Estate Planning

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					Estate Planning

      Session 1 of 3

          Wills
         Trusts
 Planning for Incapacity
   Property Interests
    Transfer Methods



       Estate Planning – 1 of 3
     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




                       Estate Planning – 1 of 3
                         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.




                       Estate Planning – 1 of 3
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 heirs




                      Estate Planning – 1 of 3
      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




                      Estate Planning – 1 of 3
               Types of Wills
• Joint will- one will created for two people
• 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




                       Estate Planning – 1 of 3
                   Will Terms
• Codicil- a separate document added to an existing will
  to address minor changes
• Pour-over will- designates the testator’s trust to
  receive property
• Residuary clause- directs the remainder of a
  decedent’s estate to a specific person or a trust
• Per capita- descendants receive equal shares
• Per stirpes- descendants may receive unequal shares

Children:   A, B, C. C’s children: x and z




                        Estate Planning – 1 of 3
              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.




                        Estate Planning – 1 of 3
      Avoiding Will Contests
Will contests are initiated through the probate
  courts.

• Pretermitted heir- a spouse or child not named in the
  will who can take a percentage of the estate equal to
  their share through intestacy

• 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.




                       Estate Planning – 1 of 3
                   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.

• After 2010, a decedent’s estate gets a marital
  deduction for the percentage of property the surviving
  spouse receives through intestacy.



                       Estate Planning – 1 of 3
               Poll Question # 1
Which statement is correct?
A. A mutual will can also be a reciprocal will.

B. A pour-over will transfers property into a testamentary trust.

C. Property will avoid intestacy if the owner has a valid will at death.

D. An elective share statute allows the heirs to take a percentage of
   the decedent’s estate in lieu of property left to them in the will.

E. A will can change the beneficiary of a trust.




                              Estate Planning – 1 of 3
               Poll Question # 1
Which statement is correct?
A. A mutual will can also be a reciprocal will.

B. A pour-over will transfers property into a testamentary trust.

C. Property will avoid intestacy if the owner has a valid will at death.

D. An elective share statute allows the heirs to take a percentage of
   the decedent’s estate in lieu of property left to them in the will.

E. A will can change the beneficiary of a trust.

Feedback:
Answer is A. A mutual will can also be a reciprocal will.
               Q&A

                              Estate Planning – 1 of 3
          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.




                         Estate Planning – 1 of 3
         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



                       Estate Planning – 1 of 3
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




                      Estate Planning – 1 of 3
           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




                       Estate Planning – 1 of 3
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




                      Estate Planning – 1 of 3
         POA for Health Care
• Health care proxy- grants an agent the power to make
  health care decisions for the principal

• Living wills are not Powers of Attorneys




                       Estate Planning – 1 of 3
              Standby Trust
• Grantors can create a funded revocable trust and
  appoint themselves trustee and beneficiary, and
  appoint a successor trustee to manage trust property
  in the event they become incompetent.

• An agent can transfer the grantor’s property into the
  standby trust using the grantor’s durable power of
  attorney.




                      Estate Planning – 1 of 3
             Poll Question # 2
What type of Power of Attorney can represent the
 principal before and after the principal becomes
 incapacitated?

      A.   Springing durable power of attorney
      B.   Durable power of attorney
      C.   Health care power of attorney
      D.   Non-durable power of attorney




                          Estate Planning – 1 of 3
              Poll Question # 2
What type of Power of Attorney can represent the
 principal before and after the principal becomes
 incapacitated?

       A.   Springing durable power of attorney
       B.   Durable power of attorney
       C.   Health care power of attorney
       D.   Non-durable power of attorney


Feedback:
 Durable power of attorney can represent the principal
  before and after the principal becomes incapacitated.



                           Estate Planning – 1 of 3
                  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 and in criminal courts.




                       Estate Planning – 1 of 3
        Types of Fiduciaries
• Executor/Executrix- 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




                      Estate Planning – 1 of 3
               Guardianship
A court-supervised arrangement to provide for an
   incompetent person’s care and to manage their
   property, if no previous plans were made for this
   contingency.

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


                       Estate Planning – 1 of 3
         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 trusts to disabled individuals
  could exceed the government’s income cap for these
  programs and affect benefit amounts.

• Special needs trusts preserve eligibility for these
  benefits and pay for extra services that are not
  covered by public assistance programs.



