to a spouse or former spouse, benefits may be rolled over

31. Variations of Traditional Families QDRO Content • specifies alternate payee’s interest in plan benefits • cannot require provision of benefit or option not allowed by the plan, including acceleration of benefits • alternate payee’s interest may be • distributed directly to the alternate payee • distributed to an IRA owned by the alternate payee • segregated until alternate payee reaches retirement age, then distributed in periodic payments

32. Variations of Traditional Families: Managing a Child’s Property Techniques to preserve and manage assets left to a child from a prior marriage include: • custodial accounts • UGMA • UTMA • trusts • irrevocable living trusts • testamentary trusts • Section 529 plan accounts • Coverdell Education Savings Account (IRC 530) • conservatorships

33. Variations of Traditional Families: Alien Spouses When the taxpayer (donor/decedent) spouse is: • a resident alien: property subject to transfer tax by a U.S. citizen is also subject to transfer tax • a nonresident alien: only transfers of real and tangible personal property situated in the U.S. are subject to transfer tax When the recipient (donee/beneficiary) spouse is: • a resident alien or a nonresident alien: the unlimited marital deduction is unavailable, but a “super” annual gift tax exclusion is available for lifetime gifts of a present nonterminable interest

34. Variations of Traditional Families: Alien Spouses Estate Tax Deductions • if transfer is to an alien spouse, unlimited marital deduction is unavailable unless property is placed in a qualified domestic trust (QDT or QDOT) • charitable deduction—not available if decedent was a nonresident alien unless transfer is to a domestic entity or for use in the U.S., or allowed by tax treaty • credit amount—$13,000 if decedent was a nonresident alien; $46,800 maximum if decedent was a citizen of a U.S. possession

35. Variations of Traditional Families: Alien Spouses QDOT (or QDT) Requirements • Trust must be either a power of appointment, QTIP, CRAT, CRUT, or estate trust. • Trust instrument must require that • At least one trustee be a U.S. citizen or corporation. • Distribution of corpus cannot be made unless a U.S. Trustee has the right to withhold federal estate tax. • The decedent’s personal representative elects QDOT treatment on the federal estate tax return. • When alien spouse dies or trust ceases to meet QDOT requirements, estate tax is also imposed and collected.

36. Variations of Traditional Families: Alien Spouses Super Annual Exclusion for Gifts to an Alien Spouse • amount—$100,000 (indexed) • requirements: • must be a completed gift of a present interest • gift must not be of a terminable interest Other Gift Tax Deductions • gift splitting—not allowed if either spouse is a nonresident alien • annual exclusion—available to nonresident alien donor under same rules as for a U.S. citizen • charitable gift tax deduction—available only for transfers to a domestic entity or for use in the U.S. • applicable credit amount—not available to a nonresident alien donor

37. Nontraditional Family Arrangements Planning issues to be addressed: • clarifying ownership and responsibility for obligations regarding property owned or purchased • ensuring distribution of property at death to nonrelatives • eliminating or minimizing transfer taxes without benefit of gift splitting and the marital deduction • allowing nonrelatives to have control of medical and end-of-life decisions

38. Nontraditional Family Arrangements: The Need for Planning Distribution Purposes • because intestacy laws favor only spouses and relatives • available techniques • bequests by will • will substitutes such as P.O.D., and T.O.D. designations and trusts Taxation Purposes • because of unavailability of • gift splitting • gift tax marital deduction • estate tax marital deduction

39. Nontraditional Family Arrangements: Tax Planning Techniques Lifetime strategies • lifetime gifts to take advantage of the annual exclusion and reduce the gross estate • convert solely owned property to tenancy in common Death-time strategies • leave property to cohabitant in will • charitable bequests • name cohabitant as beneficiary of life insurance

