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Overview of Estate Planning Compilation
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Overview of Estate Planning Compilation
The following are all pages from this module linked as a single file suitable for
printing or saving as a PDF for offline viewing. Please note that this compilation
will not include popup pages. Animations, buttons, links, or images may not
work.
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Overview of Estate Planning
Any property in which you have ownership or an interest constitutes your estate. Financial planning deals
with the accumulation of wealth and preservation of your estate. Estate planning provides for personal
protection and financial security for an individual and his or her family by providing for the care and
support of surviving family members and others, planning for incapacity, and ensuring that estate assets
are properly distributed upon death. However, all of this planning and saving may accomplish little if the
estate is subject to significant legal costs, administrative expenses, and taxes, or is transferred to the
wrong individuals. Knowledge of estate planning laws, estate planning techniques, and tax reduction
strategies is critically important for financial planners who wish to assist their clients with their estate
planning needs.
To ensure that you have a solid understanding of the importance of estate planning and the steps
involved in the estate planning process, the following lessons will be covered in this module:
Introduction to Estate Planning
Fiduciaries
Overview of Trusts
Overview of Transfer Tax
Lesson Objectives
The Overview of Estate Planning
module will give you a broad overview of the concepts, terminology,
process, techniques, and tools of estate planning.
Upon completion of this module you should be able to:
Explain the importance of estate planning
Recognize how the process of estate planning is similar to the financial planning process
Identify fiduciaries and their responsibilities
Understand the basic elements of trusts, and
Explain the transfer tax system and common goals for minimizing gift and estate taxes.
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Introduction to Estate Planning
Estate planning is a process which utilizes financial and legal tools, strategies and techniques to
accomplish specific goals and common estate planning objectives that many people may have. For
example, most people want their property interests passed to rightful beneficiaries at their deaths. They
want to care for and provide financial support for themselves during their lifetime and their family in the
event of incapacity and death. They may want to minimize transfer taxes and plan for the continuity of
income, preserve their assets and protect them from creditors, and manage their assets through trusts in
a tax-efficient manner. They may also wish to fulfill charitable objectives and plan for the disposition of
their business at retirement, disability or death.
All of these different estate planning objectives can be accomplished by an estate planning team which
includes financial planners. A financial planner must coordinate his or her efforts with attorneys, trust
officers, accountants, life insurance agents, and other advisors to help clients accomplish their financial
and personal goals.
To ensure that you have a solid introduction to estate planning, the following topics will be covered in this
lesson:
Reasons to Plan an Estate
Reluctance to Plan an Estate
Lifetime Planning
Estate Planning Process
Estate Planning Team
Selecting an Attorney
Estate Planning Documents
Upon completion of this lesson, you should be able to:
Describe the benefits of estate planning
Understand the factors that contribute to a client's reluctance to plan his estate
Associate estate planning with various stages of financial life cycle planning
Identify common considerations that determine the selection of estate planning strategies, and
Explain the role of the financial planners, attorneys, and other advisors in the estate planning
process
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Reasons to Plan an Estate
An estate is defined as the rights, titles, or interests that a person, living or deceased, has in property.
The manner in which assets are owned determines how they will pass at death and to whom they will
pass. Without proper planning, property could pass to the wrong person in the wrong manner. If someone
dies without a will (intestate) the property will pass according to the state laws. A simple will is often
executed to pass solely owned property to others, and this instrument, along with documents for
incapacity planning purposes, may be all the legal documents that someone with a simple estate may
need. However there are many different reasons to plan an estate, and people who own substantial
assets may need more comprehensive planning.
The following are some reasons why an individual should have an estate plan:
To designate the person(s) who will manage affairs and assets in case of a legal incapacity or
death
To provide financial security and protection to family members.
To control the passing of property interests to desired heirs. An estate plan can transfer particular
assets to named beneficiaries, bequeath general legacies or sums of money to beneficiaries, and
determine how and when the heirs may use the assets bequeathed to them.
To provide a stream of income to the surviving spouse and minor children during the probate
process. If an estate is properly planned, in most cases will contests and other intra-family
disputes can be avoided.
Trusts, guardianships, and conservatorships, all part of estate planning, can ensure that provisions
have been made for minor children. Additionally, proper estate planning can ensure that family
assets are preserved and managed for the benefit of the children and their needs, and for other
heirs as well.
To provide income in the event of a disability, or in other emergency situations. For example, a
stream of income for the lifetime of the surviving spouse; provide for the payment of medical
expenses or other debts; and provide for the benefit and welfare of any minor children or other
family members.
Estate planning can minimize the time and expenses associated with the probate process and
reduce or even eliminate probate expenses through the proper titling of assets or trusts.
Wealthier individuals may have additional tax and nontax reasons to obtain an estate plan:
Proper estate planning can minimize, or in some cases eliminate, taxes such as income, estate,
gift and generation skipping transfer taxes. By doing so, the client will be leaving a greater amount
of property to their family members or other heirs.
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If the client owns a business, proper estate planning can lay the foundation for a business
succession plan or the sale of the company.
Proper estate planning is necessary to guarantee that the person's estate is liquid to pay for post-
mortem costs such as debts, estate administration fees and taxes. If the estate has insufficient
liquidity, major illiquid assets such as real estate or assets that have sentimental value for family
members may have to be sold to satisfy creditors, pay estate taxes, and pay for other
administrative expenses.
To achieve charitable objectives through tax-efficient measures
To provide for professional management of property interests and investments through trusts
To shift income to family members in a lower tax bracket
Although people may share common estate planning goals, each person has distinctive financial, tax and
personal circumstances that require a customized estate plan. Estate plans need to be designed with
built in flexibility to accommodate changes if future circumstances, laws, and estate planning objectives
change.
There are many personal factors can affect an existing estate plan such as:
Health
Death or birth/adoption of family members
Remarriage or divorce
Financial factors that may impact an estate plan include:
Acquisitions or loss of property
Changes in property values
Taxes
Investment performance
Inheritances
Change in tax law
Estate plans need to be reviewed every year or when personal or financial circumstances change to
ensure that personal estate planning objectives continue to be met.
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Reluctance to Plan an Estate
There are several reasons why people may not have estate plans or may decide to delay engaging in the
estate planning process. These reasons include:
The need to accept mortality or the possibility of becoming incapacitated. The inevitability of death
is something that people have not psychologically come to terms with. People assume that
someone else will handle the distribution of their property after their death.
Many people are aware of the potential for family problems resulting from their planning. For
example, hurt feelings, will contests, family arguments over particular assets, and delays and
disputes over estate distribution, executor's commissions and probate-related fees all have a
detrimental effect on the planning of an estate.
Many people are so involved with their families and business affairs that they do not give much
thought to what will happen when they die. They may be aware of the need for estate planning, but
they will "deal with it later".
The process of estate planning requires a significant time commitment to implement. For example,
you will need to decide upon the best people to fill fiduciary roles, the ultimate distribution of your
property interests, how to plan for incapacity and end of life care, and which tools and planning
techniques you should implement to minimize transfer taxes and accomplish estate planning
goals. Time is also needed to meet with attorneys and other members of the estate planning team,
and to implement the action items outlined in the final plan.
There is an expense involved in visiting with an attorney and having documents drafted. For
example, there are legal fees associated with the creation of trust documents, power of attorney
documents, the will, and other legal documents.
