Estate Planning Final (Chapters 1-5)
Split Gifts for GSTT
If a couple splits gifts for tax purposes, then the gist is treated as split for GST purposes as well.
Legal Ownership
Implies that the party has title to the property. Generally the legal owner possesses all rights, duties, responsibilities, and privileges associated with the property. Only the person with legal ownership of property can convey that property to others.
Real Property
Includes land and anything permanently attached to the land (such as building, treesm and items permanently affixed to buildings, called fixtures)
Tenancy in Common
Interest in property held by two or more related or unrelated persons. Each owner is referred to as a tenant in common. Tenancy in common is the most common type of joint ownership between nonspouses. Each person holds an undivided, but not necessarily equal, interest in the entire property. Each co-owner does not own a designated portion of the property instead each co-oner owns an interest in the entire property.
Life Estate
Interest in property that ceases ipon the death of the owner of the interest and provides the owner of such interest with a right to the income or the right to use the property, or both. Upon termination of the life estate, the property is transferred to the remainder beneficiary who owns the underlying property and any right to income or use at the death of the life estate owner.
Joint Tenancy with Right of Survivorship
Joint Tenancy is an interest in property held by two or more related or unrelated person called joint tenants. Each person holds an undivided, equal interest in the whole property. Each joint tenant shares equally in the income and expenses of the property The right of survivorship is implied with this form of ownership, and at the death of the first joint tenant, the decedents interest transfers to the other joint tenants outside of the probate process according to state titling law. Often referred to as JTWROS Unlike with Tenancy in Common, in some instances co-owners may be liable for the debts of the other co-owners to the extent of the property held in joint tenancy. Thus, a creditor of one co-owner may be able to seize the entire property to satisfy a debt of one owner.
Gifts for Minors
Minors are not generally permitted to own property (i.e., own a present interest required to qualify gift for annual exclusion); the following gifts to minors can qualify for the annual exclusion without giving minor unrestricted right to immediate use
Form 709 (Gift Tax Return)
Must be filed by April 15 of the year following the gift. Can be extended by extending the income tax return. Donor is primarily liable for gift tax, but the donee can become responsible if the donor does not pay
Devisee
Person who inherits real property under a valid will
Legatee
Person who inherits under a valid will
Heir
Person who inherits under intestacy laws
Mental Blocks for Estate Planning
Planning for one's passing induces extensive anxiety, which interferes with the clients ability to engage in effective planning
Probate Estate
Property passing through the probate process (via will or intestacy law)
Advantages of Probate
Protects the decedent - Fulfill the decedents wishes (Court can take evidence to determine testators intent where provisions are ambiguous or inconsistent, settle dispute claims) - Protects the Executor, the legatees and the heirs 1. Orderly legal administration to prevent one heir from taking inappropriate priority over the other 2. Clean title to heirs and legatees 3. Requires notice such that creditors and heirs have an opportunity to be heard - Protects the creditors 1. Makes sure debts are paid
Gifting Strategies
Reducing the gross estate at death for federal estate tax purposes (Chapter 6) through tax efficient lifetime gifts •Direct Gifts: Effective and efficient •Gifts of Appreciating Property •Gifts to Spouses -Historically used to equalize the estates (so each spouse has estate assets to utilize applicable estate tax exemption amount (Chapter 6); less important with portability introduced in 2010) •Gifts to Minors -Custodial accounts, 529 Plans, 2503 and Crummey trusts
Testate
State of dying with a valid will
Intestate
State of dying without a valid will
Tenancy by the Entirety
Tenancy by the entirety is similar to joint tenancy between a married couple in that there are four key components that they share: 1. Tenancy be the entirety applies to joint ownership only between married couples 2. Neither tenant is able to sever their interest without the consent of the other tenant 3. Property ownership interest is automatically transferred to the surviving spouse upon death, and 4.It may involve the ownership interest of either real or personal property
Term Interest
Term interest is interest in property that grants the golder the right to use the property for a definite term (number of years). A term interest may grant right to income of use of the property or both. At the end of the term interest, the property is transferred to the remainderman.
Sole Ownership (Fee Simple):
The complete ownership of property by one individual. Essentially it means that the owner has all right associated with the property including the right to use, sell, gift, alienate, convey, or bequeath the property. In this case the owner has the unfettered right to transfer the ownership interest in the property during lifetime (gift,sale) or at death by a will. Often referred to as Fee Simple Absolute The Entire Fair Market Value of a solely owner propert interest is inclided in the owners gross estate for federal estate tax purposes.
