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Estate Planning
Session 1 of 3
Wills
Trusts
Planning for Incapacity
Property Interests
Transfer Methods
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Estate Planning Advice
• Only estate planning attorneys can practice estate
planning and give estate planning advice.
• Financial planners recognize estate planning issues
affecting their clients, then work with attorneys to
resolve them.
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Estate Planning Process
• Estate Planning is a process for preserving and
distributing a person’s assets according to their
objectives.
• Definition of an estate: The rights, titles or interests
that a person has in their property
• Common objectives: protect, grow and distribute
assets while minimizing costs and taxes
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Wills
• Wills allow the testator to control the passing of
property interests to others.
• Property transfers are regulated by state law, not
federal law. In the absence of a will, property is
distributed according to state laws of intestacy.
• Contracts supersede state laws.
Example: nuptial agreements
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Legal Requirements for Wills
Any person over the age of 18 can make a will. To
execute a will, you need “testamentary capacity” or
the will is invalid.
Testamentary capacity:
• Testator must know he’s executing a will
• Testator must be aware of what assets he owns
• Testator must know and remember his relationship
to his beneficiaries
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Invalid Will Provisions
Provisions in a will can be invalidated due to:
• Fraud
• The testator is subject to “undue influence” by
someone benefiting from the will
• Mistakes in will clauses
• The will is not properly executed- signed and
witnessed according to state statutes
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Types of Wills
• Mutual will- a will made in agreement with another
person to dispose of certain property interests
• Reciprocal will- each person’s will designates that all
property be distributed to the other person
• Holographic will- handwritten will
• Nuncupative will- oral will
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Pour-over Will
Designates the decedent’s trust to receive property left
outside the trust.
• A trust must be created before death
• Property will avoid intestacy
• Property will not avoid probate
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Will Terms
• Codicil- a separate document added to an existing will
to address minor changes
• Residuary clause- directs the remainder of a
decedent’s estate to a specific person or a trust to
avoid partial intestacy
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Per Capita & Per Stirpes
• Per Capita- descendants receive equal shares
• Per Stirpes- descendants may receive unequal shares
Children: A, B, C
C’s children: X and Z
C dies
Per Capita: A, B, X, Z = ¼ share
Per Stirpes: A & B = 1/3 share
X & Z = split C’s 1/3 share for 1/6 each
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Revoking a Will
A testator can intentionally revoke a will.
Wills can be revoked by remarriage or divorce in some
states. This may cause partial intestacy for the
property designated to the ex-spouse.
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Avoiding Will Contests
Will contests are initiated through the probate
courts.
• Pretermitted heir- a spouse or child not named in the
will.
• Elective share statute- wills cannot disinherit a spouse.
The spouse is permitted to take a percentage of the
decedent’s estate in lieu of property left to them in the
will.
Q&A in 2
slides
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Intestacy
State law determines the beneficiaries for property
in the absence of a will or will substitutes.
• Minor children receive equal shares of their parent’s
property and take ownership at their state’s age of
majority.
• Community property states- all property in intestacy
passes to the surviving spouse.
• A decedent’s estate gets a marital deduction for the
percentage of property the surviving spouse receives
through intestacy.
Q&A Next
Slide
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Incapacity Planning
An incapacitated person is unable to make or
communicate responsible decisions regarding
their:
• Health
• Medical care
• Personal care
• Property
• Legal and financial affairs.
Q&A
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Powers of Attorney
A principal gives authority to an agent to make business,
financial and/or legal decisions on the principal’s
behalf.
Powers of Attorney over property:
• Non-durable POA- ceases when the principal becomes
incapacitated or dies
• Durable POA - the agent can represent the principal
before and after incapacity occurs.
• Springing durable POA- the agent cannot act until
physicians certify that the principal is mentally
incompetent
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Advantages of a Durable POA
• A Power of Attorney can be used without the stigma of
a declaration of incompetency
• The agent may only exercise those powers expressly
contained in the document
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Agent’s Authority
The agent can:
• Transfer the principal’s property into a trust
• Run the principal’s business
• Buy or sell assets
• Make gifts
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Disadvantages of a Durable POA
• Agent cannot exercise a power that is not included in
the document
• The POA is binding when executed
• The POA may not be recognized by banks or brokerage
firms
• The POA cannot be used after death to dispose of
property omitted from a will
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POA for Health Care
• Health care proxy- grants an agent the power to make
health care decisions for the principal
• Principal can restrict the agent’s authority
• Living wills are not Powers of Attorneys and are not
recognized in all states
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Standby Trust
Is used to manage a person’s assets if they become
incapacitated.