Many people are geographically mobile. Because of their frequent relocations, they do not think
much about planning their estates. A person who lives in three or four states in a ten-year period
may not have a concept of permanence. Since state laws may affect estate planning outcomes,
people who move frequently may decide not to engage in planning until they move to a permanent
location.
Estate planning is a process that needs to be monitored and reviewed for changes in family
circumstances and as tax laws change. These periodic reviews will require additional time and
legal expenses which are needed to keep the estate plan current.
The fear that they will be giving up control of their assets.
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Lifetime Planning
Estate planning is something that can take place as early as the wealth accumulation years of the
financial planning life cycle. In this climate of financial uncertainty, the need to protect families and their
assets has become more important for all clients.
The following are some of the estate planning decisions that a person may encounter at various life cycle
stages:
1. Wealth accumulation phase
– This is also a family and wealth protection stage. If a client has a
minor child, consideration should be given to who will become the guardian of this child in the
event that one or both parents should die. This can only be done within the provisions of a will. Not
only should the client consider who will become the guardian, but also who will manage the
financial assets for the benefit of the minor children. Additionally, every client within the
accumulation phase of their estate planning should execute powers of attorney over assets and
health care matters. Insurance protection is also needed to minimize risks to property interests and
to protect or supplement income and accumulated assets in the event of disability or premature
death. Property interests need to be titled properly and beneficiary and contingent beneficiary
designations need to be in place for bank accounts, investment accounts, pension plans, IRAs, life
insurance policies and other contracts, to ensure these assets will pass directly to intended
beneficiaries.
2. Wealth preservation phase
– This is the time most clients are determining how the assets they
have accumulated will provide for themselves and/or their spouses during their lifetimes. This
phase typically occurs at or near retirement. Income tax and estate tax consequences of owning
personal and financial assets need to be considered. Estate tax planning strategies, gifting
techniques and trusts may be needed to preserve and transfer assets to others in a tax-efficient
manner. Liquidity planning is also needed at this stage to pay for eventual estate administrative
expenses, taxes and debts, as well as to meet a family's future financial needs. Liquidity planning
is often accomplished through planning with life insurance and trusts.
3. Distribution phase
– The distribution phase of the estate planning process allows the client to
control the distribution of those assets in a cost-efficient and time-efficient manner. Wills, pour over
wills, trusts, marital bypass planning, and buy-sell agreements, are just some of the methods used
to ensure the proper distribution of assets at death.
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Practitioner Advice
It is important to continually monitor your client's estate plan as they go through
life changes and move into each new phase. Practitioners should ensure that
their clients plans still align with their personal and financial goals.
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The Estate Planning Process
An estate planning process is used to develop an estate plan for all clients, regardless of their income
level, the assets they own, or their personal circumstances. An estate plan should address the client's
current financial condition and their projected future financial needs. The estate planning techniques
selected should be appropriate to accomplish the client's objectives. The estate plan should also be
flexible enough to accommodate future revisions when changes in tax laws or personal circumstances
occur.
Whether or not the client realizes it, he or she already has an estate plan. Solely owned property passes
through probate. If the decedent does not have a will, his property will pass to others according to his
state's laws of intestacy. Financial planners must understand the client's current estate plan and identify
any deficiencies. This is accomplished by following the seven steps in the financial planning process
which also relate to the estate planning process. These steps are found in CFP Board's Practice
Standards for the Financial Planning Profession
which provides a framework for the practice of
financial planning.
1. Understanding the client's personal and financial circumstances
2. Identifying and selecting goals
3. Analyzing the client's current course of action and potential alternative course(s) of action
4. Developing the financial planning recommendations
5. Presenting the financial planning recommendations
6. Implementing the financial planning recommendations
7. Monitoring progress and updating
If the scope of the financial planning engagement includes estate planning, then the estate plan will be
developed with attorneys and other professionals in conjunction with the client's comprehensive financial
plan. The estate plan will be coordinated and integrated with the client's financial planning goals and
financial planning recommendations.
Step 1
: Estate planning involves learning about the client's relationships with family members, the
assets and resources available to meet client goals, how the client wants property interests
transferred to others during life and at death, what degree of control the client wants family
members to have over inherited property interests, and what special bequests the client wants to
leave family members or charitable organizations
Step 2
: Once financial planning and estate planning goals have been established, financial
planners must assist clients in prioritizing these objectives.
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Step 3
: Financial planners evaluate a client's current financial situation and identify the strengths
and weaknesses of their financial position. This review can also reveal whether a client is able to
meet his estate planning objectives and can identify any factors that may limit or affect the
selection of certain estate planning techniques. The planner can discuss with the client the ways in
which current assets will be transferred to others at death, the tax implications of these transfers,
whether the assets will pass to the client's heirs as intended, and the potential costs associated
with these transfers. If the current situation differs from the client's estate planning intentions,
members of the client's estate planning team can determine alternative courses of action.
Step 4
: The financial planner should work closely with the estate planning attorney to ensure the
estate planning recommendations are coordinated with the client's overall financial plan.
Step 5
: The attorney will present the estate planning recommendations to the client.
Step 6
: The estate planning team and the client will determine implementation responsibilities for
the plan, including time frames to accomplish the objectives. The financial planner will determine
what responsibilities and services he will provide in coordination with the client's estate planning
team.
Step 7
: In time, changes in client circumstances, federal and state tax laws, and financial
situations may impact the new estate plan. Estate plans should be reviewed periodically to
determine whether revisions or modifications are needed.
Practitioner Tip
The financial planner should work with the client's estate planning attorney and
other professionals as soon as possible to assist in developing an estate plan
or developing alternatives to an existing estate plan. The estate planning team,
with the attorney in the lead, will develop the estate planning recommendations
and the financial planner will incorporate these planning recommendations into
the client's comprehensive financial plan to meet client goals and objectives.
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Estate Planning Team
When a client engages in the estate planning process, it is important to recognize that the financial
planner plays a key role as a member of the client's estate planning team. The estate planning attorney is
responsible for developing an estate plan and for drafting the legal documents. Financial planners
contribute to the development of the plan through their holistic knowledge of the client's goals and
financial position as well as, their understanding of general estate planning techniques and strategies.
Other important members of the team often include accountants, insurance agents, trust officers, and
other individuals serving the client in an advisory capacity who contribute their special skills, knowledge
and expertise to the development of the estate plan.
Financial planners, as directed by CFP Board Standards of Conduct
who are not sufficiently competent
in a particular area to provide the professional services required under the financial planning
engagement, must gain competence, obtain the assistance of a competent professional, limit or terminate
the engagement, and/or refer the client to a competent professional. An attorney is the only professional
authorized to practice law and financial planners must refer clients to attorneys and ensure they do not
give clients any specific estate planning advice to avoid the unauthorized practice of law.
Financial planners should work with the client to help them formulate and prioritize estate planning goals.
They should also work with the client's attorney and the client to implement and monitor the estate plan
once estate planning recommendations have been developed and finalized.
There are many actions financial planners can take to implement, monitor or assist in updating a client's
estate plan. Some examples include:
Review and change improper beneficiary designations on investment accounts, life insurance
policies, and retirement accounts
Calculate the value of the client's estate to determine if he or she is subject to federal or state
estate taxes
Determine the value of the probate estate and help clients retitle assets and fund revocable trusts,
if needed
Review wills, trusts, deeds and insurance policies to coordinate ownership of assets with estate
planning objectives
These actions require that financial planners have good counseling skills to communicate to clients the
importance of having a coordinated and properly executed estate plan.