                       Estate Planning – 1 of 3
          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.


                       Estate Planning – 1 of 3
              Poll Question # 3
Which statement is NOT correct?

A. A funded or unfunded Standby trust must be created before the
   grantor becomes incompetent.
B. A plenary guardian only manages a ward’s property and financial
   affairs.
C. Limited guardianships can be awarded to manage only specific
   aspects of an incompetent person’s care, giving that individual some
   control over his circumstances.
D. If a trustee of a Special Needs trust pays for something that is
   already covered by a government program, then benefits may be
   reduced by this amount.




                            Estate Planning – 1 of 3
              Poll Question # 3
Which statement is NOT correct?

A. A funded or unfunded Standby trust must be created before the
   grantor becomes incompetent.
B. A plenary guardian only manages a ward’s property and
   financial affairs.
C. Limited guardianships can be awarded to manage only specific
   aspects of an incompetent person’s care, giving that individual some
   control over his circumstances.
D. If a trustee of a Special Needs trust pays for something that is
   already covered by a government program, then benefits may be
   reduced by this amount.

Feedback: This statement is incorrect because a plenary guardian can
manage a ward’s personal care in addition to the ward’s property and
financial affairs.

             Q&A

                            Estate Planning – 1 of 3
          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 and probate estates




                      Estate Planning – 1 of 3
                     JTWROS
• Two or more joint tenants share equal ownership

• Property passes by Operation of Law

• Income from the property or the proceeds of a sale
  must be split equally, or a gift is made to the other
  joint tenants




                       Estate Planning – 1 of 3
  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.




                       Estate Planning – 1 of 3
      JTWROS with Spouses
After 2010:

• 50% of the property will be included in the decedent
  spouse’s estate.

• The property in the decedent’s estate will get a marital
  deduction to offset an estate tax.




                       Estate Planning – 1 of 3
 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.

After 2010:
• A marital deduction eliminates an estate tax on 50% of
  the JTWROS property included in the decedent
  spouse’s estate. This “over-qualifies” the decedent’s
  estate for the marital deduction.




                      Estate Planning – 1 of 3
        Basis Rules for 2010
Step-up in basis is replaced by a “modified adjusted
  carryover basis”



The basis of an asset cannot be adjusted above its FMV
  as of the date of the decedent’s death




                       Estate Planning – 1 of 3
Basis for Non-spouses in 2010
An executor may allocate up to $1.3 million of basis to a
  decedent’s appreciated assets.

• The $1.3 million is increased by:
          -The decedent’s unused capital losses
          -Section 172 net operating losses
          -Any deductible losses the decedent
           would have had if the property was sold
           immediately prior to death

• Basis increase is limited to $60,000 for nonresident
  aliens, without any increases for built-in losses or loss
  carryovers


                       Estate Planning – 1 of 3
Basis Rules for Spouses in 2010
• A $3 million basis increase is available for “qualified
  spousal property” that was owned by and acquired
  directly from the decedent, and given outright to a
  spouse or a Q-TIP trust.

• A surviving spouse can receive up to $4.3 million (plus
  unused losses) in carryover basis step-up.

Qualified spousal property also applies to:
• 50% of property held as JTWROS between spouses
• 50% of property held as Tenants by the Entirety



                        Estate Planning – 1 of 3
Basis for Non-spouses in 2011
• 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.




                      Estate Planning – 1 of 3
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.




                       Estate Planning – 1 of 3
    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.



                       Estate Planning – 1 of 3
Basis Rules for Spouses in 2011
For JTWROS:

• 50% of a decedent spouse’s property is included in the
  gross estate

• The property in the decedent’s estate gets stepped-up
  to FMV

• The surviving spouse’s 50% share of JTWROS property
  does not get a step-up in basis




                      Estate Planning – 1 of 3
      Step-up Example 2011
Husband and wife bought a home for $40,000 in
  1970.

• The FMV of the home is $200,000 at the husband’s
  death, so $100,000 is included in his gross estate.

• His wife receives his property with a step-up in basis to
  $100,000, but her original basis of $20,000 is not
  stepped up.

• If she sells the home, her new basis is $120,000 and
  $80,000 is subject to capital gains tax before the
  exclusion.



                       Estate Planning – 1 of 3
    Tenancy by the Entirety
Property owned by a husband and wife
• The property passes to the surviving spouse by
  Operation of Law.
• In 2010, the decedent’s property is qualified for a
  spousal basis increase.
• In 2011, 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.