Probate Process
The legal process of changing title to the decedent's assets from the decedent to the heirs and legatees
Broad Definition of Estate Planning
The process of accumulation, management, conservation, and transfer of wealth considering legal, tax, and personal objectives
Unauthorized Practice of Law
The proffering of legal advice or services by one who is not a licensed attorney in the governing jurisdiction (state)
REversionary interest
The remnant of an estate that the grantor holds after granting a life estate to another person.
Equitable Ownership
The right to enjoy the benefits of the property. This is a form of ownership that is typically associated wit the use of the property. Legal hold absolute title but equitable hold temporary title to the property. The equitable owner reaps the rewards of the property ownership through the use of the property Benefits may include: 1. The right to possess the property 2. Right to enjoy the property 3. Right to use the property 4. Right to receive income from the property
Probate Titling Impact on Inclusions in Probate Estate and Gross Estate:
The way property is titled is of importance to estate planners for a number of reasons which among these is the impact of property title on whether the property is included in the probate estate or the gross estate The Probate process is the legal process of changing title to the decedent's assets from the decedents to the decedent's heirs or legatees. The Probate Estate refers to property that transfers at death via the probate process (by will or state intestacy law).
Intestacy
To die "intestate" is to die without a valid will. To die in "testate" is to die as someone who has a valid will If a decedent who dies with a will that does not dispose of all probatable property is said to die "partially intestate
Effective Transfer
When a person's assets are transferred to the person or institution intended by the transfero
Efficient Transfer
When transfer costs are minimized consistent with the greatest assurance of effectiveness
Per Capita at Each Generation
a system for distributing property in which distributees of the same generation take equal portions of a share determined by right of representation at the generation with living members closest to the decedent
Tangible personal property
consists of all property that is not realty (not affixed to the land and generally movable) and that has physical substance
Who needs estate planning?
everyone needs a basic estate plan to address healthcare issues, propety management, and ultimate transfer of property according to their wishes.
Per Capita
for each person; in relation to people taken individually.
Intangible personal property
is property that is not real property is without physical substance (such as stocks, bonds, patents, and copyrights)
529 Plan accounts
limited purpose: qualified education expenses)
Per Stripes
the method of dividing an estate where a class or group takes the share which the deceased would have been entitled to, and not as so many individuals, i.e., by right of representation
Crummey Provision
•A "Crummey" power in a trust allows a beneficiary to withdraw some or all of any contribution to a trust for a limited period to create a gift of a present interest, qualifying gift for annual exclusion •Crummey withdrawal "right" or "power" •Trustee must provide "Crummey notice" informing beneficiary that a contribution was made to the trust, specifying the beneficiary's power of withdrawal, procedure to exercise power, deadline to exercise the power •Typically used with life insurance trusts to qualify funds donated to pay life insurance premium for annual exclusion •Beneficiary is not expected to exercise the power or withdraw the funds •When beneficiary lets the power LAPSE, who benefits? Is there a taxable gift to another beneficiary? •5/5 Lapse Rule (in tax code) -Taxable gift occurs when the power to withdraw in excess of $5,000 or 5% of the trust assets (>$100,000) is lapsed by the powerholder -Only comes into play when trust has >1 beneficiary (can't make taxable gift to oneself) -The resulting gift does not qualify for the annual exclusion, as it is a future interest -As a taxable gift, it must be disclosed on a gift tax return -Trusts have complex terms to avoid gifts (Chapter 8 p. 305-306)
Codicils
•A codicil is document that modifies, explains, or amends a will •It is a separate document that must meet all the legal requirements of a will •The testator must be competent each time a codicil is written •Frequently used due to a change in family circumstances (birth of child) and is less expensive than drafting an entire new will
Limitations of Wills
•A will does not prevent disinherited parties from contesting the will (in Colorado, a no-contest clause ("in terrorem") in a will is unenforceable if the plaintiff has "probable cause" to challenge the will) • •Courts can invalidate certain restrictions or sections of a will (e.g., excessive constraints on transfer of assets; voidable as against public policy) • •A will does not supersede automatic transfers upon testator's death (i.e., nonprobate transfers: POD, beneficiary designations, joint tenancy) • •A poorly drafted will may be found to be invalid due to lack of capacity or undue influence, or a testator's wishes may not be clearly understood •A surviving spouse has a statutory right to elect against a will
Advantages/Disadvantages of Power of Attorney
•Advantages -Can help eliminate the need for court appointment of a legal representative (generally a conservator) (necessary if Principal lacks capacity to execute a Power of Attorney) -Allows agent to sell or manage property, pay bills and taxes, etc. during incapacity -Agent has fiduciary responsibility and liability under state law, but is not court supervised like a guardian or conservator •Disadvantages -A "rogue" Agent could abuse the power (a REAL, very common problem) -A well-intending Agent could exercise poor judgment.