3 parties to a trust:
• Grantor- creates a trust by transferring the legal title
of the property to the Trustee
• Trustee- manages trust property for the beneficiary
• Beneficiary- has equitable title to trust property
In a stand-by trust, the grantor is the Trustee and
beneficiary
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Funded Stand-by Trust
Grantor is Trustee and beneficiary
• Grantor transfers all property into the trust and
manages it.
• If grantor becomes incompetent, a successor trustee
can manage trust assets without delay.
• Financial institutions will recognize trustee’s authority
to manage grantor’s property.
• Trustee can continue to manage assets after grantor’s
death.
Q&A in 2
slides
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Unfunded Stand-by Trust
Agent of a durable Power of Attorney transfers grantor’s
property into trust.
• Trustee manages assets for the grantor/beneficiary.
• Financial institutions may not honor the POA.
• Possible delays and costs associated with transferring
property to the trust.
Q&A Next
Slide
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Fiduciaries
Fiduciaries have the authority to perform special acts or
duties for others. They can make decisions, carry out
directives and manage a person’s property or affairs.
• Fiduciaries must perform their duties with utmost care
and loyalty towards the beneficiaries.
• Fiduciaries can be sued for breach of fiduciary duties in
civil court and in criminal court.
Q&A
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Types of Fiduciaries
• Executor- is a decedent’s personal representative
named in the will. The executor admits the will to
probate, collects the decedent’s assets, determines
asset values and distributes the assets to heirs with
court supervision.
• Trustee- manages trust property for beneficiaries
• Guardian- protects the ward’s property interests and
oversees their personal care
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Guardianship
A court-supervised arrangement to provide for an
incompetent person’s care and to manage their
property, in the absence of planning.
Types of Guardianships:
• Guardianship of the person- provides for the ward’s
personal care
• Guardianship of the estate- manages the ward’s
property and financial affairs
• Plenary guardianship- manages both property and
personal care for the ward
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Special Needs Trust
Disabled individuals who receive Social Security Disability
Insurance (SSDI), Supplemental Security Income
(SSI) and/or Medicaid need to maintain these cash
benefits and the medical insurance they provide.
• Income distributions from other trusts to disabled
beneficiaries that exceed the government’s income cap
for these programs adversely affect benefit amounts.
• Special needs trusts preserve eligibility for government
benefits and pay for extra services that are not
covered by public assistance programs.
Q&A in 2
slides
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Benefits of Special Needs Trusts
Cover extra services:
• Medical expenses not covered by Medicaid
• Supplemental attendant and custodial care
• Additional therapies
• Respite care for family caregivers
Pay for:
• Telephones
• Computers and internet access
• Cable TV
• Basic household furnishings
• Travel and a companion
Q&A Next
Slide
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Medicaid Planning
Medicaid is a joint federal and state entitlement program
that pays for medical assistance to certain aged,
disabled, and blind individuals, and provides benefits
to families with low income and resources.
• Individuals cannot have more than $2,000 in countable
assets when applying for Medicaid long-term care
services.
• There is a 5-year “look back” penalty period for assets
transferred to trusts, individuals or charities. States
withhold Medicaid payments for nursing home care for
a number of months, depending on the value of the
property transferred.
Q&A
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Property Interests
Sole Ownership:
• Owner has complete lifetime and testamentary control
over property
• Income produced by the property is taxable to the
owner
• The FMV of the property is included in the owner’s
gross estate and probate estate
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JTWROS
• Two or more joint tenants share equal ownership
• Property passes by Operation of Law
• Property avoids probate
• Income from the property or the proceeds of a sale
must be split equally, or a gift is made to the other
joint tenants
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Disadvantages of JTWROS
• Property can be terminated by one JT without the
consent of other JT to form a Tenancy-in-Common.
• Creditors can reach a joint tenant’s interest.
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JTWROS with Spouses
• 50% of the FMV of the property is included in the
decedent spouse’s estate.
• The property in the decedent’s estate will get a marital
deduction to offset an estate tax.