                     Estate Planning – 1 of 3
         Tenancy in Common
• Owners can have unequal ownership.
• Each tenant owns a separate, fractional interest. In
  2011 the fractional interest 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.
• Gifts occur if other property is converted to a Tenancy
  in Common or if income is divided disproportionately.




                       Estate Planning – 1 of 3
             Poll Question # 4
Chris and his brother Ray are planning to buy a catamaran
together and will split the purchase price. Chris wants his son
Tom to inherit his 50% ownership in the boat at his death. Ray
wants his two sons to inherit his 50% ownership in the boat at
his death.
How should Chris and Ray title the catamaran to meet their
objectives?
    A. JTWROS
    B. Tenancy by the Entirety
    C. Tenancy in Common




                           Estate Planning – 1 of 3
             Poll Question # 4
Chris and his brother Ray are planning to buy a catamaran
together and will split the purchase price. Chris wants his son
Tom to inherit his 50% ownership in the boat at his death. Ray
wants his two sons to inherit his 50% ownership in the boat at
his death.
How should Chris and Ray title the catamaran to meet their
objectives?
    A. JTWROS
    B. Tenancy by the Entirety
    C. Tenancy in Common

Feedback:
With a Tenancy in Common the brothers can bequeath
one-half of the boat to their children through their wills.


                           Estate Planning – 1 of 3
    Community Property States
•   Texas
•   Louisiana
•   Nevada
•   New Mexico
•   Alaska

Quasi-Community Property States:
• California
• Idaho
• Arizona
• Washington
• Wisconsin


                  Estate Planning – 1 of 3
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


                      Estate Planning – 1 of 3
    Not Community Property
• Income earned 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 to one spouse

• Property inherited by one spouse

• Spousal agreements- property acquired after marriage
  can become separate property



                      Estate Planning – 1 of 3
  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.




                      Estate Planning – 1 of 3
Basis of Community Property 2010
 • The basis increase for “qualified spousal property”
   applies to the surviving spouse’s half of community
   property if at least 50% of the community interest is
   acquired from the decedent.

 • Each spouse’s share is eligible for an increase in basis
   up to the maximum allowable amount.




                        Estate Planning – 1 of 3
     Estate Tax for Community
         Property in 2011
• 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.




                      Estate Planning – 1 of 3
               Moving Rules
I.   The character of the property acquired in a
     community property state does not change when a
     married couple moves to a common law state.

Example: A couple sells a home in Texas and buys a new
   home in Massachusetts with proceeds from the sale.
   The property is community property in
   Massachusetts.

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 therefore the
   sale proceeds are separate property when they move
   to a community property state like Texas.



                      Estate Planning – 1 of 3
 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.




                      Estate Planning – 1 of 3
   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.




                      Estate Planning – 1 of 3
    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 since it was
  bought with marital assets.

Therefore, when the couple moves to CA and buys a new
  home, their new home is community property.




                     Estate Planning – 1 of 3
    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.


                       Estate Planning – 1 of 3
             Poll Question # 5
Mary and Doug lived in MA and bought a house with money
Doug received as a gift from his uncle. They sold their house in
MA and moved to CA using the proceeds to buy a new home.
When Doug dies, the home will be treated as community
property in his estate.

True or False?




                         Estate Planning – 1 of 3
             Poll Question # 5
Mary and Doug lived in MA and bought a house with money
Doug received as a gift from his uncle. They sold their house in
MA and moved to CA using the proceeds to buy a new home.
When Doug dies, the home will be treated as community
property in his estate.

True or False?



Feedback:
The home was separate property when the couple bought the
house in MA, since the money came from a gift. Gifts are not
considered community property in a community property state.
Therefore, the new home in CA will remain Doug’s separate
property.



                         Estate Planning – 1 of 3
            Poll Question # 6
Carol and John acquired all their property interests while
married and living in NY. They moved to CA five years ago, and
decided to divorce. They have acquired $200,000 in property
interests since moving to CA. The value of their property
interests prior to moving to CA was $600,000. For property
settlement purposes, all of their assets are community property
assets.

True or False?