Unauthorized Practice of Law
•Certain activities are clearly reserved for licensed attorneys such as drafting legal documents. The practice of law is regulated by the state Supreme Court. Attorneys are JDs and bound by ethical rules addressing potential conflicts of interest, and imposing duties of competency, confidentiality, zealous representation of client, etc. •The attorney must be licensed to practice in the jurisdiction where the legal services are provided - probate, trust, real estate laws vary from state to state •A financial planner should refer a client to a licensed attorney for any legal advice (including updating out-of-state documents) •Join Inter-professional groups: Estate Planning Councils
Qualified Transfers
•Certain gifts "qualify" as an exception to gift tax treatment for public policy reasons •Qualified transfers are payments a donor makes for donee's benefit directly to a: -Qualified educational institution for tuition, or -Medical care provider for qualifying medical expenses •The key is that it must be paid directly to the institution not to the donee, not even as reimbursement •A qualified transfer does not count against the annual exclusion or applicable lifetime exemption amount - a separate exclusion
Consequences for Failing to Plan
•Client's property transfer objectives may go unfulfilled •Transfer taxes may be excessive •Other transfer costs may be excessive •Client's family may not be properly provided for financially •May disqualify a beneficiary from Medicaid benefits •There may be insufficient liquidity to cover client's debts, taxes, and costs at death •Client may become incapacitated and unable to execute estate planning documents
Side Instruction Letter
•Details the testator's wishes to the executor (and is not a part of the will). Can be used to: •Dispose of specific tangible possessions, if state law allows - typically must be referenced in the will •Express funeral and burial wishes of the decedent •Provide care instructions for disabled family member •While the letter has no legal standing, the executor will generally carry out the wishes of the testator. •Date, sign, and secure with other original estate planning documents - and proceed with caution!
Types of Gifts
•Direct •Indirect •Complete •Incomplete •Reversionary Interests •Net Gifts
Who has to file Form 709
•Everyone who makes a gift unless gifts are: -Within annual exclusion amount - unless spouses are gift splitting -Qualified transfers (excluded) -Transferred to a U. S. citizen spouse or qualified charity Taxable gifts reported on Form 709 will not result in gift tax liability until the lifetime applicable exclusion amount is used up - $12,060,000 in 2022
Valuation of a Gift
•FMV at the date of the gift •Real estate - need appraisal •Publicly traded securities are valued at average of the high and low trading price for the day •Bonds -Present value of the expected future payments •Discounts may be allowed for lack of marketability, lack of liquidity, and lack of control
Collecting Client Information
•Family information (who are the "objects of your bounty?") •Current financial statements (what client owns and how they own it - discuss with client, but review actual legal documentation - client is usually wrong about form of property ownership) •Copies of life insurance policies, annuity contracts (before they get lost?) •copy of current beneficiary designations, and forms to change beneficiary if necessary •Existing Wills and trusts •Identification of Agents for Medical and Financial Power of Attorney during disability •Previously filed returns (i.e., income and gift tax (form 709s - a cumulative calculation) •Other pertinent information (Agreements governing business interests)
Statutes Affecting Wills
•Forced Heirship -Requires a certain portion of the estate be transferred to the testator's children in certain situations (only in Louisiana - civil vs. common law) •Marital Elective Share -Allows testator's surviving spouse to elect a statutory minimum share of the probate and nonprobate estate (can be waived or modified in a prenuptual or marital agreement) •Felonious Homicide Statutes -Prevents legatees and heirs who have been convicted of intentionally killing the testator from inheriting under the testator's will or through intestacy ("a murderer shall not inherit") •Divorce Statutes -Invalidate fiduciary appointments and bequests to a former spouse (beware ERISA conflict) •Anti-Lapse Statutes -Codify the presumption that if a close relative such as a child or sibling is not alive then the testator would have wanted the assets to flow to their surviving heirs (testator can override: "to my sister, but not her descendants.")
