Estate Planning

Estate Planning

planning for risks, including untimely death + its consequences

Definition: process of accumulation, management, conservation, + transfer of wealth considering legal, tax, + personal objectives

—> proper one transfers assets effectively + efficiently

Efficient Transfer

transfer costs are minimized consistent with greatest assurance of effectiveness

Probate Process

Changing the title to the decedent’s assets from the decedent to their heirs and legatees

Nonspouses holding JTWROS

Include the percentage of the property’s value attributable to what the deceased person paid.

type of brokerage plan automatically naming spouse

401k

Spouses holding JTWROS or tenancy by the entirety

Include 50%, regardless of who paid more.

exemption = value shielded

credit = tax eliminated (subtracted from tax itself)

figuring out if estate tax return is required

(gross estate + adjusted taxable gifts) / 15 million

if wife is gifted 50% of company, does her husband own half?

wife own’s 50% outright, and interest will not be considered community property

• full 50% will be in her gross estate

digital assets

electronic records with ownership rights

TIC owners - severing ownership

can sever without consent

community property applies in

Texas

when TIC dies, their share passes

to the state

Transfer Costs

cost of doc prep, planning, + other professional fees & taxes

—> costs associated with avoiding/reducing taxes

community property step up after first spouse death

100%

Federal gift + estate tax structure

progessive, rises to 40% for a decedent whose taxable estate exceeds $12.06 M

• Estate, gift, or inheritance taxes may also apply at the state level, in addition to federal taxes, + may apply after significantly lower exemption amounts

Main reasons for interest in estate planning:

1. uncertainty of period of incapacity

2. excise taxes charged for transfers during life/at death (40% fed alone)

3. ensuring desired transfer of assets

Medicare

to qualify, must be UF citizen, age 65+, or under with qualifying disability, must have worked long enough in a job with paid Medicare taxes

Estate Planning Team Makeup

• licensed attorney

• CPA

• trust officer

• life insurance consultant (assures liquidity @ death)

• financial planner

section 2033

Section 2033 is the tax-law rule used to decide what property owned at death belongs in a person’s gross estate for estate-tax purposes

private annuity

Transaction between two private parties

• 1 party gives an asset to the other; the other agrees to give steady income for life

• cannot give the seller a security interest in the property (if parent gives stock to child in return for pmts, parent cannot take it back) - true transfer, true risk buyer may default

section 2035

3-year lookback - any gift tax paid on gifts made within 3 years o counted in the gross estate when calculating estate tax

section 2034

dower and curtesy-

• dower: right of wife to receive life estate between 1/3 and ½ of the land owned by the husband at the husband’s death if one or more children were born

• curtesy: husband’s right to receive life estate in land owned by wife at wife’s death if one or more children were born

section 2036

transfers with a retained interest

• give away property but keep right to benefit from it - like giving it to ur daughter but still living there

variable universal life

links to market index - accredited formiula

Allowable Deductions (amounts u can subtract before calculating tax)

• credit card balances = deductible

• Distribution of assets to spouse to specify bequests (marital deduction)

• payments to charitable organization

Universal life insurance policies

• designed to be more flexible than whole life- permanent as long as its funded

• flexible premiums _ interest credit

• will be cancelled if pure

• if cost of insurance rises and cash accumulation account doesn’t have funds = policy will be cancelled

2037: transfers taking effect on death

Applies when you transfer property, but the beneficiary must outlive you to receive it—and you may still get it back.

section 2038: revocable transfers

If you transfer property but still have the power to change or cancel the arrangement at death, the property generally stays in your gross estate.

Even just controlling when or how the beneficiary receives it can count.

Remember: Keep control → estate inclusion.

Straight Single-Line Annuity

• Pays you for your lifetime.

• When you die, payments stop—there’s no remaining benefit for anyone else.

• Nothing is included in your gross estate for that annuity, because no payment rights remain.

Survivorship Annuity

• Payments continue to another person after you die, such as your spouse.

• That remaining payment stream has value, so its value is included in the first person’s gross estate under the slide’s rule.

• “FMV of the remainder interest” means what a comparable annuity providing those remaining payments would cost at that time—not simply the total of all future checks.

Remember: Payments stop → no remaining value. Payments continue → remaining value counts.

Legatee

inherits under the will

Transferee

receives a transferilW

Will

essential part of any estate plan; legal doc giving testator (will-maker) opportunity to control distribution of the testator’s property at death, + thus avoid property distribution according to state intestacy law

Testate

decedent who has a valid will

Intestate

when one dies without a valid will

Domicile

place where a person votes, lives, pays taxes, etc.