                         Estate Planning – 1 of 3
            Poll Question # 6
Carol and John acquired all their property interests while
married and living in NY. They moved to CA five years ago, and
decided to divorce. They have acquired $200,000 in property
interests since moving to CA. The value of their property
interests prior to moving to CA was $600,000. For property
settlement purposes, all of their assets are community property
assets.

True or False?

Feedback:
Carol and John’s assets when acquired in NY would have been
community property assets if they had originally acquired them
in CA instead. Therefore, all of their assets are community
property after moving to CA.




                         Estate Planning – 1 of 3
             Poll Question # 7
Jackie and Paul lived in a common law state and titled their
marital assets in Paul’s name. Paul died shortly after moving to
California in 2011, and for estate purposes, the assets will be
treated as belonging solely to Paul.

True or False?




                         Estate Planning – 1 of 3
             Poll Question # 7
Jackie and Paul lived in a common law state and titled their
marital assets in Paul’s name. Paul died shortly after moving to
California in 2011, and for estate purposes, the assets will be
treated as belonging solely to Paul.

True or False?




Feedback:
These assets were originally acquired after Jackie and Paul got
married, so they would be treated as community property when
they moved to CA.




                         Estate Planning – 1 of 3
        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 income from a trust for life




                        Estate Planning – 1 of 3
Consequences of Receiving a Life
           Estate
• The donor or grantor determines the remainder
  beneficiary of the life estate. Since you 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.



                       Estate Planning – 1 of 3
         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 have the right to receive
  all of the income from the trust while you are alive.




                       Estate Planning – 1 of 3
 Gift Taxes with Life Estates
• The donor or grantor determines who the remainder
  beneficiary will be.

• The donor or grantor makes a gift of the remainder
  interest to the remainder beneficiary.

• The value of the gift is the present value (PV) of the
  remainder interest on the date the property title is
  changed, or on the date the trust is established.




                       Estate Planning – 1 of 3
      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 principal.

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


                       Estate Planning – 1 of 3
      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



                       Estate Planning – 1 of 3
Estate Tax for Life Estates 2011
Life tenant creates a life estate for themselves:

• 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.




                       Estate Planning – 1 of 3
              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.

• The donor or grantor determines the remainderman of
  the property.

• 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.



                       Estate Planning – 1 of 3
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.




                      Estate Planning – 1 of 3
               Poll Question # 8
A mother transferred $200,000 into an irrevocable trust today.
She can receive all of the income for her life, and her son will
receive the trust corpus when she dies.
Which of the following statements is NOT correct?
A. The mother has made a gift to her son of the present value of the
   trust’s remainder interest.

B. The FMV of the trust will be included in the mother’s estate if she
   dies after 2010.

C. If the mother’s income interest is valued at $75,000 today then the
   son’s remainder interest is valued at $125,000.

D. The son has a contingent interest in the property.




                              Estate Planning – 1 of 3
               Poll Question # 8
A mother transferred $200,000 into an irrevocable trust today.
She can receive all of the income for her life, and her son will
receive the trust corpus when she dies.
Which of the following statements is NOT correct?
A. The mother has made a gift to her son of the present value of the
   trust’s remainder interest.

B. The FMV of the trust will be included in the mother’s estate if she
   dies after 2010.

C. If the mother’s income interest is valued at $75,000 today then the
   son’s remainder interest is valued at $125,000.

D. The son has a contingent interest in the property.
Feedback: In this case, the son has a vested remainder interest in the
trust since he will receive the corpus when his mother dies. If the son
were to die before his mother does, he can appoint the remainder
interest to someone else in his will.

              Q&A

                              Estate Planning – 1 of 3
                    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.




                      Estate Planning – 1 of 3
      Advantages of Probate
• A court supervised distribution of property to heirs

• Protects creditors by insuring that estate debts are
  paid

• Bars future creditor claims against the estate

• Documents the title and the transfer of property to
  others




                       Estate Planning – 1 of 3
    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




                       Estate Planning – 1 of 3
              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




                           Estate Planning – 1 of 3
      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




                       Estate Planning – 1 of 3
           Operation of Law
• Right of Survivorship- JTWROS or Tenancy by the
  Entirety
• Joint bank accounts
• Government Savings Bonds: co-ownership
• Dower and Curtesy
• Life Estates
• POD accounts- Totten trusts and gifts causa mortis
• TOD accounts
• General powers of appointment exercised or released
  by will at death




                     Estate Planning – 1 of 3
        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




                       Estate Planning – 1 of 3
                       Trusts
• Funded revocable trusts avoid probate

• Irrevocable trusts avoid probate

• Property in a trust also avoids ancillary probate




                       Estate Planning – 1 of 3
                Poll Question # 9
Which property avoids probate?