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Selecting an Attorney
The duties of the attorney will depend on the client's stage in the estate planning process, whether
accumulation, conservation or the distribution phase. Only the attorney can draft the appropriate estate
planning documents. These range in complexity and length from a simple durable power of attorney and
will to the complete restructuring of the nature of the client's estate plan.
An estate planning attorney must gather data regarding the client and his or her family or other potential
beneficiaries and their individual circumstances, including information regarding the client's sources of
wealth, income, assets, liabilities and expenses, as well as the client's financial goals and fears. The
attorney must then assemble this data and relate each of these objective facts and subjective feelings to
each other, and be able to ascertain the client's current position and the extent of his or her weaknesses
in the following areas:
Liquidity
: Will the client be able to pay for taxes and other expenses during his or her lifetime
without the need for a forced sale? Will the executor be able to do the same after death?
Disposition of assets
: Are they going to the right person at the right time in the right manner?
Adequacy of capital and income
: Does the client have enough capital and income in the event
of death or disability, at retirement, for specific family needs such as the care of a special needs or
physically handicapped child, or for charitable bequests?
Stability and maximization of value
: Has the client put a floor under, and then maximized, the
value of the assets he or she currently owns? For instance, the value of a business without
adequate liability or fire insurance coverage has not been stabilized, and the value of a partnership
without a fully funded buy-sell plan has not been maximized.
Excessive transfer costs
: Is the client paying too much in income taxes, or will the client's estate
pay an unnecessary amount of estate or other death taxes or transfer costs?
Special needs
: Does the client have specific needs or desires that must be met, such as making
gifts to a charity, supporting a relativewith little financial resources, or protecting a spendthrift
spouse or child?
These actions require that financial planners have good counseling skills to communicate to clients the
importance of having a coordinated and properly executed estate plan.
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Practitioner Advice
The attorney should always work with the client and the client's other advisors
to establish priorities and agree on responsibilities. This will facilitate the
successful completion and implementation of the estate plan.
Web Activity
There are a number of resources to help you locate attorneys who specialize in
estate planning. Click here to read about the National Network of Estate
Planning Attorneys(
www.netplanning.com
) and how it can help you locate an
estate attorney in your area. Another resource, www.estateplanninglinks.com
provides links to national organizations for estate planning attorneys.
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Estate Planning Documents
The financial planner must obtain sufficient and relevant client information and documents prior to
developing any financial planning recommendations. The estate planning team will review information
that is gathered from the client through interviews, questionnaires, client records and financial
documents.
Some relevant data collected by financial planners that will be useful for developing an estate plan may
include:
Health status and longevity assumptions, marital status, children, family members with special
needs, domicile, and other pertinent personal data
Whether the client has a current estate planning documents or other necessary documents for
incapacity planning purposes
Where property is located, the way in which property is titled, and whether such titling conflicts with
provisions for distributing property interests through the will
Current assets, liabilities and net worth, and future projections of net worth from future income or
inheritance
The present value of assets included in the client's gross estate and probate estate
The financial needs of the client and family now and into the future
Types of life insurance policies owned, who the person insured is, who owns the policy, and the
cash value and death benefit amounts for each
The provisions of revocable or irrevocable trusts, or intra-family business arrangements
Beneficiary designations for retirement, bank and investment accounts, and for insurance policies
Current tax brackets, projections for retirement years, and past tax returns
Income, benefits and resources available for retirement
Estate planning encompasses both non-tax and tax elements of the planning process. The nontax
elements include the documents which all clients need regardless of the size of their estate, such as:
a will
powers of attorney over assets and health care matters
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a living will
a letter of last instruction
HIPAA Releases
Click here to view a checklist of common estate planning nontax related legal documents.
Other documents or data clients may have pertaining to their financial resources, obligations and
personal situation that are pertinent to an estate planning review may include:
deeds
trusts
statement of financial position and a summary of other assets and liabilities
insurance policies (life, health, LTC, disability, homeowners)
banking and investment account statements
retirement plan and IRA information (Designation of Beneficiary forms)
government benefits (Social Security, Medicare, Veteran's benefits)
tax documents
closely held business documents, and
information about inheritances, windfalls and other large lump sums
Practitioner Advice
Financial planners should obtain documents and information from clients prior
to meeting with the client's estate planning team. An accurate and thorough
data gathering form can be used to obtain most of the information needed to
properly plan the client's estate.
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Fiduciaries
It is impossible to make a proper selection of any member of the estate planning team without a general
understanding of what that individual should be doing and how that person interacts with others who also
have important roles to fulfill. Therefore, it is important that the client gain basic information regarding the
duties of the executor, trustee and estate attorney, as well as the attributes and selection criteria of each
party.
This lesson will establish practical guidelines in the selection process from the point of view of the person
who ultimately must make those choices—the client. To ensure that you have a solid understanding of
the selection of these roles, the following topics will be covered in this lesson:
Examples of Fiduciaries
Selecting an Executor
Executor Fees
Selecting a Trustee
Selection Factors
Upon completion of this lesson, you should be able to:
Identify executor duties and the criteria for selecting an appropriate executor
Specify the duties of a trustee and the selection criteria for choosing a suitable trustee
Distinguish between the factors in selecting a trustee and an executor
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Examples of Fiduciaries
A fiduciary has a responsibility to place a beneficiary's interest first, before his own. Fiduciaries have the
authority to perform special acts or specific duties for others. A principal gives an agent, an executor, a
trustee or others the authority to manage the principal's interests or affairs, depending on the type of
fiduciary selected. Fiduciaries who manage property interests must make every effort to preserve and
protect the property and make prudent investment decisions with the goal of increasing the property's
value. Fiduciaries that are selected by the principal to act as a power of attorney may be given the
authority to make business, financial and legal decisions on the principal's behalf. The courts may appoint
a guardian to provide for a ward's personal care and manage his property and financial affairs.
Some examples of fiduciaries include:
An executor
A trustee
A guardian
Power of Attorney
CFP Board Standards of Conduct state that a Fiduciary Duty is owed to clients. "At all times when
providing Financial Advice to a Client, a CFP
®
professional must act as a fiduciary, and therefore, act in
the best interests of the Client."
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Selecting an Executor
An executor is the person and/or institution named in a valid will to serve as the personal representative
of a testator when his or her will is probated. Technically, this person is referred to as the executor
, if
male, and executrix
, if female, but is commonly referred to as the executor or personal representative
regardless of gender.
An executor has many responsibilities when death occurs:
the executor must locate and probate the decedent's will
prove that it was the decendent's will and that it in fact was his or her last will
collect and value the decedent's property, make tax elections, pay debts, taxes and expenses, and
distribute any remaining assets to the beneficiaries specified in the decedent's will.
An executor's responsibilities typically last from nine months to two or three years. In rare instances, such
as when there is a will contest or the estate remains open for tax or other reasons, the executor's duties
continue for a period of several years.
An executor is considered a fiduciary. This means if the executor does not exercise the duties with care,
the potential exists for a lawsuit brought by the estate beneficiaries on the following grounds: a breach of
confidentiality, conflicts of interest, failure to exercise due care or diligence or prudence, failure to
properly preserve or protect estate assets, failure to file timely and proper tax returns or maintain
adequate records, and the breach of the duty to make all major discretionary decisions personally and
not to delegate such decisions.
