Estate Planning Test Bank Questions, Chapter 15

Estate Planning Objectives

• Objectives include asset distribution in line with personal circumstances and wishes.
• Evaluation of taxes versus debt liabilities is crucial in estate planning.
• Minimizing conflict among heirs is a primary goal.
• Protecting oneself during their lifetime is a fundamental aspect.

Steps of Estate Planning

• The fourth step involves establishing a will.
• Other estate planning tools, obstacles evaluation, and tax familiarization follow this.

Estate Size Considerations

• The estate planning process can differ for large versus small estates, primarily in terms of supervision needed.

Relevant Estate Planning Factors

• Important factors to consider: ownership type of assets and current fair market value.
• The original acquisition cost of assets is typically irrelevant.

Role of the Executor

• The executor administers the estate, ensuring compliance with legal requirements and managing asset liquidation.

Evaluation of a Will

• Legal wills should clearly state wishes, comply with municipal law, and account for overlooked assets to prevent conflict.

Understanding Intestate

• Intestate refers to dying without a will, which complicates asset distribution.

Importance of Having a Will

• A will safeguards interests of spouses and ensures friends can receive assets; it helps establish tax-advantaged trusts.

Trusts Overview

• Trusts are legal entities managed by a third party for the benefit of another.
• They circumvent costly probate procedures and public scrutiny.

Trust Disadvantages

• Discretion in interpreting a trust can lead to deviation from the grantor’s intentions, impacting asset distribution.

Types of Trusts

• Testamentary trusts are created through a will and take effect after death.

Revocable Trusts

• Revocable trusts can be altered by the grantor and generally do not influence taxes significantly.

Gift Requirements

• A valid gift must involve no lingering control from the giver and should not entail reciprocal agreements.

Annual Gift Tax Exemption

• Gifts under $14,000 per person are typically exempt from affecting the estate tax exemption.

Joint Tenancy vs. Tenancy by the Entirety

• Key differences include legality based on marital status and conditions for termination of the agreement.

Life Insurance in Estate Planning

• Life insurance considerations include liquidity, payment assurances, and tax advantages.

Letter of Instruction

• This document offers guidance beyond the will, addressing sensitive family matters and directing asset locations.

Tax Implications for Minor's Investments

• A minor's investment income is partially taxed at their low rate, with specific income thresholds determining tax liabilities.

Trust Account Designations

• Accounts labeled as "in trust for" indicate trust establishment with specific beneficiaries.

Fourteen Steps of Estate Planning

• Steps include understanding estate planning, identifying goals, assessing assets, and ensuring compliance with relevant laws.

Evaluating a Legally Recognized Will

• Key evaluation points encompass clarity of wishes, compliance with laws, and secure storage of the document.

Estate Planning Tools

• Various estate planning tools carry distinct characteristics and tax advantages, contributing to a comprehensive estate strategy.

Will Examination and Modification

• Examine draft wills for clarity and ensure wishes are expressed accurately.
• Ensure terminology is straightforward, avoiding ambiguity regarding asset distribution.
• Periodically review and update wills to reflect changing personal situations and tax laws.

Asset Consideration

• Identify any overlooked assets with emotional significance; these should be clearly described in the will.
• Modifying the will may prevent potential conflicts among beneficiaries over its contents.

Legal Compliance and Storage

• Confirm the will meets state laws, particularly regarding witness requirements for signing.
• Store the will in a secure location to ensure it's accessible after death.

Estate Planning Tools

• Identify characteristics, tax advantages, and disadvantages of estate planning tools such as durable powers of attorney, medical powers of attorney, and springing powers of attorney.
• The "springing power of attorney" takes effect only upon a specific event occurring.

Taxation for Minor Children

• Understand the taxation brackets for minors, including the first $800 of income taxed at a child’s low rate and subsequent income brackets.

Trust Accounts

• Banks may designate accounts as "in trust for" or "trustee for," which can impact the classification of the account as a gift or a trust.

Steps of Estate Planning

• Understand what estate planning entails and identify objectives and assets.
• Establish a will and evaluate obstacles, including tax implications and financial strategies.
• Incorporate risks associated with the estate and consider the specific needs for minors.
• Review and implement the plan periodically for ongoing effectiveness.

Evaluation Factors for a Legally Recognized Will

• Assess if the will accurately reflects personal wishes and is compliant with legal requirements.
• Check for clarity in asset distribution and ensure no assets are overlooked.
• Evaluate if the will complies with applicable municipal laws.

Financial Planning Objectives

• Estate planning objectives include aligning asset distribution with personal wishes, addressing owed debts, minimizing conflicts among heirs, and providing protection during one's lifetime.

Estate Planning Objectives

• Key objectives include matching asset distribution to personal circumstances and wishes, minimizing conflict among heirs, and ensuring personal protection during life.
• Matching taxes with outstanding debts is crucial but might not always be regarded as a core objective.

Steps in Estate Planning

• Establishing a will is fundamental.
• Identifying and considering other estate planning tools follows, along with evaluating potential obstacles and becoming familiar with applicable taxes.

Estate Size and Planning Process

• The estate planning process differs for large and small estates, particularly in terms of supervision required.

Relevance of Ownership Types in Estate Planning

• Asset ownership types, such as joint versus separate ownership, influence the estate planning outcome but recognizing original costs or market values is secondary.

Role of the Executor

• An executor is responsible for administering the estate, ensuring compliance with legal requirements, and liquidating assets accordingly.

Will Evaluation Criteria

• A legally recognized will must have unambiguous wishes stated, comply with state law, address overlooked assets, and not predispose to conflict.