Situs

exact local place/site of a property, crime, asset

• state where property is located

TPPT = Tangible Personal Property Trust

Similar to a QPRT, but holds tangible personal property instead of a home. The grantor retains use for a set term, then the property passes to beneficiaries.

• Gift value: Present value of the remainder interest.

• If the grantor dies during the term: The property’s full FMV is included in the grantor’s gross estate.

Ancillary Probate

probate process in state other than state of domicile

Escheat

transfer of real property of deceased to govt

FLP = Family Limited Partnership

A partnership used to transfer assets to younger family members while retaining management control.

• Typical structure in the slides: 1% general partner interest; 99% limited partner interests.

• Benefits: Potential valuation discounts and a layer of asset protection for limited partners.

• Avoid: Paying personal expenses with FLP assets, failing to retitle contributed assets, unsupported discounts, and ignoring the partnership agreement.

Remember: Give family ownership interests while keeping control as general partner.

Arms length

between unrelated parties

• installment sale (note, pmts made over more than 1 tax year), sale, exchange

Valid Will

• must be in writing

• must be signed at logical end by testator

Statutory Will

drawn by attorney, comply with statutes for wills of domiciliary state, signed with witnesses

Holographic Will

handwritten by testator and include material provisions of a will - dated & signed

• no witness: valid in > ½ the states

Noncupative Wills

oral, dying declarations made before sufficient # of people - not valid in most states

qualified transfers

payments made directly to:

• A qualified educational institution for someone’s tuition—not books, room, or board.

• A medical provider for someone’s qualifying medical expenses.

They’re excluded from gift tax without using the $19,000 annual exclusion or lifetime exemption.

Mutual/Reciprocal Will

identical wills often by spouses leaving everything to other person

• if executed, called “sweetheart” will J

Joint Will

transfers common interest in property to one individual

Nevada

first state to allow electronic wills (2001)

traditional will

presided over by attorn

Devisee

Named to receive real estate under the will

• always considered to be a legatee and potentially an heir

• generally receives real property under the will

when to fill out 706 vs 709

• 706 = Estate tax: Executor files after death if the filing threshold is exceeded or to elect portability. Due 9 months after death.

• 709 = Gift tax: Donor generally files for gifts above the annual exclusion, future-interest gifts, or gift splitting. Due April 15 the following year.

Filing does not necessarily mean tax is owed.

What are the main advantages of an installment sale to an IDGT (Intentionally Defective Grantor Trust)?

• Freezes estate value: The grantor receives a promissory note in exchange for assets.

• At death: The remaining note’s value is included in the grantor’s gross estate—not the assets sold to the trust.

• Future appreciation escapes transfer tax.

• Additional benefits: Valuation discounts and the grantor’s payment of trust income taxes can shift more wealth to beneficiaries without additional taxable gifts.

Remember: The estate keeps the note; the trust keeps the growth.

Introductory Clause

seeks to identify testator: full name + residence, state, naming next of kin

Declaration Clause

declares this is the latest + greatest will and testament of testator: specifically + clearly (using date) revokes previous wills + codicils to eliminate potential confusion —> proper will to submit to probate

Bequest Clause

bequests distribution of specific property: cash, tangible property, or real estate; if multiple legatees and multiple bequests, grouped in sect of will

Guardianship Clause

identifies minor children or legal dependents, and who testator puts in charge of them. Probate court must approve appointment of guardians

Community Property

a legal and financial strategy that manages and distributes assets owned equally by a married couple upon a spouse's death or divorce

Tax Apportionment Clause

directs which assets will bear payment of any debts + estate taxes

• often included as part of residuary clause

Attestation Clause

witness clause, by >/= 2 qualified witnesses

• Legatees shouldn’t serve as witnesses - could jeopardize their right to receive a bequest

Self-Proving Clause

involves notary signing + saying they witnessed those who singed the will, signing it

Simultaneous Death Clause

Estimated guidelines for disposition of assets

• Eliminates the expense of 2 probate proceedings including identical assets + ensures fulfillment of each individual's transfer desires

Survivorship Clause

Requires the surviving spouse/person to live for a certain period after the testator’s death to inherit; overcomes problems with simultaneous death issues or close death issues

Disclaimer Clause

reminds legatees they can disclaim any bequest

Contingent Legatee Clause

Process of distributing property when a legatee predeceases the decedent, dies during the survivorship clause period, or disclaims property bequeathed to them

• having this in the will allows the testator to say how property should be distributed in the event the original legatee is no longer able/willing to inherit under the will

Per Stirpes

means taking “by representation” or “by the roots”