The choice of executor(s), primary as well as successor, can be complicated by a combination of family,
personal, tax and nontax considerations. There should always be at least one and preferably two
successors to the main executor(s). All of the proposed executors must be capable of handling the
executor's tasks and responsibilities, which are often complex.
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Executor Fees
Fees are an important consideration in the executor selection process. The fee amount a personal
representative is entitled to may be determined by:
the statutory law of the state where the estate is probated
local county rules or customs governing what the personal representative is entitled to charge for
services rendered to the estate
in the case of professional executors, such as banks or trust companies, an advertised fixed and
scheduled fee, and
provisions in the will or in separate contractual agreements between the testator and the
nominated executor.
For a large estate, the scheduled fee may possibly be lowered by negotiation. An attorney specializing in
estate administration can be invaluable during this process.
An executor is entitled to reasonable compensation for services rendered. Fees should not be
determined solely on the basis of the monetary amount of the decedent's probate assets, but should take
into account:
nature of the executor's tasks
time spent
complexity of the problems and decisions that have to be made
professional background and competence of the executor, and
ultimate results and benefits obtained for the heirs.
An executor will normally be paid a fee for services performed, but the person you select, such as a
family member, may agree to serve gratuitously. More important, unless the will specifically states
otherwise, the executor will be required to post a bond to cover any potential mismanagement of the
estate. This is expensive and will eventually be charged to the estate. Assuming you have picked a
trustworthy individual, you may waive the need for posting bond in the will.
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Trustee Responsibilities
Trusts have many uses and often provide assets or income to trust beneficiaries. A trustee is the person
and/or institution named in a trust agreement to carry out provisions or terms of the trust. A trustee holds
legal title to the assets placed in the trust, which the trustee manages for all of the trust beneficiaries. The
trustee is a fiduciary who is held to the highest standards when fulfilling their duty to act in the best
interests of the beneficiaries. A trustee can be an individual, either a professional or nonprofessional, or it
can be a corporate fiduciary. It is also possible to appoint multiple trustees and common to appoint both
individual and corporate trustees.
It is the trustee's duty to ensure that the trust achieves its goals. The duties of the trustee may therefore
include the satisfaction of a number of tax and nontax objectives that include, but are not limited to, the
investment, management and protection of trust assets and compliance with the intentions of the grantor.
Ordinarily the terms of the trust agreement determine the duties and powers of a trustee. Though the
powers of a trustee may vary from state to state, the general powers that a trustee may hold include the
following:
1. Power to collect trust property, settle claims, and sue or be sued.
2. Power to sell, acquire or manage trust property in a manner that is in the best interests of the
beneficiaries.
3. Power to vote corporate shares.
4. Power to borrow money and use the trust corpus as collateral, if approved by the court.
5. Power to enter into contracts and leases that do not exceed the duration of the trust.
6. Power to make payments to a beneficiary of the trust.
7. Power to make required divisions and distributions of trust property.
8. Power to receive additional assets into the corpus of the trust.
9. Power to hire outside counsel including accountants, attorneys and investment managers.
Generally, the powers of a Trustee are determined by the instructions, or terms, in the trust document and
by state law. The trustee must thoroughly understand the duties that accompany the title of legal owner of
the trust assets. The duties of a trustee may vary from state to state, but in general, a trustee's duties
include at least the following:
1. Carry out the trust in accordance with the terms of the trust agreement or will
2. Not to delegate the trustee's duties to another individual. Any duty that calls on the trustee to
exercise skill and judgment may not be delegated, unless the trust agreement provides otherwise.
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3. Administer the trust with the degree of skill and care that would be required if the trustee were
dealing with his or her own assets
4. Administer the trust solely in the best interests of current and future beneficiaries
5. Possess, protect, and preserve the trust property
6. Separate and earmark trust property
7. Make the trust property productive
8. Make distributions in accordance with the trust agreement and the best interests of the
beneficiaries.
Practitioner Tip
A professional trustee can be either an individual or a corporation. Depending
on the assets as well as the family dynamic, it may be a good idea to
recommend having a professional trustee serve along with a non-professional
trustee, such as a family member.
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Selecting a Trustee
To a great extent, the selection process and decision criteria for selecting a trustee will follow the same
pattern as in choosing an executor. However, there are several significant distinctions.
The trustee's responsibilities commonly last for at least one generation and often last beyond two or three
generations:
1. This fact should have a significant effect on the choice of trustee or on the decision to name
multiple trustees. Due to the long time period, it is important to name successor trustees or to
provide a mechanism for their appointment by a resigning trustee or by the beneficiaries.
2. The choice of trustee is tax sensitive. There will be situations in which tax consequences will vary
widely with results ranging from success to tax disaster depending on whether the grantor, the
grantor's spouse, the beneficiaries, the grantor's business associates, the grantor's professional
advisors or a totally independent third party are named as trustees.
3. The decision is further complicated by a multiplicity of personal, family, business, investment and
nontax considerations, which must all be weighed by the grantor and the attorney drafting the
trust.
The selection of a trustee is most difficult because of the longevity of most trusts, the complexity of the
tax and other laws with which the trustee must comply, and the sensitivity a trustee must have to both the
grantor's objectives and the beneficiary's needs and desires. Professional trustees tend to be shielded
from conflicts of interest that may otherwise arise when the trustee is a friend, family member or business
associate. Click here to read more about conflict of interest. For these reasons, one or more co-trustees,
who are almost always professionals, are appointed where the terms of the trust are complex or the
estate is large. However, some drawbacks or issues must be considered. For instance, if two trustees are
selected, what is the procedure if they do not agree on a given issue? If three or more are selected, will
the majority rule? What responsibility does a dissenting trustee have for an action (or non-action) taken
by the majority?
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Overview of Trusts
Through the use of a trust, an estate owner can apportion his or her estate assets in a manner which
more appropriately and adequately serves the needs of the entire family. Trusts can be categorized as
inter vivos, testamentary, revocable and irrevocable trusts, and can accomplish many different estate
planning objectives.
To ensure that you have a solid understanding of introduction to trusts, the following topics will be
covered in this lesson:
Introduction to Trusts
Inter vivos and Testamentary Trusts
Revocable Trusts
Irrevocable Trusts
After completing this lesson, you should be able to:
Describe the differences between inter vivos and testamentary trusts
Identify the advantages and disadvantages of revocable and irrevocable trusts
Compare and contrast the tax and non-tax characteristics of revocable and irrevocable trusts
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Introduction to Trusts
What is a trust? A trust may be defined as an arrangement in which a trustee
holds legal title of property for the benefit of the beneficiaries who are named
by the person who created it. There are five elements of a trust:
Grantor- the individual who creates the trust
Trustee- the individual(s) or entity who has legal title over the assets
Corpus- the trust property
Terms of the trust- the provisions of the trust that outline how the trust
shall be administered
Beneficiary- the individual(s) or charity for whom the trust was created
and have an equitable interest in the trust.
A trust is a legal entity that holds and manages assets for another person. A trust is created when a
grantor
transfers property to a trustee
for the benefit of the beneficiaries. Virtually any asset can be
transferred into a trust—money, securities, life insurance policies, or real property. Reasons for using
trusts:
Trusts avoid probate if funded with assets during lifetime. Trusts that are funded during life bypass
the costly and time-consuming process of probate. Funding means retitling assets into the name of
the Trust.
