©2013, College for Financial Planning, all rights reserved. Module 2 Methods of Estate Transfer at...

©2013, College for Financial Planning, all rights reserved.

Module 2Methods of Estate Transfer at Death

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMEstate Planning

Learning Objectives

2–1 Identify property interests that must go through probate, the objectives and characteristics of the probate process, the duties and activities of a personal representative, and common laws and circumstances that may affect estate distribution at death.

2–2 Analyze a situation to identify the advantages and disadvantages of the probate process.

2–3 Identify the requirements for a valid will, characteristics and types of wills, and the clauses and purpose(s) of each clause of a will.

2–4 Evaluate a situation to determine whether specific will clauses are adequate and whether a will needs to be amended.

2–5 Describe the characteristics and purpose of intestate succession statutes, situations in which they apply, and the disadvantages of relying upon such statutes for distribution of a decedent’s estate.

2–6 Identify the characteristics of a given will substitute.

2–7 Analyze a situation to identify the advantages and disadvantages of a will substitute.

2–8 Evaluate a situation to select the most appropriate will substitute.

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Questions to Get Us Warmed Up

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Learning Objectives









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Estate Transfer at Death: Assets Subject to Probate

• Assets owned in sole ownership• Assets owned in tenancy in common• Assets owned as community property

(with no right of survivorship provision)• Assets not in a form of will

substitute recognized as legally valid by laws of the applicable state

• Assets passed by will or intestacy

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Question 1

A decedent’s one-third interest in a commercial building as a tenant in common must go through probate.TrueFalse

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Question 2

Owning property in joint tenancy with right of survivorship (JTWROS) is not a will substitute because the property passes outside of probate.TrueFalse

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Question 3

A characteristic of the sole ownership form of property ownership is that the property goes through probate.TrueFalse

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Learning Objectives









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Probate Process Objectives

• Transfer of decedent’s wealth in an orderly manner

• Provision for a decedent’s surviving spouse and dependent children, if any

• Allowing valid creditors of the decedent to collect their debts from the decedent’s wealth

• Allowing collection from the decedent’s wealth of any taxes owed by the decedent or the estate

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Question 4

Which of the following are characteristics of the probate process? I. It acts as a means of documenting title to

probate property owned by a decedent.II. It simplifies the transfer of probate

property.III. It serves as a forum for the admission and

publication of a decedent's will.IV. It serves as a forum for the submission and

payment of creditor claims.a. I and II onlyb. III and IV onlyc. I, III and IV onlyd. II, III, and IV only

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Learning Objectives









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Location of Probate

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Laws Affecting Estate Distribution at Death

Cannot be changed by will

•Community and quasi-community rules

•Spousal elective share

•Homestead allowance (exemption) statutes

•Exempt property award statutes

•Family allowance statutes

•Pretermitted or omitted heir (child/spouse) statutes

•Felonious homicide statutes

•Advancement statutes

•Disclaimer statutes

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Laws Affecting Estate Distribution at Death

Can be changed by will

• Abatement statutes• Ademption statutes• Divorce or annulment

statutes• Simultaneous

death statutes• Tax apportionment

statutes

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Question 5

Which one of the following types of statutes specifies the order in which the shares of beneficiaries of a decedent’s estate will be reduced in order to satisfy debts against the estate? a. abatementb. tax apportionmentc. ademption d. exempt property award

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Question 6

Preventing a surviving spouse from being left destitute upon the death of his or her spouse is not a purpose of which one of the following? a. community property lawsb. spousal elective

share statutesc. laws of intestate

successiond. advancement

statutes

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Question 7

Ademption means that property bequeathed to a person is consumed to the extent necessary to pay estate debts and expenses. TrueFalse

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Learning Objectives









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Circumstances Affecting Estate Distribution at Death

• Valid nuptial agreement—may prohibit or limit right of surviving spouse to contest will, claim elective share, etc.

• Contractual obligations such as a buy-sell agreement obligating the estate to sell a business interest, or contract to sell property entered into by decedent prior to death

• Adopted and illegitimate children—will receive same share as natural child unless otherwise stated in will

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WillsRequirements for a Valid Will• Testamentary capacity• Valid form• Valid execution by

testator• Valid execution by

witnesses (when required)

Forms of Wills• Typewritten or

witnessed will• Holographic will• Nuncupative will

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Distribution to a Class of Beneficiaries

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Question 8

The clause in a will that disposes of real property is known as a a. devise.b. bequest.c. legacy.d. general bequest.