Intestate Definition

• Intestate refers to the situation of dying without a will, exposing the estate to state law determinations regarding asset distribution.

Reasons to Have a Will

• Important reasons for having a will include designating specific asset distributions to spouses, addressing state mandates regarding asset allocation, and ensuring that friends or non-family beneficiaries are provided for.

Trusts and Third-Party Management

• Trusts involve separate legal entities where third parties manage property for beneficiaries, offering advantages like bypassing probate.

Strategies to Avoid Probate

• To avoid probate and its public scrutiny, establishing a trust is beneficial compared to simply preparing a will.

Disadvantages of Trusts

• Trusts may deviate from the grantor's specific wishes due to the discretion given in interpreting the trust's terms.

Trust Advantages

• Advantages of trusts include potential tax benefits, circumventing probate, and better management control, while costs and risks associated with trustee actions are disadvantages.

Letter of Instruction

• This document may include specific wishes, such as burial preferences, to guide executors.

Assets That Bypass Probate

• Assets such as joint ownership with survivorship rights, qualified pension plans, and life insurance proceeds generally bypass probate.

Tax Considerations in Estate Planning

• Key taxes to consider during estate planning include estate, gift, probate, and income taxes.

Federal Estate Tax (2014)

• The maximum federal estate tax rate in 2014 was set at 40%.

Credit Shelter Trust Names

• Alternative names for a credit shelter trust include Type B trust, Bypass trust, and Exemption-equivalent trust.

Bequest Over Gift Advantages

• Bequests allow grantors to maintain asset control during their lifetime and delay transfers to heirs, unlike gifts.

Fast-Growing Assets as Gifting Vehicles

• Fast-growing assets are typically preferred gifting vehicles because transferring them can reduce estate value.

Legal Documents for Incapacity

• Important documents include letters of instruction, medical powers of attorney, and general powers of attorney, which ensure decision-making power is retained.

Reviewing Your Will

• Regular examination of your will is essential to ensure it aligns with current wishes, legal compliance, and oversight of any overlooked assets.

Characteristics of Estate Planning Tools

• Wills allow asset division upon death, gifts offer flexibility but may control loss, trusts provide professional management but have costs, while powers of attorney ensure decisions in incapacity.

Estate Planning Objectives

• Objectives include matching assets to wishes, managing taxes and liabilities, minimizing conflicts among heirs, and ensuring personal protection during life.
• All listed options are relevant financial planning objectives.

Steps of Estate Planning

• Fourth step: Consider other tools to meet estate planning objectives.
• Establishing a will and evaluating potential obstacles are also key steps.

Estate Size and Planning Process

• Estate planning can differ for large vs. small estates, mainly in supervision levels required.

Strategies in Estate Planning

• Ownership type (joint vs. separate), original cost, and current fair market value are all relevant to outcome strategies.

Role of the Executor

• The executor is responsible for managing the estate, complying with legal requirements, and liquidating assets.

Validating Wills

• Legally recognized wills must be evaluated for clarity of wishes, compliance with laws, overlooked assets, and potential for conflict.

Intestate Definition

• Intestate refers to dying without a will, lacking a formal plan for asset distribution.

Importance of Wills

• Reasons for having a will include ensuring desired asset distribution, compliance with state laws, and planning for tax-advantaged trusts.

Trusts Management

• A trust involves a third party managing property for a beneficiary, distinct from other estate planning tools.

Avoiding Probate

• To avoid probate, preparing a will is essential; trusts can also bypass this process.

Trust Flexibility

• Deviation from a grantor's wishes is typically a disadvantage of trusts due to interpretative leeway allowed.

Trust Advantages

• Tax benefits, bypassing probate, and enhanced control are among the advantages of establishing a trust.

Testamentary Trust

• A testamentary trust is specified in a will and implemented after the grantor's death.

Revocable Trusts

• Revocable trusts can be modified by the grantor and generally do not affect gift taxes.

Definition of a Gift

• A gift requires unconditional transfer without reciprocation and cannot represent a contractual agreement.

Gift Tax Exemption

• The gift tax exemption amount is up to $14,000 per person.

Joint Tenancy vs. Tenancy by the Entirety

• Key differences include eligibility for married persons and the necessity of mutual consent for termination.

Life Insurance in Estate Planning

• Life insurance is crucial for liquidity, assurance of payment, and potential tax savings in estate planning.

Legal Instruction Letters

• A letter of instruction is not legally binding but helps guide executors regarding asset locations, sensitive matters, and burial wishes.

Probate Bypass

• Assets held jointly, retirement accounts, and life insurance proceeds generally bypass probate.

Tax Assessments in Estate Planning

• Consideration of gifts, estate taxes, probate costs, and income taxes is essential when planning an estate.

Federal Estate Tax Rate

• The maximum federal estate tax rate was 40% in 2014.

Credit Shelter Trust

• Alternative names for a credit shelter trust include B trust, C trust, and bypass trust.

Bequest Advantages

• Bequests allow retention of assets during the grantor's lifetime and defer distributions to beneficiaries.

Fast-Growing Assets

• These assets are preferred for gifting due to their potential for increasing estate valuation.

Legal Documents for Incapacity

• Essential documents include medical powers of attorney and general powers of attorney.

Will Validity and Updates

• Wills should be periodically reviewed for clarity, legal compliance, and to reflect current personal circumstances.

Estate Planning Tools Evaluation

• Each estate planning tool needs to be assessed for characteristics, tax advantages, and pros and cons to ensure effective planning.

This quiz contains test bank questions from Chapter 15 on estate planning. It focuses on financial planning objectives associated with estate planning. Test your knowledge on key concepts related to the distribution of assets and objectives in estate planning.