Trusts are much more difficult to challenge in court than are wills.
Trusts can be used to reduce or eliminate taxes such as income, gift, estate or generation-skipping
transfer taxes at the federal and/or state level
Trusts allow for professional management of trust assets. If a beneficiary doesn't have the
understanding or desire to manage money effectively, or manage an investment portfolio or a
family business, a trust can provide professional management services.
Trusts can provide for management and distributions during time of incapacity.
Trusts can include private instructions regarding the management, control, and disposition of
assets, consistent with a client's goals and family needs. Whereas a will becomes a matter of
public record, a trust does not.
Trusts can be used to provide for a child with special needs. It can provide the necessary funds for
a child with special needs and funds for disabled children without disqualifying them from receiving
government benefits from programs like Medicaid.
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Trusts can provide for minor children in a manner more flexible and custom-tailored to the
grantor's desires. For example, trusts can be used to hold money or postpone full ownership of
trust assets until a child reaches a designated age.
Trusts can ensure that children from a previous marriage will receive some inheritance.
Trusts can provide for spouses of second marriages which control the ultimate distribution of the
assets after the surviving spouse's death.
Trusts can enable the investment of an asset that does not lend itself to fragmentation. This often
occurs where the grantor desires to spread the beneficial ownership among a number of
individuals. Life insurance policies and real estate are just two examples of assets that are difficult
to split up, or are worth substantially more if held together.
Limit the parties who can obtain the assets and achieve particular dispositive objectives. For
instance, where family control of a business or a specific asset is important, the grantor will want to
limit the class of beneficiaries and prevent recipients from disposing of property to persons outside
the family. A common example is the desire to protect assets from the consequences of an
unsuccessful marriage or being sued.
Review Question
Match the elements on the left with the corresponding descriptions on the right by clicking them.
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Inter Vivos and Testamentary Trusts
An inter vivos trust is also known as a living trust. An inter vivos trust is one that is established and takes
effect during the grantor's lifetime.
There are two types of living trusts:
revocable, and
irrevocable.
Both categories of trusts have different tax and non-tax implications and can accomplish very different
estate planning objectives. Property included in these trusts avoids probate at the grantor's death.
A testamentary trust is created per the terms of a will and is funded with the decedent's assets after death
occurs. Therefore, a testamentary trust is activated after probate is completed. There are a number of
different purposes for testamentary trusts, including:
reducing estate taxes
providing professional investment management of trust assets, and
ensuring that your estate is distributed to the intended beneficiaries.
Property passing from the will to a testamentary trust does not avoid probate or ancillary probate, which
subjects property located in a state other than your state of domicile to probate.
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Revocable Trust
Revocable trusts can be funded or unfunded, depending on their purpose. Actual funding of a revocable
trust requires assets to be retitled into the name of the trust. Property interests and funds included in a
revocable trust pass outside the will and the probate process, saving probate costs.
In a revocable trust, the grantor, the trustee, and the beneficiary may all be the same person. A successor
trustee is appointed to serve if the grantor, as trustee, becomes incapable of managing trust assets for
himself or for other trust beneficiaries. Revocable trusts often provide for the lifetime welfare of the
grantor, family members and other beneficiaries.
Property transferred to a revocable trust is not subject to the gift tax- which is a tax on the right of an
individual to transfer money or property to other individuals or trusts. Because the grantor can control and
even manage assets within the trust, can change the terms of the trust at any time, and can revoke the
trust, property transferred to a trust is not a completed gift and is not taxed. The property in trust remains
under the grantor's control while the trust is in effect, and is therefore part of the grantor's gross estate at
death, subject to estate tax.
The following table lists the advantages and disadvantages of a revocable trust:
Advantages
Disadvantages
The assets in the trust
avoid probate and
ancillary probate upon
your death.
There are no income tax
advantages - you pay
taxes on any income and
capital gains on the assets
in the trust.
You maintain the power to
alter or terminate the trust
and remove the assets.
The assets in the
revocable living trust are
considered part of your
estate for estate tax
purposes.
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Advantages
Disadvantages
If you become
incompetent, your assets
will continue to be
professionally managed
by the trustee.
Trusts that are unfunded
typically fail to achieve
probate avoidance or
estate tax reduction.
You can replace the
trustee if you do not have
confidence in his or her
skills.
A funded trust reduces the
potential for a will contest
or an election against the
will, and provides privacy
in administering a
grantor's affairs.
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Irrevocable Trust
Estate planning techniques that reduce the estate tax base often involve the use of irrevocable trusts. All
irrevocable trusts must be funded to legally exist. Once created, the terms of an irrevocable trust cannot
be changed and they cannot be revoked. Thus, the grantor loses ownership and control of the property
placed in the trust, and cannot take property back if circumstances change. Although the assets and
future appreciation of those assets transferred to the trust may reduce the value of the grantor's estate,
assets transferred into an irrevocable trust may be subject to gift tax liability. Trust assets are not included
in the grantor's estate at death, or subject to estate tax, if the grantor does not retain any rights,
ownership, interest or control of the trust assets at his death. Upon the death of the grantor, revocable
trusts become irrevocable trusts.
The irrevocable trust becomes a separate legal entity. It may pay taxes, at the trust's tax rates, on the
income and capital gains earned by the assets within the trust. Assets within an irrevocable trust also
avoid the probate process.
The following table lists the advantages and disadvantages of an irrevocable trust:
Advantages
Disadvantages
The assets in the trust
avoid probate upon your
death.
You no longer maintain
control over the assets in
the trust.
Any appreciation on
assets in the trust may be
excluded from the estate;
estate taxes may be
minimized when you die.
Assets transferred into the
trust may be subject to gift
taxes.
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Advantages
Disadvantages
Income earned on assets
in the trust can be directed
to the beneficiary, which
can result in tax savings if
the beneficiary is in a
lower tax bracket.
Lack of flexibility to make
changes to trust
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Overview of Transfer Taxes
Depending on your client's wealth and estate plan, they may be subject to a gift tax or the estate tax on
property that is transferred to others during their lifetime or at their death. The method in which property is
distributed is important because it may determine the amount of federal income taxes that must be paid
by the beneficiaries when they sell the property. In some situations, it may be preferable to let the
property transfer at death rather than as a gift. The reason is that the surviving spouse and the
beneficiaries will receive a stepped-up cost basis for assets inherited from the decedent.
To ensure that you have a solid understanding of tax laws as they relate to estate planning, the following
topics will be covered in this lesson:
Gift and Estate Tax Relationship
Gifting Strategies
Basis
Marital and Charitable Deductions
Minimizing Estate Tax
After completing this lesson, you will be able to:
describe how the gift tax and the estate tax are interrelated
identify gifting techniques to reduce the value of taxable gifts
explain the differences between carry-over basis and stepped-up basis
determine when it is appropriate to use marital deductions to offset gift and estate taxes
describe some common methods for minimizing estate taxes
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Gift and Estate Tax Relationship
The gift tax and the estate tax are both separate transfer taxes that are unified and interrelated under a
federal transfer tax system. Lifetime gifts and testamentary transfers are subject to the same unified gift
and estate tax rate schedule. This imposes the same tax burden on transfers made during life and at
death.
Each person can make gifts up to a certain amount during their lifetime before a gift tax needs to be paid.
