MINI-COURSE SERIES
ESTATE PLANNING Part I
Copyright Š 2012 by Institute of Business & Finance. All rights reserved.
ESTATE PLANNING
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OVERVIEW Your client’s estate includes all property he owns, minus anything owed (assets minus liabilities). The client may find it useful to use a worksheet to make a rough estimate of the dollar value of his estate, which can be helpful both for general planning purposes and to predict whether or not the estate is likely to be liable for estate taxes (doubtful considering the $5.12 million 2012 exemption). The estate will very likely have a different worth upon death, so precise figures are not necessary. For most people, the heart of estate planning is deciding who gets what and when. Your client may have a very clear idea of who should inherit her property. Still, there are a number of issues the client may want to consider, from naming alternate beneficiaries to staggered bequests. One cannot leave what one does not own. Ownership rules for single people are simple. Except as limited by contract (e.g., some form of shared ownership), your single client can leave all property owned outright. The fact that some institution has a claim on the property, such as a mortgage on a house or a lien on a car, does not create shared ownership.
Estate Planning Goals and Objectives
Fulfill client’s property transfer wishes Minimize transfer costs and taxes Maximize net assets to heirs Provide needed liquidity at death Fulfill client’s health care decisions
WILLS Every one of your clients should have a will, a basic estate planning device. The will names the executor, the person with legal authority to administer transfer of property covered by the will. Wills have one big drawback: property left by a will must go through probate. Your client should not decide what property to transfer by will until he has looked at transfer methods that avoid probate.
PART I
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ESTATE PLANNING
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Whatever is decided about avoiding probate, a will is still needed. A will is a backup device essential to the transfer of any property that somehow was not transferred by other methods, such as property overlooked or was unexpectedly acquired (e.g., a surprise inheritance or lottery winnings). In almost all states, a will is the only document used to name a personal guardian for minor children. A will may also be the best way to transfer some types of property, like personal checking accounts or vehicles.
AVOIDING PROBATE Probate is the name given to the legal process by which a court oversees the distribution of property left by will. The probate process is examined in detail in a later chapter. Probate proceedings are generally mere formalities, because there is rarely any dispute about a will, but it is often cumbersome and lengthy. During probate, assets are identified, all debts (e.g., lawyers, appraisers, accountants, court filing fees, etc.) and estate taxes are paid and remaining property is distributed to heirs. The average probate proceeding lasts for at least a year before the estate is actually distributed. Probate lawyers are very expensive a cost that cannot be avoided by your client unless the client lives in California (where simple estates can be probated without an attorney) or Wisconsin (simplified system that includes court clerical assistance). Although it is legal in most states for the executor named in a will to act for the estate, the forms can be intimidating, and court appearances may be required. One can reduce or eliminate probate fees by transferring property outside probate. Later chapters explain the following probate-avoidance methods: • Living trusts • Joint tenancy with rights of survivorship (JTWROS) • Pay-on-death designated accounts (POD) • Life insurance are paid directly to the policy beneficiary • Qualified retirement accounts and IRA are paid to the named beneficiary • State law exemptions for smaller estates ($5,000 to $200,000)
Limited estate planning by making just a will can, in some circumstances, make good sense. For example, many younger people in good health often decide to postpone detailed estate planning. A will naming a personal and property guardian for minor children and leaving property to a spouse, partner, and perhaps also a few close friends or relatives may be all that is currently needed.
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IBF | MINI-COURSE SERIES
ESTATE PLANNING
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For older people with a reasonable amount of property or people in ill health, it makes little sense to depend on just a will. The amount of time and effort it takes to plan to avoid probate is modest—certainly far less than will be consumed going through the probate process, not to mention significant costs saved. Aside from avoiding probate altogether, if one significantly reduces the value of property transferred by probate, the client will likely reduce the attorney’s fee as well. The probate estate is the portion of an estate that must go through probate. Anything transferred by probate-avoiding methods is not part of the probate estate; it goes directly to beneficiaries without court proceedings. If a client plans wisely, he can greatly reduce the probate estate or even eliminate it. In unusual situations, probate can be useful. If the estate will have many debts or claims by creditors, probate provides a forum for resolving those claims with relative speed and certainty. If creditors who are notified of the probate do not file claims within a set period (usually a few months), claims are barred forever.
SPECIAL NEEDS TRUST One of the most important things parents of children with special needs can do is set up a special needs trust (supplemental-needs trust). A child can be denied significant Medicaid and Social Security benefits if more than $2,000 of assets are in his name. Assets in a special needs trust are not counted against the dollar limit. A personal residence, car, and personal items are also not counted toward the $2,000 limit. Funding for special needs trusts typically come from the parents’ life insurance. Money can be placed in a special needs trust while the parent is still alive, but any funding should be done by anyone but the parents and child. For example, assets contributed by a parent to the trust can easily disqualify the child from receiving Medicaid and Social Security benefits. Advisors recommend that the child’s guardian and trustee be different people. The guardian should be someone who understands the child’s needs and gets along with the child. The parents can prepare the guardian by drafting a letter of intent outlining their wishes for the child, information about the child’s mental and physical health, and the child’s likes and dislikes (e.g., types of food, entertainment, clothes, etc.). The trustee should be someone who is knowledgeable about finances and investments. Using different people means there is a system of checks and balances.
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TYPES OF BENEFICIARIES The word beneficiaries means people or institutions that are left property; there are different types of beneficiaries: Primary beneficiaries. Those who are left identifiable gifts of property. Alternate beneficiaries. Those receiving a gift if primary beneficiary cannot. Life estate beneficiaries. People who receive a life estate interest in property (some rights to receive income from or use of property during their life), but they never become legal owners of the property. Life estate beneficiaries have no right to give away this property when they die. Final beneficiaries. Those named to inherit property after a life beneficiary dies. Residuary beneficiaries. Those named to receive property left under a will or trust not expressly left to other beneficiaries. Usually, an alternate residuary beneficiary is also named.
Common Transfer Objectives
Transfer property while minimizing costs Avoid probate Use lifetime transfers—gifts and sales Plan for children Plan for incapacity of testator Provide for testator’s surviving spouse Fulfill testator’s charitable intentions
Primary Beneficiaries Primary beneficiaries are usually named to receive a specific item of property. For example, a will might state: “I leave my car to Amy Jones.” Some people name several primary beneficiaries for different items. Some name none at all, simply leaving all their property to their residuary beneficiaries. If a client knows he wants to leave all property to one or a few people—say a spouse or children—the client still may face some additional complexities. Does the client want to name an alternate beneficiary in case the person originally named dies before the client? Suppose the client wants to name two or more alternate beneficiaries. What happens if they wind up receiving your property? Does each one receive an equal share? If they inherit real estate, must it be sold unless all agree to keep it?
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THINGS TO DO Your Practice Contact those clients you feel may still be subject to estate taxes. Schedule a meeting to discuss tax savings devices. The Next Installment Your next installment, Part II, covers managing assets of minors. You will receive Part II in a few days. Learn Are you ready to take your practice to the next level? Contact the Institute of Business & Finance (IBF) to learn about one of its five designations: o o o o o
Annuities – Certified Annuity Specialist® (CAS®) Mutual Funds – Certified Fund Specialist® (CFS®) Estate Planning – Certified Estate and Trust Specialist™ (CES™) Retirement Income – Certified Income Specialist™ (CIS™) Taxes – Certified Tax Specialist™ (CTS™)
IBF also offers the Master of Science in Financial Services (MSFS) graduate degree. For more information, phone (800) 848-2029 or e-mail adv.inv@icfs.com.
PART I
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