A.   Property held as a Tenant-in-Common
B.   Property titled Tenancy by the Entirety
C.   Life insurance policy owned by the decedent who is not the insured
D.   Community property passing to the surviving spouse
E.   Life insurance proceeds payable to the decedent’s estate




                              Estate Planning – 1 of 3
                Poll Question # 9
Which property avoids probate?

A.   Property held as a Tenant-in-Common
B.   Property titled Tenancy by the Entirety
C.   Life insurance policy owned by the decedent who is not the insured
D.   Community property passing to the surviving spouse
E.   Life insurance proceeds payable to the decedent’s estate



Feedback:
This avoids probate because it passes by Operation of Law to
the surviving spouse.




                              Estate Planning – 1 of 3
       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



                       Estate Planning – 1 of 3
 Three 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
  beneficiaries

• Beneficiary- has equitable title to trust property




                   Estate Planning – 1 of 3
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 the beneficiary’s present interest has
  ended

• Reversionary interest- property reverts back to the
  grantor after the beneficiary’s interest has ended


                       Estate Planning – 1 of 3
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




                       Estate Planning – 1 of 3
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


                       Estate Planning – 1 of 3
Disadvantages of Revocable Trusts
   Costs associated with establishing the trust:

   •   Attorney fees
   •   Transfer costs
   •   Trustee fees

 Revocable trusts offer no creditor protection




                        Estate Planning – 1 of 3
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 after 2010




                      Estate Planning – 1 of 3
          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




                      Estate Planning – 1 of 3
Income Taxation of Irrevocable
           Trusts
• Non-grantor trusts- income that is not distributed is
  taxed to the trust

• Grantor trusts- income that is not distributed is
  taxed to the grantor

• Distributions made to trust beneficiaries are taxed at
  the beneficiary’s marginal tax rate




                      Estate Planning – 1 of 3
              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




                      Estate Planning – 1 of 3
   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



                       Estate Planning – 1 of 3
         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




                       Estate Planning – 1 of 3
               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




                       Estate Planning – 1 of 3
             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 $11,200 in 2010.
• 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.


                     Estate Planning – 1 of 3
   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.




                       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.



                         Estate Planning – 1 of 3
     Beneficiary Deductions
The beneficiary gets deductions for depreciation and
  transaction expenses when the trust property is sold,
  and the beneficiary can deduct investment expenses
  on Schedule A.

Example: If a trust distributes $20,000 to a beneficiary,
  the beneficiary may only need to report $19,000 of
  DNI due to the investment expense deduction.




                      Estate Planning – 1 of 3
      DNI and Capital Gains
• Simple trust- Capital gains are not included in
  figuring DNI. Capital gains are assigned to corpus and
  taxed to the trust.

• Complex trust- Capital gains are considered a return
  to principal and are excluded from DNI unless they are
  distributed to a beneficiary or set aside for charity.
  Capital gains that are not distributed are taxed to the
  trust. Distributed capital gains are taxed to the
  beneficiary.




                      Estate Planning – 1 of 3
             Poll Question # 10
Which statement is NOT correct?

A. Property transferred into an irrevocable trust is generally not
   subject to gift tax.

B. A remainder interest is a future interest.

C. In a simple trust, capital gains are assigned to corpus and taxed to
   the trust.

D. The rule against perpetuities determines how long a trust can exist.

E. Income in a trust is taxed to the grantor if it is used to pay for life
   insurance premiums on the grantor’s life.




                              Estate Planning – 1 of 3
             Poll Question # 10
Which statement is NOT correct?

A. Property transferred into an irrevocable trust is generally not
   subject to gift tax.

B. A remainder interest is a future interest.

C. In a simple trust, capital gains are assigned to corpus and taxed to
   the trust.

D. The rule against perpetuities determines how long a trust can exist.

E. Income in a trust is taxed to the grantor if it is used to pay for life
   insurance premiums on the grantor’s life.

Feedback: Property transferred into an irrevocable trust is
generally subject to gift tax.



                              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 next 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




                      Estate Planning – 1 of 3

				
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