This amount is known as the exemption equivalent amount that escapes taxation. For 2024, the
exemption equivalent amount is $13,610,000. Each taxpayer has a unified credit that is available to offset
the gift and/or estate tax up to the exemption equivalent amount on a dollar-for-dollar basis. The tax on
$13,610,000 is $5,389,800 therefore the unified credit amount for 2024 is $5,389,800. Because each
person can gift up to $13,610,000 tax-free, married couples can gift up to $27.22 million free of gift and
estate taxes in 2024.
The unified credit must be used to offset the tax on all taxable gifts. Taxable gifts are gifts that exceed an
annual exclusion amount, and this amount is $18,000 per person in 2024. Married couples can split the
amount of a gift in half, so that each spouse reduces the taxable portion of their gift by the annual
exclusion amount. Consequently, married couples can gift $36,000 to another person or transfer $36,000
into an irrevocable trust, before using up a portion of their unified credit. When a person gifts more than
the exemption equivalent amount after reducing the taxable value of gifts by annual exclusions and/or
other gifting techniques, a gift tax must be paid. The exemption equivalent amount and unified credit
applies to estate taxes as well.
For example, if Tom did not make any taxable gifts during his lifetime, and Tom died in 2024, his estate
could transfer $13,610,000 to his beneficiaries without paying an estate tax. That is because Tom's
unified credit is available to offset or reduce any estate tax due. However, if Tom had made taxable gifts
to several people during his lifetime, then all taxable gifts made after 1976 are added back to Tom's
estate tax return at his death. The result is that Tom's estate will be taxed at a higher rate. And if Tom had
made lifetime gifts that exceeded $13,610,000 he would have paid a gift-tax during his life, but a credit for
the gift tax paid is available to reduce his estate tax liability.
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Practitioner Advice
The Tax Cuts and Jobs Act of 2017 doubled the previous $5 million basic
exclusion amount to $10 million, indexed for inflation. A new "chained"
Consumer Price Index will be used to determine inflation rather than the
traditional CPI measure that had been previously used. The chained CPI will
produce smaller increases than the traditional CPI. The higher basic exclusion
amounts will remain in effect under TCJA until 2025 and then will revert back to
$5 million, adjusted for inflation.
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Basis
When a gift is made to an individual, a donor passes the carry-over basis in the property to the donee.
The basis is used to calculate potential income tax gain on a future sale.
In contrast, property included in the owner's gross estate at death receives a "stepped-up" basis to fair
market value when the property transfers to heirs. Therefore, if an heir sells the property after the owner's
death, and the property has not appreciated in value, there is no capital gains tax due.
For example, suppose Sharon lived in a non-community property state and owned, in her own name,
some shares of stock with an original cost of $5,000 and a current market value of $15,000. If she sold
the shares today, she would have to pay tax on the $10,000 gain. However, if she died and Arnold
received these shares from her estate and then subsequently sold the stock for $15,000, there would be
no capital gains tax to pay. This is because the property receives a stepped-up cost basis for income tax
purposes. Thus, if the shares are valued at $15,000 at the time of the death and later sold for the same
amount, no capital gains taxes would be due.
On the other hand, if Sharon had made a gift to Arnold of the stock before her death, Sharon's basis of
$5,000 would carry over to Arnold. If appreciated property is gifted, the donor's basis in the property
carries over to the donee. Therefore, if the FMV of the stock is $15,000 on the date of the gift, the value
of the gift is $15,000. Since Sharon had a basis of $5,000, when Arnold sold the stock for $15,000, he
would have to recognize a gain of $10,000.
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Gifting Strategies
The object of the tax element of estate planning is to transfer as much of your client's assets to the
intended beneficiaries with the least amount of transfer and income taxes. Before any lifetime gifting is
completed, it is important to first make sure the client has sufficient assets to provide for themselves. One
method by which this may be accomplished is through a lifetime gifting program. Under current law, every
individual, or donor, has the opportunity to gift $18,000 annually to as many people, or donees, as he or
she selects. This is known as the annual exclusion. If an estate planning objective is to minimize the
amount of assets which will be included within a decedent client's estate, and the client has discretionary
assets which are not required for comfort during lifetime, the estate planner may suggest that the client
engage in an annual gifting program utilizing the annual exclusion. For example
: A gift of $10,000 to 10
donees reduces a wealthy donor's estate tax base by $100,000, which lowers their estate tax by $40,000
if they are in the highest marginal transfer tax bracket at their death.
Making gifts avoids probate, reduces the value of the taxable estate, and allows the estate owner to help
out heirs while he or she is still alive. Additionally, the recipient of the gift, the donee, will not pay tax on
the gift. The gift tax is tax exclusive, meaning the donor is responsible for paying any gift tax due. Note: if
the gift is a capital asset, the donee receives the donor's basis (called the carry-over basis), and the
capital gain tax liability is deferred until the donee sells the property.
Engaging in a gifting program also allows the donor to transfer assets with tremendous appreciation
potential, for example, stocks or real estate. If your client owns a piece of real estate which appreciates in
value, the appreciated value of the assets will be included in the owner's estate, thereby increasing the
estate tax liability. However, by gifting the asset at today's current market value, all of the appreciation on
the asset will avoid inclusion in the owner's estate.
In addition to the annual gift tax exclusion, there is an unlimited gift tax exclusion on payments made for
medical or educational tuition expenses. These payments may be made for anyone, regardless of
relationship, as long as the payments are made directly to the educational or medical facility. The
unlimited gift tax exclusion also applies to contributions made to political parties.
From a gift tax perspective, an unlimited amount of assets may be gifted to qualified charities, since there
is an unlimited gift tax deduction for lifetime transfers to qualified charities. Additionally, from an income
tax perspective, these lifetime gifts also qualify for an income tax deduction.
As you can see, your client can give away a substantial amount of assets during his or her lifetime,
assuming he or she can afford to give away the control over the property, in an attempt to maximize the
amount of assets transferring to heirs.
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Case-in-Point
Let's look at a married couple with two children and an estate valued at $30
million. In 2024, the annual exclusion per person is $18,000 and the maximum
transfer tax rate is 40%. Over a 10–year period, the couple could hypothetically
transfer to each of their children a total of $36,000 per year tax-free—$18,000
from each spouse—for a total of $360,000 to each child. These gifts would
reduce the couple's taxable estate from $30 million to $29,640,000 which
would result in a lower estate tax liability. If the parents had not given away the
$720,000, and that amount appreciated over the 10-year period, their estate
would be worth even more than $30 million and would be taxed at a higher
amount.
Practitioner Advice:
Remember that the annual exclusion for gifts applies to each spouse. That is,
each spouse can each give up to $18,000 to each of their children, or to
whomever they wish, without paying any gift taxes. The recipient of a gift does
not pay any income tax on the amount of money he or she receives.
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Marital and Charitable Deductions
There are two common deductions that estate planners use to minimize gift and estate taxes:
1. Marital deduction, and
2. Charitable deduction
The Internal Revenue Code allows an unlimited marital deduction for gift and estate tax purposes. This
means that there's no limit to the amount of tax-free transfers between spouses during lifetime or at
death. In other words, when one spouse dies, the estate, regardless of size, can be transferred to the
survivor without any estate tax if the surviving spouse is a U.S. citizen.
This assumes that one spouse is not transferring terminable interest property to the other spouse by a gift
or a bequest. Terminable interest property passes automatically to another beneficiary in a trust who is
not the spouse, and bypasses inclusion in the spouse's estate at death. The reason a marital deduction is
not available to a donor spouse or decedent spouse for terminable interest property (TIP) is because the
recipient spouse has not been given total control over the property during lifetime or at death.