Statue of Limitations
•Generally 3 years from filing (due date) •No time limitation if failure to file, inadequate disclosure, or fraud •It is important to file a timely gift tax return where a valuation discount (e.g., a minority interest stock) may be subject to reasonable differences of opinion. Consequence will be valuation at time of later filing, when gifted property may have appreciated.
Statutory Wills
•Generally drawn by a licensed attorney and comply with the laws for wills of the domiciliary state of the decedent (in Colorado, compliant wills are "self proving," as the formalities increase likelihood that testator is acting intentionally)
Income Tax Issues Related to Gifts
•In general the donee will take the adjusted basis and holding period of the donor ("carryover basis") •There are two exceptions you will not be tested on: •When the fair market value of the asset given is less than the donor's basis - donee takes dual basis •When Donor pays gift tax on appreciated property - donee's basis will increase by the pro rata share of the gift tax paid on the appreciation
Indirect Gift
•Indirect transfer by donor for the benefit of a donee ²Donor pays donee's bill or forgives loan to donee ²Purchaser titles property jointly with another who has not contributed to purchase ²Below-market loans •Imputed interest is phantom taxable income for lender and also deemed to be a taxable gift •Imputed interest tied to the borrower's net investment income because it shows the borrower's capacity to pay a market rate of interest, supporting gift treatment. •May be eligible for annual gift tax exclusion •If loan <$10,000, free of income tax and gift tax consequence
Future Interest Gift
•Interest that is limited in some way to a future date or time •Donee's right to the property is contingent upon some future date or time •Examples -Mandatory beneficial interest in future distributions of trust income or principal ²Discretionary beneficial interest in trust income or principal, under ascertainable standards of HEMS -Beneficial interest in residuary trust estate at death of current beneficiary (remainderman)
Common Clauses
•Introductory Clause -Identifies testator, testator's residence, state of domicile, and next of kin •Declaration Clause -Identifies document as last will and testament of testator -Revokes all previous wills and codicils of testator •Bequests Clause (Specific Legacy) -Directs specific property to be passed to others ("off the top") •Residuary Clause -Distributes the residue (rest or balance) of the estate •Appointment of Fiduciaries: Names decedent's choices for Executor/Executrix and successors, and trustee(s) of any testamentary trusts •Guardianship Clause: Names the guardian for minors or other legal dependents •Tax-apportionment Clause •Attestation Clause -A provision at end of the document signed by the witnesses as authentication of testator's will •Self-Proving Clause -A declaration signed by the notary stating that he witnessed the testator and the witnesses sign the will (requirements determined by state probate code)
Probate Laws
•Laws of the state where Decedent resided at death apply - legal domicile •"ancillary" probate may occur under laws of state(s) where decedent's real property is located
Living Wills/Advance Medical Directives
•Legal document expressing an individual's last wishes regarding life sustaining procedures, under specific circumstances - a terminal condition and inability to communicate •Absolves agent from burden of feeling he/she is totally responsible for "pulling the plug" •There may be a statutory exception for a pregnant patient -Some states have an electronic registry so the document can be filed and easily retrieved
Legal Capacity to Execute a Will
•Mental Capacity required to make a will is "sound mind" The party making the will must: •Understand what is being done by writing of will •Recognize and recollect the property being disposed by the will •Recognize the relationships of relatives and friends who have any claim to testator's assets (who are the "natural objects of your bounty"?) •"Sound Mind" Rules -The legal capacity is not as rigorous as capacity rules required to form legal contracts -Elder financial abuse is an increasing focus of state legislatures and district attorneys - many financial professionals now have statutory reporting duties -Will contests are about lack of capacity and/or undue influence