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JTWROS Estate Tax
Gross Estate- 50% of JTWROS property
Minus: expenses, debts, taxes, losses
Adjusted Gross Estate
Minus: marital deduction- 50% of JTWROS property
Taxable Estate = 0
Step-up Basis for Spouses
The surviving spouse’s basis is not stepped-up to FMV
Husband and wife bought a home for $40,000. Each has
an original basis of $20,000.
• At husband’s death the FMV of the home is $200,000
so $100,000 is included in his gross estate.
• Wife inherits ½ of the home ($100,000) but her
original basis is not stepped-up.
• If she sells the home today her new basis is $120,000
and $80,000 is subject to capital gains tax before
applying the exclusion.
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Disadvantages of JTWROS with
Spouses
• If one spouse becomes incompetent, the other spouse
does not have total access to the property without a
durable POA or guardianship.
• Decedent’s estate is “over-qualified” for the marital
deduction. Decedent cannot use his unified credit to
offset an estate tax. This may cause higher estate
taxes at the surviving spouse’s death.
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Marital Deduction
Gross Estate- 50% of JTWROS property
Minus: expenses, debts, taxes, losses
Adjusted Gross Estate
Minus: marital deduction- 50% of JTWROS property
Taxable Estate = 0
Estate tax unified credit- not used
Federal Estate Tax payable = 0
Basis Rules for Non-spouses
Property can be held as JTWROS with non-spouses.
• The amount included in a JT’s gross estate is based on
their proportional contribution when the property was
acquired
• The amount in the gross estate gets a complete step-
up in basis at the decedent’s death.
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Stepped-up Basis Example 1
A mother buys property and titles it JTWROS with her
son.
• The FMV of the property is included in her gross estate
at death since she paid for it.
• The son will receive a full step-up in basis for the FMV
of the property.
• Mother made a gift of 50% of the FMV of the property
when she titled the deed JTWROS
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Step-up Basis Example 2
Jim and Bob buy land together for $100,000. Jim pays
$80,000 and Bob pays $20,000.
• At Jim’s death the FMV of the property is $200,000.
Therefore 80% or $160,000 is included in Jim’s gross
estate.
• Bob will inherit Jim’s property worth $160,000.
• Bob will add the $160,000 to his original basis of
$20,000 for a new basis of $180,000.
Q&A in 2
slides
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Tenancy by the Entirety
Property owned by a husband and wife
• The property passes to the surviving spouse by
Operation of Law.
• 50% of the property is included in the decedent’s gross
estate, which gets a marital deduction and a step-up in
basis.
• A spouse must have the consent of the other spouse to
terminate ownership or convert the title to sole
ownership or a Tenancy in Common.
• Property cannot be attached by creditors to satisfy
individual debts, but property may be attached by the
couple’s joint creditors.
Q&A Next
Slide
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Tenancy in Common
• Owners can have unequal ownership.
• Each tenant owns a separate, fractional interest which
is included in the decedent’s estate.
• Property interests can be sold, gifted, or transferred at
death, and income is based on ownership share.
• Property interests pass through a will.
• Property goes through probate.
• Gifts occur if other property is converted to a Tenancy
in Common or if income is divided disproportionately.
Q&A
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Community Property States
• Texas
• Louisiana
• Nevada
• New Mexico
• Alaska
Quasi-Community Property States:
• California
• Idaho
• Arizona
• Washington
• Wisconsin
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Community Property Interests
• Income earned by spouses after marriage
• Income earned by one spouse after marriage
• Separate property commingled with community
property assets
• Property acquired during marriage but titled in one
spouse’s name
• Appreciation of separately owned property due to the
contributions of the non-owner spouse
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Not Community Property
• Property owned by spouses prior to marriage
• Income earned on the spouse’s separately owned
assets
• Separate property used to acquire other property
during marriage
• Property received as a gift for one spouse
• Property inherited by one spouse
• Spousal agreements- property acquired after marriage
can become separate property
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Characteristics of Community
Property
• Each spouse has a vested interest in one-half of the
property acquired during marriage, which is divided
equally at divorce or death.
• A Will is needed to bequeath property to a spouse or a
3rd party, or the property goes through intestacy.
• Community property outside a trust goes through
probate.
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Estate Tax for Community
Property
• 50% of community property is included in the
decedent’s gross estate and receives a marital
deduction if bequeathed to the surviving spouse.
