1. ©2013, College for Financial Planning, all rights reserved. Module 11 Estate Planning Chartered Retirement Planning Counselor SM Professional Designation Program

2. Learning Objectives 11–1: Identify the objectives of estate planning. 11–2: Explain the use of wills and will substitutes for transferring property. 11–3: Describe the federal taxes involved in estate transfer and the concepts of applicable credit amount and applicable exclusion amount. 11–4: Explain the federal tax rules that apply to property transfers through gifts. 11–5: Explain the federal tax rules that apply to property transfers at death. 11–6: Explain how clients can use the marital deduction and bypass planning, trusts, and charitable deductions to meet their estate planning objectives. 11–7: Describe various approaches that small-business owners can use to transfer ownership. 11-2

3. Questions to Get Us Warmed Up 11-3

4. Learning Objectives 11–1: Identify the objectives of estate planning. 11–2: Explain the use of wills and will substitutes for transferring property. 11–3: Describe the federal taxes involved in estate transfer and the concepts of applicable credit amount and applicable exclusion amount. 11–4: Explain the federal tax rules that apply to property transfers through gifts. 11–5: Explain the federal tax rules that apply to property transfers at death. 11–6: Explain how clients can use the marital deduction and bypass planning, trusts, and charitable deductions to meet their estate planning objectives. 11–7: Describe various approaches that small-business owners can use to transfer ownership. 11-4

5. Estate Planning Objectives Provide for the financial needs of survivors Proper distribution of assets at death Protection of assets from the claims of creditors Avoid probate when appropriate Provide for possible incapacity Minimize death taxes Provide for orderly transfer of a business 11-5

6. Characteristics of Different Forms of Concurrent Ownership of Property Form of Property Ownership Maximum # of Owners+ Identity of Owners Right to Transfer During Life Right to transfer at Death Deemed Ownership % Tenancy in Common UnlimitedAnyoneOwned interest only; no consent of co- owners required Owned interest only; by will or intestacy (probate) As stated in title; if not stated, equal ownership is presumed Joint Tenancy with Right of Survivorship UnlimitedAnyoneOwned interest only; no consent of co- owners required (except possibly for spouses) By right of survivorship only; surviving owners split interest equally (will substitute) Equal for all owners regardless of contribution to purchase unless otherwise stated Tenancy by the Entirety TwoHusband and wife only Owned interest only; consent of spouse required By right of survivorship only (will substitute) Equal for both spouses regardless of contribution to purchase Community Property TwoHusband and wife only State laws differ; usually owned interest only; consent of spouse usually required for real estate Owned interest only; by will or intestacy (probate) Equal for both spouses regardless of contribution to purchase 11-6

7. Learning Objectives 11–1: Identify the objectives of estate planning. 11–2: Explain the use of wills and will substitutes for transferring property. 11–3: Describe the federal taxes involved in estate transfer and the concepts of applicable credit amount and applicable exclusion amount. 11–4: Explain the federal tax rules that apply to property transfers through gifts. 11–5: Explain the federal tax rules that apply to property transfers at death. 11–6: Explain how clients can use the marital deduction and bypass planning, trusts, and charitable deductions to meet their estate planning objectives. 11–7: Describe various approaches that small-business owners can use to transfer ownership. 11-7

8. Will Substitutes: Types Right of survivorship Joint tenancy Tenancy by the entirety Contract/beneficiary designation Insurance IRAs/pension benefits Inter vivos trusts Payable on death (P.O.D.) accounts Totten trusts Transfer on death (T.O.D.) securities accounts Government savings bonds 11-8

9. Estate Property Distribution Probate affects only the distribution of property. Taxation of estate property (whether distributed through probate or outside probate) is an entirely different matter. 11-9 Either via: Probate - Will - State intestacy laws Outside probate - Trusts - Right of survivorship - Beneficiary designation Property is then distributed At death, an estate is created

10. Learning Objectives 11–1: Identify the objectives of estate planning. 11–2: Explain the use of wills and will substitutes for transferring property. 11–3: Describe the federal taxes involved in estate transfer and the concepts of applicable credit amount and applicable exclusion amount. 11–4: Explain the federal tax rules that apply to property transfers through gifts. 11–5: Explain the federal tax rules that apply to property transfers at death. 11–6: Explain how clients can use the marital deduction and bypass planning, trusts, and charitable deductions to meet their estate planning objectives. 11–7: Describe various approaches that small-business owners can use to transfer ownership. 11-10

11. Estate Transfer Expenses: Estate Taxes Gross estate Deductions o Funeral and administrative expenses o Debts o Uninsured theft and casualty losses o Unlimited marital deduction o Unlimited charitable deduction o State death taxes actually paid Taxable estate Adjusted Taxable Gifts Estate tax base Credits o Gift tax payable o Applicable credit amount 11-11

12. Estate Transfer Expenses: Gift Tax Exempt transfers o Medical o Tuition Annual exclusion o Present interest o Amount Gift splitting (spouses only) Unlimited charitable deduction Unlimited marital deduction Cumulative calculation Applicable credit amount 11-12

13. Gift & Estate Taxation Principles Type of Tax Valuation of Assets Basis of Transferee Filing Requirements Gift taxFair market value (FMV) on date of completion of the gift Carryover of basis from donor April 15 of calendar year following the year of gift (Form 709) Estate taxFMV on date of death or alternate valuation date Step-up in basis to value used for estate tax (except IRD) 9 months after date of death (Form 706) 11-13

14. Estate Tax Gross estate components Property: o interests owned at death o interests transferred during life with strings attached o over which decedent held a general power of appointment o included in the probate estate o that passes at death by will substitute Survivorship benefits from a decedent’s IRAs, qualified retirement plans, and annuities 11-14

15. Estate Tax Property interests transferred during life with strings attached (and not released more than three years prior to death) Retained right to use the transferred property income from the transferred property amend or revoke disposition of the transferred property reacquire the transferred property determine beneficial enjoyment by others 11-15

16. Estate Tax: Three-Year Inclusionary Rule Requires Inclusion of property in gross estate when decedent has surrendered, within three years of death, a retained right in previously transferred property that would have required inclusion had the retained right been held at death. Inclusion of life insurance death benefit when insured and owner of policy transfers ownership within three years of death. 11-16 Decedent established and funded a revocable living trust. Within three years of his death, decedent makes the trust irrevocable by giving up his right to revoke. The trust assets are included in his gross estate.