Multiple Donee Strategies
•Never gift property in a loss position...sell it instead (harvest the loss to reduce taxable capital gains, and gift the cash proceeds instead) •Gift property with the greatest appreciation potential to the youngest donee, who has time to wait •Gift appreciated property to tax exempt charities to avoid the capital gain taxes •Gift income-producing property to the donee in the lowest marginal income tax bracket so that the income is subject to the lowest possible income tax - e.g., a retiree with fixed income
Characteristics of a gift
•Occurs during lifetime of donor •Voluntary - (e.g., not court-ordered support) •Transfer of property is complete (regs: donor must part with "dominion and control") •Without receipt of full and adequate consideration in return •Requires "detached and disinterested generosity" (no "quid-pro-quo", not stolen)
Gifts of a present interest
•Only a present interest gift will qualify for the annual exclusion •Present interest = unrestricted right to the immediate use of the property. Donor has parted with "dominion and control" •Gifts in trust are a gift of a future interest
Spouse Status (in estate planning) factors into:
•Property titling -laws on joint tenancy, community property, tenancy by the entirety •Probate: spousal rights and guarantees •Wealth transfer taxes: •gift splitting •special contribution rule of estate inclusion •marital deduction (relevant in Windsor)
Single Donee Strategies
•Rarely wise to gift cash (not strategic; no leverage for appreciation, or imbedded taxable income) •The donor should prepare a current balance sheet with a forecast of what is likely to appreciate the most •Transfer the asset likely to appreciate the most •This will remove highly appreciating assets from the donor's gross estate and the appreciation will occur in the hands of the donee
Other Clauses
•Simultaneous Death Clause •Survivorship Clause - not to exceed 6 months to qualify for estate tax marital deduction •Disclaimer Clause ("post mortem" estate planning - Chapter 12) -Disclaiming party cannot have benefited. -Must be made in writing and within (9) months. -Person disclaiming can't direct disposition of property. •Contingent Legatee Clause ("Remote contingent beneficiary") •No-Contest Clause - In Terrorem Clause -Need something to lose -(Not enforceable in Colorado if plaintiff has "probable cause" to contest)
Advantages of a Properly Prepared and Valid Will
•The decedent with a valid will can: • •Choose and appoint an Executor/Executrix to serve as the decedent's personal representative to administer the estate, with or without bond (modern term: Personal Representative) •Provide for the orderly transfer of the decedent's probate property - assets that are not automatically transferred at death by beneficiary designation or operation of law (joint tenancy) •Designate a guardian and conservator for minors and or dependents •Create a testamentary trust •Make testamentary transfers to nonfamily members or charities (these are never intestate heirs) •A will can help to minimize the estate tax burden through proper utilization of the unlimited marital deduction (Chapter 10) • •A will can provide for disinheritance of unworthy heirs •A will can direct the estate's share of any tax burden to be paid as well as sources of funds to be used to pay such taxes
Trusts for Minors
•Trusts for minors under IRC Section 2503(b) and Section 2503(c) - deemed a present interest qualifying for annual gift tax exclusion
Impediments to Estate Planning Goals
•Unwillingness to face prospect of incapacity or mortality •Procrastination •Current good health •Costs •Lack of knowledge •Lack of awareness of the value of assets •Lack of experience with costs and consequences of failure to plan
Avoiding Will Contests
•Will contests often occur in nontraditional relationships (e.g., non-married or cohabitating couples) where survivor lacks protection of spousal status •Being open with legatees before death may alleviate some of the conflict. •Well-drafted wills can often discourage will contests. •Alternative to wills may be more appropriate for those in nontraditional relationships (lifetime gifts, trusts, property titling). •Validation of the will by the courts before the testator's death may be an option if the state law allows. (Not Colorado!)