• 100% of the property gets stepped-up to FMV at the
spouse’s death.
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Step-Up in Basis
The surviving spouse’s basis is stepped-up to FMV
Husband and wife bought a home for $100,000.
Home is worth $800,000 at wife’s death.
• $400,000 is included in wife’s gross estate
• Husband inherits ½ of home worth $400,000
• Husband’s original basis of $50,000 is stepped-
up to $400,000
• Husband owns 100% of home with a new basis
of $800,000
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Moving Rules
I. The character of the property acquired in a
community or a quasi-community property state does
not change when a married couple moves to a
common law state.
Example: A couple sells a home in Nevada and buys a
new home in NY with proceeds from the sale. The
property is community property in NY.
II. The character of the property acquired in a common-
law state does not change when a married couple
moves to a community property state.
Example: A couple sells a home in Vermont. The sale
proceeds are separate property. When they move to
Texas and buy a new home, it is not community
property.
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Quasi-Community Property
• Property initially acquired by spouses in a common law
state that is treated as community property when the
couple moves to certain community property states:
California, Arizona, Idaho, Washington, and Wisconsin.
• Quasi-Community Property is an exception to the
moving rule.
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Moving to Quasi-Community
Property States
Property acquired in a common law state is treated as
community property if:
The property could have been classified as “community
property” when it was originally acquired.
*Look back to see how the property was initially
acquired.
Q&A in 2
slides
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“Look Back”
Will property from a common law state become
community property when the couple moves to a
quasi-community property state?
Yes:
If property was acquired after marriage
No:
After marriage, property was acquired as:
• a gift
• an inheritance
Quasi-Community Property
Example 1
A married couple bought a home in NH and years later
they sold their home and moved to CA.
Their NH home would have been “community” property if
it had been originally acquired in CA.
Therefore, when the couple moves to CA and buys a new
home, their new home is community property.
Q&A Next
Slide
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Quasi-Community Property
Example 2
A home was originally bought in Maine with money
inherited by the wife.
The couple sold their Maine home and moved to CA
where they bought a new home.
The Maine home would not have been considered
“community” property if it had been initially acquired
in CA.
Therefore, the home remains the wife’s separate
property when they move to CA.
Q&A
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Receive a Life Estate
You have the right to possess or enjoy property or derive
income from the property while you are alive.
You may receive:
• A gift of a life estate in real property
• All of the income from a trust for life
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Consequences of Receiving a Life
Estate
• The donor or grantor determines the remainder
beneficiary of the life estate. Since you, the life tenant,
cannot determine the remainderman or have access to
the remainder interest, the value of the life estate is
not included in your gross estate at death.
• You cannot be forced out of a life estate in real
property regardless of the remainder beneficiary’s
misfortunes.
• The life tenant must pay all property taxes and
insurance, or the remainder beneficiary can sue.
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Create a Life Estate
You may create:
• A life estate in your home. You have the right to live
there until your death.
• A life estate in a trust. You gave yourself the right to
receive all of the income from the trust while you are
alive.
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Gift Taxes with Life Estates
• A person who creates a life estate will choose the
remainder beneficiary.
• The creator makes a gift of the remainder interest in
property or trust to the beneficiary.
• The value of the gift is the present value (PV) of the
remainder interest.
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PV of Remainder Interest
Mother creates a life estate in her home with daughter as
remainderman.
• Gift tax value- Present Value of the remainder interest
gifted to the daughter.
• Date of gift- the date the property title is changed.
• Future interest gift- may be subject to gift taxes.
Determining Income and
Remainder Interests
Paul and Rose transfer $150,000 into a trust today for
Paul’s father Ted, age 72, and their daughter Sue.
Income will be distributed annually to Ted for the rest
of his life. When Ted dies, Sue will receive the income
interest and trust corpus.
What is the value of the income interest and the
remainder interest if the interest rate is 9.6%?
Valuation Table for: SINGLE LIFE 9.6%
Age Annuity Life Estate Remainder
72 6.2356 .59862 .40138
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Split Interest Example
Valuation Table for: SINGLE LIFE 9.6%
Age Annuity Life Estate Remainder
72 6.2356 .59862 .40138
The PV of Ted’s income interest:
$150,000 x .59862 = $89,793
The remainder interest gift to Sue:
1. Multiply the remainder factor .40138 x $150,000 =
$60,207
2. Subtract the income interest of $89,793 from
$150,000 = $60,207
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Estate Tax for Life Estates
Life tenant creates a life estate for himself:
• IRS Section 2036- The FMV of the property or trust
will be included in the life tenant’s gross estate at
death.