17. Learning Objectives 11–1: Identify the objectives of estate planning. 11–2: Explain the use of wills and will substitutes for transferring property. 11–3: Describe the federal taxes involved in estate transfer and the concepts of applicable credit amount and applicable exclusion amount. 11–4: Explain the federal tax rules that apply to property transfers through gifts. 11–5: Explain the federal tax rules that apply to property transfers at death. 11–6: Explain how clients can use the marital deduction and bypass planning, trusts, and charitable deductions to meet their estate planning objectives. 11–7: Describe various approaches that small-business owners can use to transfer ownership. 11-17

18. Estate Transfer Tools: Trust Types Marital Deduction trust Bypass trust Contingent (standby) trust Grantor retained interest trust Charitable remainder trust Charitable lead trust Disclaimer trust Irrevocable life insurance trust Spendthrift trust Pourover trust 11-18

19. Marital Deduction Trusts Purpose Allow spouse of grantor to receive income Allow grantor to receive marital deduction Types Power of appointment trust Qualified terminable interest property (QTIP) trust with an election Estate trust 11-19

20. Learning Objectives 11–1: Identify the objectives of estate planning. 11–2: Explain the use of wills and will substitutes for transferring property. 11–3: Describe the federal taxes involved in estate transfer and the concepts of applicable credit amount and applicable exclusion amount. 11–4: Explain the federal tax rules that apply to property transfers through gifts. 11–5: Explain the federal tax rules that apply to property transfers at death. 11–6: Explain how clients can use the marital deduction and bypass planning, trusts, and charitable deductions to meet their estate planning objectives. 11–7: Describe various approaches that small-business owners can use to transfer ownership. 11-20

21. Business Succession Planning Possible transfer techniques Outright gifts Installment sales Private annuity transactions QTIP trust Buy-sell agreements o Cross purchase o Entity redemption 11-21

22. Business Forms Family limited partnerships (FLP) Pass through for income tax purposes General partnership interest o Unlimited liability o Control of business Limited partnership interest o Limited liability o No control over business decisions 11-22

23. Business Forms Limited liability company (LLC) Pass through for income tax purposes All members have limited liability All members equal in management unless agreement says otherwise 11-23

24. Learning Objectives Appendix B: Incapacity Planning as it relates to Estate Planning 11-24

25. Incapacity Planning Property management Conservator (guardian of property) Durable power of attorney Revocable living trust Contingent (standby) trust Medical care Living will Durable power of attorney for health care (medical proxy) 11-25

26. Medicaid Planning: Qualification Tests Medical o Over age 65 o Blind, or o Disabled o Activities of daily living (ADL) o Need for supervision Income o 300% of the maximum SSI benefit Resource o $2,000 (may vary by state) 11-26

27. Medicaid Planning: Exempt Resources Primary residence ($500,000) o spouse or dependent continues to reside o applicant or spouse intends to return Personal property Vehicles Life insurance Annuities (actuarially sound and immediate) Burial insurance 11-27 Maximum value limits are imposed by state law in most categories, although amounts vary by state.

28. Medicaid Planning Transfer of assets to become eligible Five-year lookback period for income or resources that were transferred for less than FMV Transfers result in period of ineligibility measured by the amount of the transfer divided by the average monthly cost of nursing home care as of the application date in the region in which application is made Ineligibility begins at the later of the first day of the month in which the transfer was made, or the first day the applicant is receiving services in a nursing home and the applicant is eligible for Medicaid but for the transfer 11-28

29. Question 1 Which of the following should not be addressed in incapacity planning? a. decisions on personal care b. decisions regarding health care c. decisions regarding marital status d. decisions regarding management of finances and property 11-29

30. Question 2 Which of the following statements regarding property owned as community property is not correct? a. The property may be owned only by a husband and wife in most community property states. b. How property is titled determines whether property is considered to be community property. c. Property inherited by one spouse during the marriage is not considered to be community property. d. Each owner has equal ownership rights to the property. 11-30

31. Question 3 Robert made a gift to John of property worth $50 for which he had paid $75 two years ago. One year after the gift, John sold the property for $45. Which one of the following amounts represents John’s basis in the property to compute his gain or loss? a. $45 b. $50 c. $75 d. None of the above. 11-31

32. Question 4 Which of the following is not a possible subtraction from total gifts for the year? a. charitable deduction b. annual exclusion c. unused applicable credit amount d. marital deduction 11-32

33. Question 5 Which of the following statements regarding living revocable trusts is not correct? a. They will not save the grantor any income or estate taxes. b. Assets owned by the trust at the grantor’s death will avoid probate. c. They are often used for incapacity planning. d. The grantor cannot act as trustee of his or her revocable living trust. 11-33

34. ©2013, College for Financial Planning, all rights reserved. Module 11 End of Slides Chartered Retirement Planning Counselor SM Professional Designation Program