Basic Document in an Estate Plan
•Wills •Side Letters of Instruction •(burial wishes) •(guidelines for exercise of discretion) •Powers of Attorney for Property ("financial" POA") •Durable Powers of Attorney for Health Care ("medical POA") •Living Wills or Advance Medical Directives ("5 wishes") •Do Not Resuscitate Orders (DNRs)
Nuncupative Wills
•a lawsuit waiting to happen -An oral dying declaration (usually only covers tangible personal property as opposed to realty and intangibles) made before sufficient witnesses -Not valid in all states (must be specifically authorized by statute to counter common law Statue of Wills, whereby the Crown granted landowners the right to dispose of land with a written will)
Complete Gift
•are gifts that have come to fruition -The donor has released all control over the asset and the donee can be identified, has accepted delivery
Gift Tax
•excise tax on the right to transfer assets to another person during life - prevents avoidance of other taxes, such as shifting income producing assets to lower bracket taxpayers, or avoiding estate tax at death
Uniform Probate Code (UPC)
•is a model code, but may or may not be adopted completely by any state •Eliminated statutory commissions •Introduced informal, unsupervised proceedings •Introduced as a national model in 1969, CO adopted it in 1973
UTMA accounts
•ownership in a named custodian, converts to donee's ownership upon reaching age of majority (18 or 21, depending on state)
•Holographic Wills
- (stop gap measure for critical changes while legal docs are being updated formally?) -A will written in the testator's handwriting (not typed) -The will must be signed and dated by testator -No witnesses are required
Disadvantages of Probate
- Complex and takes time 1. Generally takes 6-24 months 2. Assets may be "tied up" while the claims are heard and settled - Monetary Expenses 1. Court costs 5-10% (sometimes up to 20%) 2. Ancillary probate (probate in a domicallary state for ancillary property owned by the decedent) 3. Income Tax Reporting: estate is a taxpayer - Loss of Privacy 1. Court proceedings are open to public scrutiny
Wealth Transfer Expenses
- Lawyers Fees - Accountants Fees - Cost of Documents - Court Fees - Transfer Taxes
Estate Planning Team
- attorney - CPA - life insurance consultant - trust officer - financial planner
Risks to Dying Intestate
-A surviving spouse may receive the same share of a decedent's probate estate as a child (1 child vs. 10 children) -A spouse may share assets with in-laws. -The decedent's children are usually treated equally in intestacy, which may not be equitable - The Probate Court will appoint an administrator and require a surety bond, increasing the cost of probate. -The decedent with a valid will can appoint an executor to serve (and without bond)
Gift is not taxable if
-Incomplete - e.g., revocable -Involuntary - e.g., support obligations, divorce property settlement -Compensation - e.g., business context -"Exempt" - e.g., political contribution -"Excluded" - eligible for the annual exclusion -"Qualified" - direct payment of tuition or medical expense
Electronic Wills
-Model statute presented in 2019: Uniform Electronic Wills Act
•Joint Will (aka in Colorado, "contract to will")
-One will for two people -At the death of the first person, the survivor is contractually bound by the joint will -Elements of a valid contract required - consideration, offer & acceptance, disclosure of material facts (financials) -Modern practice is a statutory marital agreement, with marital deduction planning
Wealth Transfer Taxes
-Promotes a "healthy" democracy nKeeps economic inequality in check -Prevents concentration of wealth and power in an unelected few nFairness: inheritances are unearned windfalls to survivors, while others pay income tax on earned income -There are sufficient exemptions, exclusions and loopholes to remove concern from all but the wealthiest, who may still pass great wealth to survivors with estate planning -Provides valuable tax revenue for the government to run properly -Contributes to deficit reduction nIncentivizes charitable giving -Frees up financial resources for productive use in the economy -Wealth transfer taxes are progressive
Revoking a Will
-Simply destroy the old will by shredding or burning it -Create a new will specifically revoking the old one
•Incomplete gifts are gifts that have not yet come to fruition
-They are not taxable gifts for gift tax purposes (donor has retained an interest or power) (e.g., power of revocation) -Joint bank accounts? Not taxable upon creation as with titling real property in JT with a party who has not contributed equally to purchase. With joint bank account, each joint tenant has power to withdraw the entire account. Gift occurs only when JT withdraws funds in excess of funds contributed.