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Question 9

A single will clause caused a decedent’s estate to be distributed one-fourth to each of her two surviving children, with the remaining one-half to be shared equally by three surviving grandchildren from two predeceased children of the decedent. The beneficiaries were the only surviving descendants of the decedent. Which one of the following terms was used in that distribution clause? a. per capitab. per stirpesc. per capita at each generationd. by representation

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Question 10

Which one of the following is not appropriate for the use of a codicil? a. adding a new provision to a willb. deleting an existing provision from a

willc. revoking an existing willd. amending a provision in an existing will

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Question 11

In his will, Juan Venezuela leaves his residence and all tangible personal property to his wife, Anita, and leaves the remainder to his two children in equal shares. If any of his beneficiaries predecease him, that beneficiary’s share passes to the surviving beneficiaries in equal shares. Does Juan need to amend his will? Carefully consider the supporting rationale in selecting your answer.

a. Yes, if his wife predeceases him, her portion of his estate will pass through intestacy at Juan’s death and be distributed to unintended beneficiaries.

b. No, the will properly disposes of his entire estate.c. Yes, the will does not dispose of his intangible

personal property.d. Yes, there is no residuary clause.

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Question 12

Which one of the following is a document that designates a trust as the recipient of all property that has not been otherwise disposed of when the person who executed the document dies? a. codicilb. power of appointmentc. testamentary trustd. pourover will

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Learning Objectives









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Intestacy: Situations Where Intestate Laws Apply

Total intestacy—necessary elements are:• decedent must die without a valid will; and• decedent must have an interest in property

that is not held in will substitute form at death

Partial intestacy—necessary elements are:• decedent must have an interest in property

that is not held in will substitute form at death; and

• decedent must have an interest in property that is not disposed of by will

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Intestacy: Characteristics of Intestate Succession Laws

• Provision for surviving spouse and dependents, if any

• No provision for charities or nonfamily members (exceptions in some states for registered domestic partners)

• Provision that decedent’s property escheats to the state if there are no surviving heirs within a stated degree of relationship to the decedent

• If decedent had a surviving spouse, the spouse is always given some portion of the intestate property

• Surviving children may get nothing if they are also the only children of the surviving spouse, or they may get everything if there is no surviving spouse

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Intestacy: Disadvantages

• Cannot accommodate special needs, since all heirs of the same class must be treated equally

• Cannot benefit friends, stepchildren, or charities (exceptions in some states for registered domestic partners)

• Every heir is given an undivided interest in each asset; impairs value and makes management cumbersome

• Death taxes may be higher than necessary or desirable

• Court rather than decedent names fiduciaries

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Question 13

A will that disposes of the testator’s real and tangible personal property is considered to adequately dispose of the testator’s estate. TrueFalse

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Question 14

If a decedent’s property does not pass to someone by will substitute or by will, and there are no legal heirs under the applicable state intestate succession statute, the property escheats to the state. TrueFalse

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Learning Objectives









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Characteristics of Will Substitutes

Joint Tenancy With Right of

Survivorship and Tenancy by the Entirety• Survivorship rights

provide for automatic disposition to surviving tenant(s) at a tenant’s death; probate is avoided.

• Tenancy by the entirety is limited to spouses only.

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Payable on Death (P.O.D.) Accounts• Deposit of cash or cash

equivalent funds for the benefit of another, payable on death of original depositor

• Depositor has complete control over funds

• Beneficiary designation is revocable

• Conservatorship or guardianship may need to be established if funds are paid to a minor 2-36


Transfer on Death (T.O.D.) Accounts• Endorsement of particular securities or a

security account for the benefit of another, transferable on the death of the original owner

• Owner has complete control over securities or account until death

• Beneficiary designation is revocable• Conservatorship or

guardianship may need to be established if securities are transferred to a minor

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Characteristics of Will Substitutes Government Savings Bonds

Co-ownership issued in

one of two forms:• To alternative payees (“to

A or B”); survivor becomes sole owner upon death of other payee

or• In beneficiary format (“A

payable on death to B”); primary payee reserves right to control disposition and B becomes sole owner upon death of A (but not vice versa)

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Characteristics of Will Substitutes Revocable Inter Vivos Trusts

• Trust must be funded during grantor’s lifetime to avoid probate at death

• Allows grantor to retain total control until death

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Characteristics of Will Substitutes Irrevocable Inter Vivos Trusts

• Trust must be funded during grantor’s lifetime to avoid probate at death

• Assets used to fund testamentary trusts do not avoid probate

• Grantor can retain partial control until death through terms of the trust or powers of the trustee

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Characteristics of Will Substitutes Life Insurance

• Beneficiary should not be an individual’s estate

• Both primary and contingent beneficiaries should be designated to prevent benefit from being paid to estate of insured if no named beneficiary survives the insured

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Characteristics of Will Substitutes Pension Benefits

• Beneficiary should not be an individual’s estate

• Primary and contingentbeneficiaries should be designated to prevent benefit from being paid to estate of participant if no named beneficiary survives the participant

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Question 15

Louis Allen inherited a parcel of real estate. Five years ago, he changed the title to joint tenancy with right of survivorship with his wife, Eve. Louis would like to will the property to John, his son from a previous marriage.