40. Nontraditional Family Arrangements:Medical Treatment & Funeral Arrangements Available Techniques • living will regarding desired medical treatment • durable power of attorney for health care; cohabitant must be named as agent since laws favor relatives • visitation during medical treatment; cohabitant must be given this right as laws, or hospital protocols may mention only relatives • funeral arrangements and disposition of remains; give cohabitant authority to make decisions, or preplan everything to avoid laws that give authority only to relatives

41. Question 9 The alternate payee’s interest in retirement plan benefits subject to a qualified domestic relations order (QDRO) may be distributed in all of the following ways except • directly to the alternate payee. • to an IRA owned by the alternate payee. • in periodic payments to the alternate payee after the plan participant reaches retirement age. • to another person instead of the alternate payee.

42. Question 10 Which one of the following statements regarding the rights of adopted children is incorrect? • If the laws of intestate succession apply to the estate of a person who adopted a child, the adopted child will receive a share equal to that of the deceased parent’s natural children. • In a step parent situation (where the step parent has not adopted the step child) holding property in joint tenancy with right of survivorship (JTWROS) between the spouses is a good way to ensure that the child will not be disinherited. • If an adopting parent’s spouse (who is not also a natural parent of the adopted child) has not also adopted the child, the adopting parent must take special care to ensure that the adopted child is not disinherited.

43. Question 11 Which one of the following statements regarding qualified domestic trusts (QDOTs or QDTs) is incorrect? • The trust must be one that would qualify for the marital deduction if the recipient spouse were a U.S. citizen. • The trustee or trustees must all be U.S. citizens or corporations. • The personal representative of the estate of the first spouse to die must elect on the estate tax return to have the trust treated as a QDOT.

44. Question 12 Which one of the following statements regarding alimony payments to a former spouse is incorrect? • The payments are income to the former spouse who receives them. • The payments are not deductible by the former spouse who pays them. • If payments are made through an alimony trust, the payments are income to the former spouse who receives them.

45. Question 13 Which one of the following statements regarding the super annual exclusion available for gifts to a noncitizen spouse is incorrect? • It can exclude a base amount of $100,000 (indexed annually for inflation) of transfers to an alien spouse every year. • It applies only to gifts of a present interest. • It applies to any gift made to an alien spouse.

46. Question 14 Which one of the following statements regarding property agreements between unmarried cohabitants is incorrect? • The agreement should list the property owned by each party immediately prior to the beginning of the cohabitation. • The agreement should state how property acquired during the period of cohabitation is to be treated if the cohabitation ends prior to the death of one of the parties. • The agreement should state how the cohabitation must be terminated if the relationship is held to be a common law marriage.

47. Question 15 Which one of the following statements regarding the use of a revocable living trust to benefit an unmarried cohabitant at death is incorrect? • The property in such a trust will not be subject to probate. • The property in such a trust will not be subject to a will contest. • The property in such a trust will remain under the control of the grantor until death. • The property in such a trust that passes to the unmarried cohabitant will be entitled to the marital deduction.

48. Question 16 All of the following are estate planning strategies that are not available to unmarried cohabitants except • gift splitting. • the marital deduction. • the charitable deduction. • making the QTIP election.

49. Question 17 Which one of the following statements regarding tax planning techniques for unmarried cohabitants is incorrect? • Converting solely owned property to tenancy in common property between unmarried cohabitants will ensure that the surviving cohabitant will eventually own the entire property. • Outright transfers between unmarried cohabitants entitle the donor to an annual exclusion. • Having life insurance death benefits available for estate liquidity may be particularly important for an unmarried cohabitant.

50. Question 18 Which one of the following statements comparing the use of an institution rather than a family member as a fiduciary is incorrect? • An institutional fiduciary often will have greater financial management expertise than will an individual fiduciary. • An institutional fiduciary is likely to provide more continuity of management than is an individual fiduciary. • An institutional fiduciary is more likely than an individual fiduciary to be familiar with the individual beneficiaries involved and the desires of the testator or grantor of the trust.