Deck 15: Basic Structure of Estate Planning

Question 1

Pete Bertocci has an "I Love You" will. However, you feel that since his financial situation is complicated, he needs a more comprehensive will. How do you communicate that fact to Pete?

Answer 1

Pete needs to understand that a will is a powerful tool of estate planning. For instance, because of marital deduction, an unlimited amount can be transferred to the surviving spouse free of the federal estate tax. However, upon second death, sizable estate taxes may have to be paid. A sophisticated will can solve some of these estate tax problems. In addition, a sophisticated will can be used to transfer the estate to the appropriate persons and institutions with significant savings in estate taxes.

Question 2

List some pointers relating to making a will.

Answer 2

Estate planning attorneys recommend that the following points be kept in mind when making a will.
1. The individual should work closely with the family as the will is written by a professional. That way, family objectives can be met regardless of who dies first.
2. A beneficiary should not be chosen as a witness. If called upon to validate the will, the person may not be able to collect the inheritance.
3. The maker would be well-advised to use in the will percentages and absolute numbers rather than simply dollar amounts. For instance, if $250,000 is left to charity and the remainder to the spouse, nothing would be left for the spouse if the estate shrinks to that level. Of course, these percentages and dollar amounts should be periodically reviewed to avoid such problems as the possibility of making a charitable contribution of a larger dollar amount than anticipated, if in the future the estate value shrinks from the current level.
4. The will should be as flexible as possible. For instance, the heirs may suffer if the will insists on their holding certain stocks for the long term.
5. The will should be altered by a codicil and not by writing on the document itself.
6. The will should be kept up-to-date. Also, it should be reviewed whenever there are significant changes in the family and in the tax laws.
7. All will-related affairs should be kept in order. This includes making an inventory of all assets and purchasing additional life insurance to provide liquidity to compensate for an estate consisting largely of illiquid assets.

Question 3

What are the key disadvantages of not having a valid will?

Answer 3

Whether or not a person has actually drafted a will, some form of will is used to distribute the estate. So even if a person dies without a will, state statutes known as the laws of intestacy take over and determine how the estate is distributed. Frequently, the state's notion of how the estate should be handled, and how the minor children should be managed, are at odds with how the deceased would have wished the executor to proceed. In particular, charitable organizations and individuals other than relatives will receive nothing. Consequently, dying intestate can be a real tragedy.
There are other disadvantages to not leaving a will. Upon dying intestate, the estate will be handled by a personal representative appointed by the court. That representative may not be the one who would have been selected by the deceased. Another disadvantage is that legal procedures may force the personal representative to sell and distribute the estate or convert it into "legal investment" (government bonds, checking accounts, and so on) in accordance with the law. Most states limit the types of investments in which a personal representative can invest estate assets. Furthermore, the personal representative may be required to sell nonincome producing assets because there is no provision in the will authorizing the personal representative to retain them. Thus, an investment which the decedent would like to have retained in the family, such as a closely held business, might have to be sold and the proceeds invested within the prescribed statutory limitations. Finally, without the protection of a will, the estate could be reduced substantially by unnecessary administrative expenses and estate taxes, making the net estate value less than anticipated.

Question 4

Compare and contrast the three types of joint ownership.

Question 5

Write a short essay on trusts.

Question 6

What are the purposes of creating a trust?

Question 7

From a recent article Donald Karr has learned that if he transfers all his assets into an irrevocable trust, then upon his death his estate will completely escape estate taxes. Donald is about to finalize such an arrangement but is willing to hear you out. How do you advise him?

Question 8

Explain the estate planning features of joint tenancy with rights of survivorship.

Question 9

How do you respond to those who believe that estate planning can be dispensed with in case of joint ownership?

Question 10

Write a short essay on probate.

Question 11

Enunciate the common misconceptions of estate planning.

Question 12

Describe the salient features of the Economic Growth and Tax Relief Reconciliation Act of 2001.

Question 13

What are the basic tools of estate planning?

Question 14

Stew Mansfield is reacting negatively to your suggestion that he should engage you to develop an estate plan for him. The reason is that since Stew can transfer an unlimited amount to his wife, he believes he does not need an estate plan. What is your response?

Question 15

Dave and Mary Lents own everything jointly. Dave argues that since this is a joint tenancy with the right of survivorship arrangement, he doesn't need any estate planning. Can you help him?

Question 16

What is the importance of a will?

Question 17

With the help of a diagram, explain the consequences of dying intestate

Question 18

What are the major objectives of estate planning?

Question 19

What is federal estate tax? How is the federal estate tax calculated?

Question 20

Lillian Barr, age 82, has over $6 million in her portfolio. She has two sons and eight grandchildren. Lillian is concerned about estate taxes and wants to gift most of her money right away. Do you agree with her strategy?