Additionally, the Internal Revenue Code allows an unlimited gift and estate tax deduction for transfer to
charities. Therefore, transferring assets to charities may be another method used to reduce the taxable
estate.
Case-in-point
Illustration of a simple will using estate tax figures
Simple Will ($28 million estate): A husband and wife each own assets of $14
million. Assume that the husband dies in 2024. His $14 million estate will
automatically transfer to his wife through his will, and no estate tax will be
imposed due to the unlimited marital deduction. This inheritance will increase
his wife's estate by $14 million. If she dies later this year $28 million will be
included in her gross estate. However, her unified credit of $5,389,800 will
offset the tax on $13,610,000 and the unused portion of her husband's
exclusion can offset an additional $13,610,000 in estate tax. Therefore, her
estate will be taxed on $918,200 which is due 9 months after her death.
flowchart
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Practitioner Advice
When a simple will is used for a married couple, the surviving spouse will
inherit the decedent spouse's property. Assuming the surviving spouse does
not remarry, if the estate is subject to an estate tax then a marital deduction is
not available to offset the tax. An estate tax is due if the surviving spouse has
an estate greater than $13,610,000 in 2024. In the Case-in-point, the wife's
estate tax is calculated as follows:
Wife's estate at death: $28 million
Estate tax on $28M is $11,145,800
Subtract wife's unified credit of $5,389,800 (the credit reduces a gift or
estate tax on $13,610,000 to zero) = $5,756,000
Subtract husband's unused exclusion amount of $5,389,800 that gets
passed to the wife by portability= $366,200 estate tax payable from the
wife's estate.
You will learn how to calculate estate taxes later in this course.
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Minimizing Estate Tax
A tax on the property transferred or received upon the death of the owner is known as a death tax
. There
are two types of death taxes: an estate tax and an inheritance tax. An estate tax
is imposed on the
property of the deceased before it is transferred; an inheritance tax
is levied on the property when it is
received by the beneficiary. At the federal level, only an estate tax exists. However, state governments
impose either estate or inheritance taxes, and sometimes both.
Most discussions of death taxes also include an examination of gift taxes. Without a gift tax, estate taxes
could be avoided by simply giving property away during lifetime.
Calculating Estate Tax
Calculate
Gross Estate
Value
The value of all of the decedent's
assets and property, including life
insurance proceeds, pensions,
collectibles, investments, real estate,
and any other assets owned at time of
death.
▼
Calculate
Taxable
Estate
Gross estate less funeral and
administrative expenses, debt,
liabilities or mortgages, certain taxes,
and any marital or charitable
deductions.
▼
Calculate Gift
Adjusted
Taxable
Estate
Add accumulated lifetime gifts.
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Calculating Estate Tax
▼
Determine
Estate Tax
Subtract applicable gift and estate tax
credit to determine the estate tax
base, then multiply by estate tax rate
schedule to determine estate tax
amount.
Financial planners should periodically review the value of a client's estate to determine whether there is a
current or a potential estate tax liability. In summary, there are several ways to minimize estate taxes this
year and beyond:
Make gifts to others
– Property or money gifted to others reduces the value of an estate, which
reduces the amount subject to estate tax. Each person can gift a maximum of $18,000 per person,
per year, before a taxable gift is made. Lifetime gifts under $13,610,000 are not subject to a gift tax
because a donor's unified credit is available to offset the tax on these taxable gifts. If a gift tax
must be paid, the amount of the tax will also reduce the value of an estate.
Make payments directly for educational or medical expenses
– Unlimited amounts of money
can be paid directly to educational or medical institutions without triggering a gift tax.
Make gifts or bequests to charity
– Unlimited amounts of money or property can be given to
federally approved charities during the donor's lifetime or at death. Charitable gifts reduce the
value of an estate due to an unlimited charitable deduction.
Make gifts or bequests to spouses
– An unlimited marital deduction is available to offset the tax
on gifts made to spouses or bequests of property passing to a spouse through a will.
Transfer money or assets to an irrevocable trust
– As long as the grantor does not retain any
rights or control over the trust income or corpus, the value of the assets are not included in the
grantor's estate.
Create an irrevocable life insurance trust (ILIT)
– An owner of a life insurance policy who is also
the insured must include the death benefit amount of the policy in his gross estate at death. The
policyholder can transfer an existing life insurance policy on his life to an ILIT to remove the death
benefit from his estate (assuming the policyholder lives for more than 3 years from the date of the
transfer). The trust can also purchase a new life insurance policy on a person's life to remove the
death benefit from that person's estate.
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Review Question
If Bill left 50% of his estate to his wife, 25% to charity and 25%
to his son, how much of Bill's estate is deductible on his estate
tax return?
Case-in-Point
Given the high estate tax rates imposed, your personal tax strategy should
shift toward estate tax planning once your net worth climbs above the tax-free
transfer threshold. Individuals with a net worth below the tax-free transfer
threshold should focus on income tax strategies and on non-tax estate
planning concerns.
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Module Summary
Overview of Estate Planning
A. Type of fiduciaries
1. Executor/ Personal representative
2. Trustee
3. Guardian
B. Duties of fiduciaries
C. Breach of fiduciary duty
D. Trusts
E. Marital property agreements
A. Type of Fiduciaries
Fiduciaries must always place another person's interest first, before their own. They have the authority to
perform special acts or specific duties for others. Depending on the type of fiduciary selected, they can
make decisions, carry out directives or manage another person's property or affairs. Types of fiduciaries
include executors, trustees and guardians. CERTIFIED FINANCIAL PLANNERS
™
have a fiduciary duty
to put their clients' interests first.
Executor/Personal representative
An executor, or an executrix, is a decedent's personal representative named in the will to administer their
estate. The executor admits the will to probate, locates and collects the decedent's assets, determines
the value of the assets, and distributes them to heirs with court supervision. The executor is responsible
for paying the decedent's debts and expenses and for filing income and estate taxes due.
Trustee
A grantor chooses a trustee to manage trust property for beneficiaries. The trustee has legal title of the
property in trust and the trustee must be legally competent to carry out the directives written in the trust
document.
Guardian
Guardianship is a general term used to protect a ward's property interests and oversee their personal
care. A guardian does not have legal title to the property administered for the ward's benefit. A guardian
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or conservator's scope of authority can be comprehensive or limited to managing only specific aspects of
an incompetent person's care.
Types of guardianships are:
Guardianship of the person – provides for the ward's personal care
Guardianship or conservatorship of the estate – manages the ward's property and financial affairs
Plenary guardianship – manages both the ward's property and personal care
B. Duties of Fiduciaries
Fiduciaries must perform their duties with utmost care and loyalty towards the beneficiaries. Fiduciaries
who manage property should strive to preserve it and make prudent investment decisions to increase its
value.
C. Breach of Fiduciary Duties
Fiduciaries can be sued for breach of fiduciary duties in civil and criminal courts.
D. Trusts
An inter-vivos trust is a trust created while a grantor is alive. A revocable trust is an inter-vivos trust that
may be funded or unfunded, which becomes irrevocable at the grantor's death. The grantor can also
create an irrevocable inter-vivos trust, which must be a funded trust. A trust created by the grantor's will is
a testamentary trust and the assets do not avoid probate.