• The remainder beneficiary will receive a step-up in
basis to FMV at the life tenant’s death.
Q&A in 2
slides
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Term Interests
You may receive an estate for a term of years:
• You are given the right to use the property or to
receive the trust income until the term ends.
• If you die before the term is up, your will can appoint
another person to use the property, or receive the
income from the trust until your term ends.
Q&A Next
Slide
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Vested and Contingent Interests
A beneficiary may have a vested or contingent interest in
property.
• Vested interest- your right to receive the remainder
interest is fixed and absolute. If you die before you
receive the remainder interest, the property passes to
a new beneficiary, as determined by your will.
• Contingent interest- your right to receive the
property depends on the happening of a specific event.
Example: Remainderman must outlive the income
beneficiary.
Q&A
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Probate
Probate is the process of proving the will in court.
• Personal property is probated in the decedent’s state
of domicile.
• Real property is probated in the state where it’s
located (situs) which may subject the property to
ancillary probate.
• Ancillary probate- property owned in a different state
is probated in the other state.
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Advantages of Probate
• A court supervised distribution of property to heirs
• Protects creditors by ensuring that estate debts are
paid
• Bars future creditor claims against the estate
• Documents the title and the transfer of property to
others
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Disadvantages of Probate
• Delay in probating the estate- typically 9 months to 2
years
• Costs- attorney and court fees, and the executor fee if
not waived
• A public proceeding- privacy issues
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Probate Property
Property transferred via a will is subject to probate:
• Solely owned personal or real property
• Tenancy-in-Common
• Community property
• Property passing from the will into a testamentary trust
• Property transferred by a pour-over will into a trust
• Life insurance policy owned by the decedent who was not the
insured
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More Probate Property
Property not transferred by will that is subject to
probate:
• Intestate property
• Life insurance policy proceeds or annuities payable to
the decedent’s estate
• Homestead and exempt property allowances
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Operation of Law
• Right of Survivorship- JTWROS or Tenancy by the
Entirety
• Joint bank accounts
• Government Savings Bonds: co-ownership
• Life Estates
• POD accounts- Totten trusts and gifts causa mortis
• TOD accounts
• General powers of appointment exercised or released
by will at death
Q&A in 2
slides
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Transfers by Contract
Contracts avoid probate if payable to named
beneficiaries
• Life insurance proceeds
• Pension plans and IRAs
• Annuities with named joint annuitants
• Buy/Sell agreements
• Nuptial agreements
Q&A Next
Slide
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Trusts
Avoids probate:
• Funded revocable trusts
• Irrevocable trusts
• Property in trust avoids ancillary probate
Does not avoid probate:
• Unfunded revocable trust
• Testamentary trust
Q&A
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Introduction to Trusts
Trust- a legal entity that holds property
Types of trusts:
• Inter vivos- established while the grantor is alive
and takes effect immediately
• Revocable- may be funded or un-funded
• Irrevocable- must be funded to legally exist
• Testamentary- created through a will
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Beneficiary Interests in Trusts
• Present interest- an immediate and unrestricted use
of the trust property
• Future interest- use or ownership of trust property is
postponed
• Remainder interest- is a future interest that goes
into effect after a beneficiary’s present interest has
ended
• Reversionary interest- property reverts back to the
grantor after a beneficiary’s interest has ended
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What Trusts Can Accomplish
• Control who manages the trust property, who benefits
from the property, and when the property gets
distributed
• Provide income to one beneficiary and trust corpus to
another beneficiary
• Reduce a person’s estate, gift or income tax liability, or
freeze the value of an estate if appreciating property is
transferred to others
• Provide for the care of dependent beneficiaries
• Provide for the grantor’s care if incompetency occurs
• Provide for the management of assets in other states
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Advantages of Revocable Trusts
• Provides privacy in the administration of your
affairs
• Used for incapacity planning
• Can have professional management of trust assets
• Funded trusts avoid probate and ancillary probate