Question 21

Question 18. The marital deduction:

A) Allows spouse of the deceased to deduct 50 percent of bequeathed property
B) Allows spouse of the deceased to avoid paying estate taxes on 100 percent of bequeathed property
C) Is $1 million
D) Depends on the size of the estate
E) None of the above are correct answers

Question 22

Question 5. Two types of assets are included in a person's estate. These types are _______ and ______. ____________ ownership refers to assets owned outright by a person, whereas ____________ assets refer to those assets which must pass through a probate court.

A) Probatable and nonprobatable; Probatable, nonprobatable
B) Probatable and nonprobatable; Nonprobatable, probatable
C) Revocable and nonrevocable; Revocable, nonrevocable
D) Joint and survivor; Joint, survivor
E) None of the above

Question 23

What are the two principal forms of trusts?

A) Inter vivos living) and testamentary takes place upon death of grantor
B) Probatable and nonprobatable
C) Joint and single
D) Testate and intestate
E) None of the above

Question 24

Question 2. Which of the following is an instrument that could be used by a person to make alterations to an existing will?

A) Testamentary change form
B) Living trust
C) Codicil
D) Exordium clause
E) Inter vivos form

Question 25

Question 15. What is the maximum rate at which an estate could be taxed in 2012?

A) Twenty eight
B) Thirty three
C) Seventy
D) Forty five
E) Sixty five

Question 26

Question 11. Who benefits from the distribution of trust property?

A) Trustee
B) Custodian
C) Beneficiary
D) Deceased
E) Deceased's wife who is not a beneficiary

Question 27

Question 19. Which of the following items is not an allowable deduction from a person's estate?

A) Home mortgage indebtedness
B) Funeral expenses
C) Expenses of last illness
D) Casualty losses
E) All represent allowable deductions

Question 28

Question 3. A personal representative can be:

A) One or more individuals
B) A bank
C) A trust
D) A and B
E) A, B, and C

Question 29

Question 1. Which type of will is generally adequate for people with relatively small estates?

A) Reciprocal
B) Simple
C) Mutual
D) Holographic
E) None of the above

Question 30

Which of the following forms of ownership always allows each spouse to share an equal interest in the assets?

A) Joint tenancy with right of survivorship JTWRS
B) Tenancy in common
C) Tenancy by the entirety
D) Noncommunity
E) None of the above constitute a correct answer

Question 31

Question 9. When property is held by four nonspouses as joint tenants with rights of survivorship, upon the death of the first joint tenant, ________ percent of the joint property is included in his or her gross estate.

A) 50
B) 75
C) 110
D) 0
E) none of the above percentages are correct

Question 32

Question 16. Life insurance proceeds are included in a person's estate if it was gifted within __________ years of death.

A) One
B) Two
C) Three
D) Four
E) Five

Question 33

Question 4. The personal representative disposes of the probate assets:

A) As he sees fit
B) In accordance with the instructions contained in the will
C) The same way the nonprobate assets are disposed
D) In accordance with the wishes of the surviving spouse
E) In a way that would maximize the income for the surviving spouse

Question 34

Question 7. Which of the following is not true of JTWRS?

A) Co-owners may not sell or give away assets without the signature of the other party
B) When a death occurs, the share of the deceased passes to the surviving joint owner
C) It is possible to have only one owner
D) This form of ownership may not avoid the probate process
E) All are characteristics of JTWRS

Question 35

Question 8. Assets held in joint tenancy with right of survivorship:

A) Are included in the gross estate for estate tax purposes
B) Are excluded from the gross estate for estate tax purposes
C) Could be taxed twice, once upon the death of the first spouse and again upon the death of the second spouse
D) A and C
E) B and C

Question 36

Question 12. Which of the following statements is not true?

A) Everyone must have a trust to avoid probate
B) The purpose of a trust is to carry specific objectives that in the absence of a trust would otherwise be difficult to carry out
C) A trust could be used to safeguard investable funds
D) A trust could be a very useful toll when a person remarries
E) None of the above

Question 37

Question 14. If a person makes $200,000 of taxable gifts during his/her lifetime, how much could be deducted from the unified credit? Use year 2015 to answer this question.

A) $70,000
B) $0
C) $90,000
D) $200,000
E) None of the above

Question 38

Question 13. The trustee of trust property must carry out the grantor's instructions that are:

A) Contained in the trust
B) Contained in the will
C) Contained in the letter of the last instructions
D) To the best of the trustee's ability
E) Acceptable to the spouse

Question 39

Question 20. The IRS allows certain expenses and liabilities to be deductible from the gross estate. Which of the following expenses is not allowed to be deducted?

A) Funeral expenses
B) Mortgage and other indebtedness
C) QTIP trust
D) Claims against the estate
E) Life insurance premium

Question 40

Question 17. Which of the following items is not includible in a person's gross estate?

A) Retirement assets
B) Closely-held business
C) Incomplete lifetime transfers
D) Proceeds of life insurance owned by deceased
E) All are includible