What is one consequence of holding the property in its current form?a. The testamentary transfer from Louis to John

will occur without Eve’s consent.b. John will receive it without a step-up basis.c. It will pass to Eve as the surviving joint tenant

regardless of the terms of the will.d. John and Eve will each own half after Louis

dies, and they might not get along.2-43

Question 16

Roberta Molinaro recently inherited $105,000 cash from her mother’s estate. Roberta wants to assist her two adult children with their educational needs, and when she dies she wants them to receive title to the unexpended cash inheritance. Roberta wants to leave the cash to her children without intervention by the probate court. She also wants to have exclusive control during her life.

Which one of the following statements concerning the most appropriate form of will substitute for Roberta is correct?a. Titling the account with her children as tenants in common will

accomplish all of Roberta’s objectives.b. A separate bank account in Roberta’s name will ensure that the

cash ultimately will go to her children outside of probate.c. A joint bank account with her children will accomplish all of

Roberta’s objectives.d. A payable on death (P.O.D.) bank account will provide her with

access to the cash while she is alive, and it will also allow her children to receive the remaining cash at her death without going through probate.

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Question 17

Charles Sorensen purchased a parcel of commercial real estate. Charles wants the bulk of his estate to pass to his wife. However, he plans to pass the commercial real estate to his adult children. Charles does not have a will and does not intend to make one.

Which one of the following statements concerning the most appropriate form of titling for the commercial real estate owned by Charles is correct?

a. Holding it in sole ownership will allow him to pass the property to his children without the surviving spouse taking a share of the property.

b. Titling it in tenancy by the entirety will accomplish his testamentary goals.

c. Holding it in joint tenancy with right of survivorship with his children will allow the property to pass directly to them without the consent of the surviving spouse.

d. Titling it in tenancy in common with his children is preferable because it will pass to them automatically, by operation of law, at his death.

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Question 18

Which one of the following statements is true regarding the establishment of a revocable joint tenancy bank account by a parent with his or her child?a. The parent will be deemed to have made a gift

of one-half of the funds that he or she deposits into the account.

b. The child will have authority to remove only one-half of the funds deposited by the parent.

c. The child will be able to withdraw funds deposited by the parent only upon the parent’s death.

d. The parent will be deemed to have made a gift to the child only if the child actually withdraws funds from the account for his or her own use.

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Question 19

Which one of the following will substitutes is not unilaterally revocable by the original owner of the affected asset if the owner is still competent? a. funds placed in a bank account with a

P.O.D. designationb. property titled in joint tenancy with

right of survivorshipc. securities in an account with a T.O.D.

designationd. funds placed in a revocable trust

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Learning Objectives









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Will Substitutes: Advantages Over Probate

• Transfer of title is quicker, cheaper, and more private.

• Revocable forms are easier to change.

• Irrevocable forms provide limited asset protection.

• There is a possible reduction in gross estate (some irrevocable forms).

• There is a possible continued control and use by original owner.

• State law may remove nonprobate property from reach of elective share statutes.

• Revocable forms are not taxable when established.

• They allow possible use of annual exclusion and tax exclusive nature of gift tax (if trust, applies to irrevocable trusts only).

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Will Substitutes: Disadvantages Compared to Probate

• Possible substantial set-up and maintenance costs (trusts)

• Possible loss of control over asset (irrevocable trusts, joint tenancy, tenancy by the entirety)

• Possible transfer tax cost when established (irrevocable trusts, joint tenancy, tenancy by the entirety)

• If used to excess, may prevent full use of applicable credit amount (joint tenancy between spouses and tenancy by the entirety)

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Question 20

David Norwood and his brother, George, are planning to buy a duplex together. Because each wants to be sure that his children eventually will inherit his ownership interest, the most appropriate form of property ownership for them is tenancy in common. TrueFalse

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©2013, College for Financial Planning, all rights reserved. Module 2 Methods of Estate Transfer at...

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