for out of state property
• Reduces the potential for a will contest or an election
against the will
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Disadvantages of Revocable Trusts
Costs associated with establishing the trust:
• Attorney fees
• Transfer costs
• Trustee fees
Revocable trusts offer no creditor protection
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Taxation of Revocable Trusts
• Income tax neutral- trust income is taxed to the
grantor
• Gift tax- no gift tax because transfers into trust are
not completed gifts
• Estate tax- trust assets are taxed at FMV in the
grantor’s estate
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Irrevocable Trusts
• Grantor retains no control over trust assets and cannot
change the terms of the trust
• Trust assets avoid probate
• Rule against perpetuities- trusts cannot last longer
than 21 years and 9 months after the death of the last
beneficiary
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Income Taxation of Irrevocable
Trusts
Non-grantor trusts:
• Income that is not distributed is taxed to the trust
• Distributions made to trust beneficiaries are taxed to
the beneficiary
Grantor trusts:
• Income that is not distributed is taxed to the grantor
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Grantor Trusts
Grantor is taxed on trust income if:
• Trust income is paid or may be paid to the grantor or
the grantor’s spouse
• Trust income can accumulate for future distributions to
the grantor or the spouse
• Trust income can be used to pay for life insurance
premiums on the grantor or the spouse’s life
• Trust income is used to discharge a grantor’s legal
obligation
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More Grantor Trust Rules
• Grantor retains a reversionary interest > 5% in the
trust income or corpus
• Grantor or spouse has the power to control beneficial
enjoyment of trust principal or income
• Grantor can dispose of trust corpus at less than its full
value
• Grantor can borrow from the trust without proper
interest payments and security
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Gift and Estate Tax
Irrevocable Trusts:
• Gift tax- applies to most property transfers into
the trust. The trust takes the donor’s basis in the
transferred property.
• Estate tax- trust assets are not included in the
grantor’s estate if the grantor does not retain any
interest or control over them.
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Simple Trusts
• All trust income- interest and dividends- must be
distributed to the beneficiaries in the year the income
is earned
• The Trustee cannot distribute trust corpus or make any
charitable gifts
• The trust is a separate tax entity but pays no income
taxes
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Complex Trust
• Can accumulate income, distribute corpus, and
make gifts to charities.
• Is a separate tax entity that deducts distributed
income and pays tax on the income retained.
• Accumulated income becomes undistributed net
income (UNI), and may be subject to additional
taxes to the beneficiary in later years when it’s
distributed.
• Accumulated income in non-grantor trusts is
taxed at 35% for amounts over $11,650 in 2012.
• Tax-exempt interest accumulated in the trust is
fully taxable as income to the trust. It retains its
tax-exempt status only if it is distributed to the
beneficiaries.
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Distributable Net Income
DNI ensures that a trust receives a deduction for the
amounts distributed to the beneficiary, so that the
distribution is not taxed twice.
Example: A trust earns $10,000 in income and
distributes $6,000 to a beneficiary.
The trust gets a deduction for the $6,000 distributed and
the trust is taxed on the remaining $4,000.
Q&A in 2
slides
Estate Planning – 1 of 3
DNI- Beneficiary
DNI limits the amount of trust income the beneficiary is
required to report.
The deduction the trust takes for a distribution is equal
to:
• The lesser amount actually distributed to the
beneficiary, or the DNI
Example: A trust earns $10,000 in income and distributes
$12,000 to a beneficiary. The first $10,000 is considered to
be income, and the remaining $2,000 is considered to be a
tax-free distribution of corpus. The trust will deduct the
$10,000 distributed to the beneficiary which avoids taxation.
The beneficiary is only taxed on the $10,000 not the full
$12,000 distributed from the trust.
Q&A in 2
slides
Estate Planning – 1 of 3
Estate Planning Session 2 of 3
Preview
In this session we will focus on gifting strategies and the
steps involved in the gift tax calculation. Marital
deduction requirements, charitable transfers and life
insurance planning will be discussed in conjunction
with gift tax strategies.
Modules to complete before the July 5th virtual classroom
session:
• Gifting
• Charitable Giving
• Trusts
Estate Planning – 1 of 3
Thank You!
See you at the next session!
Estate Planning
Session 2 of 3
Thursday, July 5th 2012
7:00pm to 9:00pm (Eastern Standard Time)
Login information will be mailed to you in the coming
week.
Estate Planning – 1 of 3
