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Chapter 17

Chapter 17. Introduction to Estate Planning. What Is Estate Planning?. The process of accumulating, managing, conserving, and transferring wealth considering legal, tax, and personal objectives. Estate Planning Objectives. Fulfill client’s property transfer wishes Minimize taxes

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Chapter 17

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  1. Chapter 17 • Introduction to Estate Planning

  2. What Is Estate Planning? • The process of accumulating, managing, conserving, and transferring wealth considering legal, tax, and personal objectives

  3. Estate Planning Objectives • Fulfill client’s property transfer wishes • Minimize taxes • Minimize costs • Provide needed liquidity

  4. The Eight-Step Estate Planning Process • Gather client information, including current financial statements • Establish client’s transfer objectives, including family and charitable objectives • Define problem areas: e.g., disposition of assets, liquidity issues, excessive taxes or costs, and other situational needs, such as disability of heir

  5. The Eight-Step Estate Planning Process (cont.) • Determine estate liquidity needs now and at five-year intervals, including estate transfer costs • Establish priorities for client objectives • Develop comprehensive plan consistent with information and objectives • Implement plan • Review plan periodically and update when necessary

  6. Common Transfer Objectives • Minimize estate and transfer taxes to maximize assets received by heirs • Avoid probate • Use lifetime transfers—gifts • Meet liquidity needs at death • Plan for children • Plan for transferor’s incapacity • Provide for needs of surviving spouse • Fulfill transferor’s charitable intentions

  7. Basic Documents Included in an Estate Plan • Will • Power of attorney • Living wills and advance medical directives • Side instruction letter (or personal instruction letter)

  8. Types of Wills • Holographic • Nuncupative (oral) • Statutory (formal) • Codicil: amends or revises a prior will

  9. Common Clauses Last will and testament Revoke prior wills Payment of debts/taxes Selection of executor Disposition of property Residuary clause Appointment and powers clause Self-proving clause Witness clause

  10. Other Clauses • Simultaneous death • Survivorship • Disclaimer • No contest • Spendthrift

  11. Power of Attorney • General power • Special/limited power • Durable power for health care • Durable power for property

  12. Living Will • Also known as advance medical directive • Establishes situations when maker no longer wants life-sustaining treatment • Must meet formal requirements provided by state statute • Normally applies only when maker is terminally ill

  13. Side Instruction/Personal Instruction Letter • Purpose • Disposition of tangible possessions (household goods) • Decedent’s funeral preferences • Location of safe deposit boxes and documents • Information about outstanding loans and other financial transactions • Separate from will and has no legal standing

  14. The Probate Process • Functions • Prove validity of will • Supervise distribution of assets • Protect creditors • Change title to property • Duties of executor or administrator • Probate and non-probate property • Advantages and disadvantages

  15. Property and Ownership Interests • Fee simple—probate • Tenancy in common—probate • Joint tenants with right of survivorship (JTWROS) • Tenancy by the entirety • Community property—probate • Pay on death (POD), transfer on death (TOD) accounts

  16. Less Than Complete Ownership Interests • Life estate • Ceases upon death, then passes to remainderman • Interest for term • Ceases after definite term, then passes to remainderman

  17. Methods of Transfer • During life (inter vivos) • Sale • Gift • At death (testamentary) • Will or intestacy • Survivorship • Contract • Trust

  18. Trusts • A trust is a legal arrangement in which property is transferred: • By a grantor • To a trustee • For the benefit of the beneficiaries

  19. The Structure of a Trust 

  20. Types of Trusts • Living trust (revocable) • Irrevocable trust (inter vivos) • Testamentary trust • Trust for minors • Irrevocable life insurance trust (ILIT) • Grantor trust

  21. Application Trusts • Credit equivalency trust—also called a B trust or bypass trust • Power of appointment (POA) trust • Qualified terminable interest property (QTIP) trust • Charitable remainder trust (CRT)

  22. Reducing the Gross Estate • Generally, the smaller the gross estate, the smaller the estate tax liability • Reduce the gross estate by: • Using qualified transfers (directly to medical and educational institutions) • Gifting under the annual exclusion • Lifetime use of exemption equivalency • Removing proceeds of life insurance from gross estate

  23. Common Estate Planning Mistakes Invalid, out-of-date, or poorly drafted wills Simple wills (sweetheart or I love you wills) Improperly arranged or inadequate life insurance Possible adverse consequences of jointly held property Estate liquidity problems Wrong executor/trustee/manager

  24. Unified Gift and Estate Transfer Tax System • General theory: • For any taxable transfer of property, either during life (gifts) or at death (bequests), transferor will pay same tax regardless of when transfer is made

  25. The Federal Gift Tax System • Gifts are valued for gift tax purposes at fair market value on date of transfer • Annual exclusion and gift splitting • Applicable credit • Qualified transfers • Gifts to spouses • Payments for support • Reporting and paying taxes

  26. The Federal Estate Tax System • Reporting and paying taxes • The gross estate • Deductions from the gross estate • Funeral costs and last medical expenses • Administrative expenses and losses • Debts • State death taxes

  27. The Charitable Deduction • Definition • Qualified organizations • Direct charitable bequests • Charitable trusts • Charitable remainder trust (CRT) • Charitable lead trust (CLT)

  28. The Marital Deduction • Definition • Unlimited deduction from adjusted gross estate for qualifying bequests or transfers of property to surviving spouse • Qualifications • Terminable interest rule and exceptions

  29. The Marital Deduction • Direct bequests to a spouse • Qualified terminable interest property trust (QTIP) • Power of appointment trust

  30. Optimizing the Marital Deduction • Credit equivalency (bypass) trust • Mechanics of the bypass trust • Use of disclaimers • Alien surviving spouses • Qualified domestic trust (QDOT)

  31. Generation-Skipping Transfer Tax (GSTT) • Purpose • Tax large transfers that skip a generation (e.g., from grandparent to grandchild) • Tax rate • Exceptions • Annual exclusion • Lifetime exemption • Qualified transfers

  32. Estate Tax Reduction Techniques • Do not overqualify estate; use applicable exclusion amount • Do not underqualify estate; use marital deduction to reduce estate tax to zero • Remove life insurance proceeds from gross estate

  33. Estate Tax Reduction Techniques (cont.) • Change ownership of life insurance or use irrevocable life insurance trust (must remove all incidents of ownership) • Use lifetime gifts; make use of annual exclusions with gift splitting • Use basic trusts • Use charitable contributions, transfers, and trusts

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