Transfer Objectives
-Transfer property to desired beneficiaries -Minimize taxes, maximize assets to heirs -Avoid probate process -Use lifetime transfers - gifts -Meet liquidity needs at death -Plan for financial support and care of children -Plan for incapacity of transferor -Provide for needs of surviving spouse -Fulfill charitable intentions of transferor
2503(b)
-Trust term may continue for beneficiary's lifetime, but must distribute income to beneficiary annually •Annual exclusion available for the present value of the income interest •Income distribution generally unacceptable to clients
Mutual/Reciprocal Wills
-Two identical wills leaving all assets to the other (usually spouses) -Sometimes referred to as Sweetheart wills -These wills do not bind the other party to prevent them from changing them in the future
If gifts are taxable
-Valuation discounts may apply -Marital or Charitable deduction may apply -Donor may have remaining lifetime exemption/credit to use
Appointment of Personal Representative
1. For a testate estate: An executor who is issued letters Testamentary 2. For an intestate estate: An Administrator, who is issued Letters of Administrastion 3. A surety bond may have to be posted (Series H)
Estate Planning Goals and Objectives
1. Fulfill property transfer wishes 2. Minimize transfer taxes 3. Minimize Transfer costs 4. Fulfill healthcare decisions 5. Provide needed liquidity at death 6. Maximize net assets to heirs
Seven Basic Steps of the Estate Planning
1. Gather and analyze the information necessary to understand the client's personal and financial circumstances, including the client's current financial statements and existing estate planning documents 2. Identify and select the client's transfer objectives, including family and charitable objectives 3. Analyze the client's current estate plan and potential alternative courses of action 4. Develop a comprehensive plan of transfers consistent with all information and objectives 5. Present the estate planning recommendations 6. Implement the selected estate planning recommendations 7. Review the estate plan periodically and update the plan when necessary (especially for changes in family situations)
Psychological barriers include
1. Indecisiveness in terms of heirs 2. Concern about how equal or unequal gifts or bequests will be perceived by the potential stakeholders 3. Hoarding disorders which make it difficult to part with even small assets 4. Decision fatigue resulting from numerous amounts of decisions that are required in estate planning
Tools of Wealth Protection
1. Life insurance 2. Disability insurance 3. Long-term care insurance 4. Business disability insurance 5. Medicare (gov) 6. Social Security (gov)
State Probate law determines PR's compensation
1. PR distributes estate 2. Specific Bequests 3. Residuary Estate 4. What if there are not enough assets to satisfy all bequests? The bequests are reduced proportionately ("abatement")
Estate Administration
1. Posts legal notices (can shorten creditor claim period in CO) 2. Marshal (collects decedents property and appraises 3. 4'their value: duty to create an inventory of the decedent's estate for heirs/legatees/beneficiaries 4. Secures and protects estate assets 5. Collects income estate assets 6. Pays or challenges the decedents debts and taxes pays expenses and taxes of estate 7.Duty to provide an ACCOUNTING to heirs/legatees/beneficiaries of receipts and disbursements during the accounting period
Methods for Transferring assets at death
1. Probate Process 2. Operation of Law (statutory law governing joint tenancy of real property and "multi-party accounts") 3. Beneficiary Designation- through contract law (insurance policy or retirement account, transfer on death statutes 4. Trust Ownership- if the settlor has transferred property ownership to a trust, the trust does not "die" with the settlor; at the settlor's death the trust agreement provides for a successor trustee and distributions to beneficiaries
In our legal system, all property interests are classified into one of three categories:
1. Real property 2. Tangible personal property 3. Intangible personal property
- Opening Probate
1. Someone produces the original will 2. Party with custody of the will must lodge it directly with the probate court with jurisdiction (decedents domicile) 3. An interest part petitions for appointment as the Executore/Personal Representative/Administrator and for acceptance of the will to probate 4. Notice of appointment and probate required to devisees under the will and to heirs at law (in case the will is deemed invalid)- another disadvantage of probate
The Probate Estate excludes property passing by...
1. State Contract Law à Beneficiary Designation 2. State Titling Law à Joint Tenancy with right of Survivorship 3.State Trust Law
Types of Wills
1. Statutory Wills 2. Holographic Wills 3. Nuncupative Wills 4. Mutual/Reciprocal Wills 5. Joint Will
There may also be cases where the client does not have a valid will such as...
1. The decedent did not comply with the testamentary requirements of the domiciliary state at the time of the execution of the will 2. If the decedent moved to another state of domicile and failed to update the will to meet the legal requirements of the new state (however, if the will is valid in a previous state of domicle, then it may be held to be valid in a new domicile 3. The decedent did not satisfy the necessary requirements (such as testamentary competence) to execute a will
The basic documents used in estate planning include
1. Wills 2. Side letters of instruction 3. Powers of attorney for property 4. Durable powers of attorney for health care 5. Living wills or advance medical directives 6. Do not resuscitate orders
Probate Process: determined by state probate code - varies even with Uniform Laws
1.. Opening Probrate 2. Appointment of Personal Representative 3. Estate Administration 4. State probate law determines PR's compensation
Transfer Tax
40% since 2015
Powers of Attorney
A Power of Attorney is a legal document where a Principal authorizes a trusted person as his Agent to act on the principal's behalf, for the benefit of the principal •Powers can be General or Limited to specific circumstances or transactions •Financial powers and medical decisions are typically in separate powers of attorney (financial agent/medical agent) •The agent is a fiduciary for the principal •May be revoked at any time by the Principal, unless incapacitated •Does not survive the death of the Principal •Durability Feature -Power remains in effect even if the principal becomes incapacitated or disabled •Springing Power -A power that "springs" into existence upon some defined event or determination (e.g., the principal is unconscious or leaves the country) (downside - not "ready to go" - proof of incapacity required)
Direct Gift
A direct payment of cash or transfer of property from one person to another
Digital Assets
A special form of intangible personal property that has been increasing in importance, Section 2(10) of the revised uniform fiduciary access to digital assets act, which has been adopted in 47 states and the district of Columbia as of the date of this writing. Digital assets may included stored information on a user's computer and other digital devices, social media accounts, information uploaded to websites, and catalogs of the content of electronic communications.