E. Marital Property Agreements
Married couples can use documents such as wills, trusts, pre-nuptial or post-nuptial agreements and
disclaimer provisions in wills to determine the disposition of their combined property interests.
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Practice Questions
Which of the following is NOT an example of a Fiduciary?
(Check all that are true.)
An Executor
✘
A Beneficiary
✔
A Trustee
✘
A Guardian
✘
Joe and Mary are married, they have one child each from a
prior marriage and two children together. They also have a
god-son, John, that is like family. If Joe and Mary were to give
the maximum annual gift to each child, including John, what is
the total value of their combined gifts for 2024?
Choose the best answer.
$ 72,000
$ 180,000
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$ 90,000
$ 144,000
Nicole was 87 years old and recently passed away. In her
portfolio, she had FP stock that she purchased on December
12, 1985 for $19.87 per share. Upon her passing, the cost of
FP stock was $57.21. The stock is going to be distributed
outright to her niece, Lindsay. What will Lindsay's cost basis
be once she receives the stock?
Choose the best answer.
$ 57.21
$ 77.08
$ 19.87
None of the above
All of the following are advantages of an irrevocable trust
except:
Assets will avoid probate upon the death of the individual
✘
Appreciation of assets within the trust would be excluded from the
estate upon the death of the individual
✘
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The Grantor has complete control of the assets during his/her
lifetime.
✔
Income earned within the trust may be directed to a beneficiary,
which can result in tax saving if the beneficiary is in a lower tax
bracket
✘
Who is responsible for collecting the decedent's possessions
which will be recorded as assets of the estate?
Choose the best answer.
The Trustee
The Beneficiary
The Executor
The Power of Attorney
What is one advantage of establishing a Revocable Trust?
Choose the best answer.
Assets will pass outside the Grantor's estate
The trust language can never be changed or altered
Trust can help plan for the Grantor's incapacity
Trust will pass through probate
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When assisting your clients, Bob and Mary, with their estate
plan, you need to figure out how much each client has left of
his or her lifetime exemption after they jointly make the
following gifts this year:
$500,000 to Bob's mother
$42,000 to their youngest daughter for rent
$260,000 paid directly to the hospital for Bob's mom
$300,000 to their son for a down payment of a new
home
$65,000 paid directly to the university for their
grandson's college tuition
Assume that they have split all of the gifts this year. Since
they each have a lifetime exemption of $13,610,000 how
much does each spouse have left of their lifetime exemption
after making these gifts?
Choose the best answer.
$13,243,000
$13,568,000
$13,532,000
$12,920,000
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instance, membership dues for the first year are paid today, and dues for the second year are payable one year from today. However, the ADLA also
has an option for members to buy a lifetime membership today for $4,500 and never have to pay annual membership dues.
Obviously, the lifetime membership isn't a good deal if you only remain a member for a couple of years, but if you remain a member for 40 years, it
it's
a great deal. Suppose that the appropriate annual interest rate is 8.5%.
O 13 years
O 15 years
What is the minimum number of years that…
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127,000 Premium Premium
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a. Complete the materials issuances and balances for the materials subsidiary ledger under FIFO.
Received
Issued
Balance
Receiving
Materials
Unit
Report
Quantity
Requisition
Quantity
Unit
Price
Amount
Date
Quantity
Amount
Number
Number
price
May 1
400
$9
$3,600
26
280
$11
May 4
103
450
May 10
32
190
13
May 21
116
270
May 27
b. Determine the materials inventory balance at the end of May.
C. Journalize the summary entry to transfer materials to work in process. If an amount box does not require an entry, leave it blank.
d. Comparing
as reported in the materials ledger with predetermined order points would enable management to order materials before a(n)
causes idle time.
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[The following information applies to the questions displayed below.]
Altira Corporation provides the following information related to its merchandise inventory during the month of August
2021:
Aug.1 Inventory on hand–2,000 units; cost $5.30 each.
8 Purchased 8,000 units for $5.50 each.
14 Sold 6,000 units for $12.00 each.
18 Purchased 6,000 units for $5.60 each.
25 Sold 7,000 units for $11.00 each.
28 Purchased 4,000 units for $5.80 each.
31 Inventory on hand-7,000 units.
Required:
1. Using calculations based on a perpetual inventory system, determine the inventory balance Altira would report in its August 31, 2021,
balance sheet and the cost of goods sold it would report in its August 2021 income statement using the FIFO method.
Cost of Goods…
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On January 1, 20x1, Pete Electrical Shop received from Marion Trading 300 pieces
of bread toasters. Pete was to sell these on consignment at 50% above original
cost, for a 15% commission on the selling price. After selling 200 pieces, Pete had
the remaining unsold units repaired for some electrical defects for which he
spent P2,000. Marion subsequently increased the selling price of the remaining
units to P330 per unit. On January 31, 20x1, Pete remitted P64,980 to Marion
after deducting the 15% commission, P850 for delivery expenses of sold units,
and P2,000 for the repair of 100 units. The consigned goods cost Marion Trading
P200 per unit, and P900 had been paid to ship them to Pete Electrical Shop. All
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Double-Declining-Balance Depreciation
A building acquired at the beginning of the year at a cost of $1,193,000 has an estimated residual value of $220,000 and an estimated useful life of 40 years.
Determine the following.
a. The double-declining-balance rate
%
b. The double-declining-balance depreciation for the first year
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Common categories of a classified balance sheet include Current Assets, Long-Term Investments, Plant Assets, Intangible Assets,
Current Liabilities, Long-Term Liabilities, and Equity. For each of the following items, identify the balance sheet category where the item
typically would best appear. If an item does not appear on the balance, indicate that instead.
Account Title
1. Long-term investment in stock
2. Depreciation expense-Building
3. Prepaid rent (2 months of rent)
4. Interest receivable
S
5. Taxes payable (due in 5 weeks)
6. Automobiles
7. Notes payable (due in 3 years)
8. Accounts payable
9. Cash
10. Patents
Classification
Account Title
11. Unearned services revenue
12. Accumulated…
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What would be my 3 journal entries for these transactions?
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Ho Designs experienced the following events during Year 1, its first year of operation:
1. Started the business when it acquired $66,000 cash from the issue of common stock.
2. Paid $28,000 cash to purchase inventory.
Difference in book and actual inventory
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3. Sold inventory costing $16,800 for $33,000 cash.
4. Physically counted inventory showing $10,900 inventory was on hand at the end of the accounting period.
Required:
a. Determine the amount of the difference between book balance and the actual amount of inventory as determined by the physical
count.
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A process with no beginning work in process, completed and transferred out 85200 units during a period and had 50100 units in the
ending work in process inventory that were 20% complete. The equivalent units of production for the period for conversion costs were:
O 95220 equivalent units.
O 135300 equivalent units.
O 70200 equivalent units.
O 85200 equivalent units.
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Samuelson and Messenger (SAM) began 2021 with 200 units of its one product. These units were purchased near the end of 2020 for
$25 each. During the month of January, 100 units were purchased on January 8 for $28 each and another 200 units were purchased
on January 19 for $30 each. Sales of 125 units and 100 units were made on January 10 and January 25, respectively. There were 275
units on hand at the end of the month. SAM uses a perpetual inventory system.
Required:
1. Complete the below table to calculate ending inventory and cost of goods sold for January using FIFO.
2. Complete the below table to calculate ending inventory and cost of goods sold for January using average cost.
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