• directs = shares to each member of specified tier/class of relatives

• Shares pass down a family branch

Per Capita

• “by the head” or “by total head count” based on alive beneficiaries

• Each generation receives equal shares

Per Capita @ Each Generation

• = shares to each living member of same generation

  • heirs of same generation get equal share; preferred method

No-Contest Clause

• “in terrorem” clause; attempts to discourage disappointed legatees from contesting the will, by substantially decreasing/eliminating any bequest to them if they file a formal, legal contest to the will

Codicil

an ammendment, or supplement, to a will

• separate doc or attached to the will; must meet all legal requirements of a will

• sometimes easier to redraft will and include this so amendments aren’t lost

Power of Attorney

legal doc authorizing a trusted person to act on another’s behalf

Attorney in Fact

power holder/agent : acts in place of another person

Principal

grantor of the power

Power of Appt

Authority to decide who receives certain assets, usually held in a trust.

• General power: You can direct assets to yourself, your estate, or creditors of either—generally causing inclusion in your gross estate.

• Limited power: You can choose only among specified recipients, excluding those above.

Remember: Appointment = pick who gets the assets

Springing Power

agents authority “springs” into existence upon some defined event/determination

• purpose: ensures someone has power to act for principal + handle affairs

Durable Power of Attorney for Health Care (DPOAHC)

• health care proxy, legal doc appointing an agent

Physician Orders for Life Sustaining Treatment (POLST)

• Supplement of a living will + healthcare POA by addressing the treatment wishes of an individual in a standardized way

Prenuptial

entered into before marriage to establish plan for disposition of property in event of divorce, separation, death

Digital Assets + Estate Planning Docs

• RUFADAA: Adopted by 47 states

• Recognized digital assets as property assets that can be held, managed, conserved + transferred

Potential for Financial Abuse

• estimated that at least 1 in 10 community-dwelling adults experience some form of abuse every year- likely higher

Ancillary Probate

• probate process conducted in a state other than the state of decedent’s domicile

Attestation Clause

Witness clause stating testator is of sound mind + that testator signed the doc in witness’ presence

Escheat

reversion of an heirless, interstate decedent’s property to state

Nuncupative Will

• oral will, dying declarations

If a partner of a nontraditional, unmarried couple wishes to pass assets to the surviving partner, he or she should plan to avoid probate.

True

Probate Process Visual

To begin the probate process

The petitioner (usually the executor) must provide the court with certain information, including a certified copy of the death certificate, the last will (if available), a list of the decedent’s heirs' names and addresses, and a list of known creditors. Depending on the state, this can be rather easy. Generally, the state will have a short form that can be filled out and submitted to the probate court, with the necessary documents attached. A hearing will then be scheduled for interested parties to appear. The known creditors of the estate should be notified of the date of the hearing. In addition, the date of the hearing should be publicized in the appropriate legal and community newspapers. Assuming all paperwork is in order and there are no disputes among the heirs, the hearing will be rather short. The court will accept the will, it will be filed in the public records, and the court will officially open the probate process. The court will then appoint a personal representative,

Executor/Administrator

personal representative appointed to administer the estate

Letters Testamentary

Empowers the executor to act as the agent of the court.

Difference between executor and administrator

primary difference is that the decedent chooses the executor, and the probate court names the administrator. In some states, administrators may have to formally close the estate before the probate court, while an executor may be able to close informally

Surety Bonds

legally binding three-party contract that guarantees a business or individual will fulfill an obligation or perform a job correctly

• If an administrator is appointed by the court, then admin must generally post a bond

IDGT- treats ownership differently

• Income tax: The person who created the trust—the grantor—pays tax on its income.

• Estate tax: If properly structured, the assets in the trust are excluded from that person’s estate at death.

Self-Cancelling Installment Note (SCIN)

arrangement where someone sells property and receives payments over time. If the seller dies before the payments are finished, the remaining debt disappears.

GRUT — Grantor Retained Unitrust

• Keep: A fixed percentage of the trust’s value, revalued annually.

• Give: Whatever remains afterward goes to beneficiaries.

• Key distinction: Dollar payments rise or fall with the trust’s value; annual valuations make hard-to-value assets less suitable.

• Risk: Dying during the term can cause estate inclusion.

• Remember: GRUT = percentage of Updated value.

GRAT — Grantor Retained Annuity Trust

• Keep: A fixed dollar payment each year for a set term.

• Give: Whatever remains afterward goes to beneficiaries.

• Benefit: Strong investment growth can increase what passes to beneficiaries.

• Risk: Dying during the term can cause estate inclusion.

• Remember: GRAT = same Amount.