Wills
A will is a legal document that gives the testator (will maker) the opportunity to control the distribution of the testator's property at death and thus avoid property distribution according to state intestacy law (A distribution scheme provided by each state for those individuals that die without a valid will) Any assets do not automatically transfer upon the tesators death under state contract laws, state property titling law, or state trust law (such as retirement benefits with a designated beneficiary, jointly owned property, and life insurance policies) will become part of the probate estate, which is normally distributed according to the will. Will governs how probate assets should be administered and distributed through and from the probate process
2503(c)
Allows income to be accumulated, but trust terminates when minor turns 21 •Annual exclusion available for the entire contribution •Child typically given short window to withdraw at age 21 •
Advantages and Disadvantages associated with probate estate
Both the advantages 1. Avoidance of additional cost, time, and publicity associated with probate estate 2. Avoidance of potential will contest And the disadvantages 1. Loss of control over who will receive the property at death Potential for property to be severed by a joint owner during lifetime
Probate Interests (tile and ownership):
Common among these legal forms of ownership are... 1. Sole Ownership 2. Community Property 3. Tenancy by the Entirety 4. Tenancy in Common 5. Joint Tenancy with Right of Survivorship 6. Other - Life Estate - Usufruct - Term Interest
Community Property
Community Property is a civil law concept designed to protect the property interest of marroed women, and is followed by state in the U.S whose early development was influenced by French and Spanish Law. Married individuals within these state own an equal undivided interest in all property accumulated during their marriage. During marriage, the income of each spouse is considered community property there is a presumption of community property even when property is titled only to one spouse. Community property does not usually have an automatic right of survivorship featire although some states have a survivorship option. When the first spouse dies, one half of the value of the propert will pass through the probate process for retitling per direction of the decedents will or the state intestatcy laws. Each spouses one half interest will also be included in their own federal gross estate This status can be dissolved by death, divorce, or by agreement between the spouses. Specifacally, one spouse can gift their half of the community property to the other spouse thereby creating separate property owned entirely by the donee spouse. (because there is an unlimited marital deduction for gift taxes, such a gift would not create any gift tax liability.
Applicable Exclusion Amount
Credit given to each person that can be applied to the amount of federal estate tax owed by that person at death. 2022= 12,060,000
Why are documents important to an estate planning plan?
Documents effectuate the transfer of property at the death of the testator (the maker of the will), grant powers to others for both property and health care decisions, and direct doctors and hospitals on matters concerning the artificial sustenance of life
Estate Planning Definition
Estate planning is then in essence the measure that takes into account the transfer of property, the methods of effecting those transfers, the risks associated with those transfers. It is also about the process of growing old, or not, and the planning for the financial consequences of each possible outcome
Gross Estate
Everything in the probate estate plus - Property owned at death that passes outside of probate - Certain property transferred during lifetime over which the decedent retained an interest or control Property over which the decedent held a general power of appointment
Other Gift Tax Exemptions and Exclusions
Gifts made to political organizations are exempt from gift tax There is an unlimited charitable deduction for gifts made to qualified charities - Chapter 9 Transfers in a business setting are presumed to be compensation and therefore not a gift (taxable income/compensation to employee unless de minimus) Payments for legal support are not gifts; Legal support of a child does not necessarily stop at age 18 (depends on state law) (e.g., paying rent during college, vs. purchasing a condo and titling in student's name - support or wealth transfer?
Heir vs Legatee vs Devisee
Heir: Are a person's blood relatives and spouse. An heir can include a person's siblings, children, parents, nieces, nephews, grandparents, aunts, uncles, cousins An Heir may not be a legatee if the heir receives nothing under the will Legatee: Someone who inherits property from the deceased person. This might include someone named in the will Legatee may also be a charity or business Devisee: A term that generally describes a person who receives real property under a will
