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Understanding Living Trusts

This Document Will Help You Prepare To Take The Online Examination

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Understanding Living Trusts

Published by Erland Education Services (formerly Erland Financial Education Services). About the Author Erland Education Services is a provider of financial continuing education curriculum for financial professionals, which began operations in 1993. The company’s curriculum is written and researched using a variety of current, reliable sources. The proprietor and curriculum author, Peggy Erland, has a background including thirty-two years as a licensed agent, seven years as a licensed securities representative, four years as a dean of training for a nationwide firm, and six years managing insurance and securities sales support units. Her experience includes curriculum development, individualized and group training, training evaluation, technical manual creation, and research and documentation of thousands of technical sales issues. No part of these courses may be reproduced, transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express permission of Erland Education Services. Although great effort has been made to ensure this publication contains accurate, timely information, it is provided with the understanding that the author is not engaged in rendering legal, accounting, tax, or other professional service. If professional advice is required, the services of a competent legal advisor should be sought. Copyright © Erland Education Services (formerly Erland Financial Education Services) 2008, 2009, 2010, 2011,

2012, 2013, 2014, 2015, 2016, 2017, 2018

Understanding Living Trusts 1

Table of Contents

UNDERSTANDING LIVING TRUSTS ............................................................................................... 2

CHAPTER ONE: ESTATE PLANNING ........................................................................................... 5

LEARNING OBJECTIVES: ........................................................................................................................ 5WHAT IS AN ESTATE? ........................................................................................................................... 5ESTATE PLANNING ............................................................................................................................... 5LACK OF PLANNING ............................................................................................................................. 6BENEFITS OF ESTATE PLANNING .......................................................................................................... 6COST OF ESTATE PLANNING ................................................................................................................ 7DYING INTESTATE ................................................................................................................................ 7

State Intestacy Rules ........................................................................................................................ 7State Intestacy Rule Summary ......................................................................................................... 8

INTESTACY LAWS – BY STATE .............................................................................................................. 8CHAPTER ONE STUDY QUESTIONS .................................................................................................... 10

Answers to Chapter One Study Questions .................................................................................... 12

CHAPTER TWO: PROBATE ............................................................................................................ 13

LEARNING OBJECTIVES: ...................................................................................................................... 13WHAT IS PROBATE? ............................................................................................................................ 13KINDS OF PROBATE ............................................................................................................................ 14HISTORY OF PROBATE ........................................................................................................................ 14THE PROBATE PROCESS ...................................................................................................................... 14

Non-Probated Property .................................................................................................................. 15CHAPTER TWO STUDY QUESTIONS .................................................................................................... 16

Answers to Chapter Two Study Questions .................................................................................... 17

CHAPTER THREE: PROS AND CONS OF PROBATE .............................................................. 18

LEARNING OBJECTIVES: ...................................................................................................................... 18EXPENSE .............................................................................................................................................. 18LENGTH OF TIME ................................................................................................................................ 18PRIVACY .............................................................................................................................................. 19CLAIMS OF CREDITORS ....................................................................................................................... 19PROPERTY DISTRIBUTION ................................................................................................................... 19PROBATE AVOIDANCE ........................................................................................................................ 19CHAPTER THREE STUDY QUESTIONS ................................................................................................. 20

Answers to Chapter Three Study Questions .................................................................................. 21

CHAPTER FOUR: ESTATE PLANNING AND TAXES ............................................................. 22

LEARNING OBJECTIVES: ...................................................................................................................... 22FEDERAL ESTATE TAX ........................................................................................................................ 22

Potential Repeal of EGTRRA ......................................................................................................... 22Impact of TRA 2010 ....................................................................................................................... 22Estate Exemption Portability ......................................................................................................... 23American Taxpayer Relief Act of 2012 .......................................................................................... 23


Tax Cuts and Jobs Act .................................................................................................................... 23Assets Subject to Federal Estate Tax .............................................................................................. 24Spousal Exemption ......................................................................................................................... 24

FEDERAL INCOME TAXATION ............................................................................................................ 24FEDERAL GIFT TAX ............................................................................................................................. 24

Gift Tax Credits .............................................................................................................................. 25Requirements of Gifts ..................................................................................................................... 26

GIFT AND OTHER ESTATE TAX DEDUCTIONS .................................................................................... 26STATE TAXES ....................................................................................................................................... 26GENERATION SKIPPING TRANSFER TAX ............................................................................................ 27CHAPTER FOUR STUDY QUESTIONS ................................................................................................... 28

Answers to Chapter Four Study Questions ................................................................................... 29

CHAPTER FIVE: LIFE INSURANCE AND ESTATE PLANNING .......................................... 30

LEARNING OBJECTIVES: ...................................................................................................................... 30WHAT IS LIFE INSURANCE? ................................................................................................................ 30

Term Insurance ............................................................................................................................... 30Cash Value Insurance ..................................................................................................................... 30

LIFE INSURANCE AND PROBATE ........................................................................................................ 31Individuals as Beneficiary .............................................................................................................. 31Estate as Beneficiary ....................................................................................................................... 31

LIFE INSURANCE AND TAXES ............................................................................................................. 31Income Taxes .................................................................................................................................. 31Estate Taxes .................................................................................................................................... 32

LIFE INSURANCE AND GIFTING .......................................................................................................... 32Charities .......................................................................................................................................... 32Transfer of Ownership .................................................................................................................... 33Loss of Control ................................................................................................................................ 33

CHAPTER FIVE STUDY QUESTIONS ..................................................................................................... 34Answers to Chapter Five Study Questions .................................................................................... 35

CHAPTER SIX: JOINT OWNERSHIP AND ESTATE PLANNING ........................................ 36

LEARNING OBJECTIVES: ...................................................................................................................... 36FORMS OF JOINT OWNERSHIP ............................................................................................................ 36

Joint Tenants .................................................................................................................................. 36Tenancy-By-the-Entirety ................................................................................................................ 36Tenants-in-Common ....................................................................................................................... 36Community Property ...................................................................................................................... 37

JOINT TENANCY AND PROBATE ......................................................................................................... 37IMPORTANT CONSIDERATIONS OF JOINT TENANCY .......................................................................... 37

Irrevocability ................................................................................................................................... 37Role of a Will .................................................................................................................................. 38Creditors ......................................................................................................................................... 38

JOINT TENANCY AND TAXES .............................................................................................................. 38JOINT TENANCY AND COST BASIS ..................................................................................................... 38CHAPTER SIX STUDY QUESTIONS ....................................................................................................... 40

Answers to Chapter Six Study Questions ...................................................................................... 42


CHAPTER SEVEN: OTHER ESTATE PLANNING TOOLS ..................................................... 43

LEARNING OBJECTIVES: ...................................................................................................................... 43RETIREMENT ACCOUNTS .................................................................................................................... 43BANK ACCOUNTS ............................................................................................................................... 43

Joint Bank Accounts ....................................................................................................................... 43Payable-on-Death Bank Accounts .................................................................................................. 44

TRANSFER-ON-DEATH ....................................................................................................................... 44NAMING BENEFICIARIES .................................................................................................................... 44

Percentage or Fractional Distributions .......................................................................................... 44Per Capita Distributions ................................................................................................................ 45Per Stirpes Distributions ................................................................................................................ 45

CHAPTER SEVEN STUDY QUESTIONS ................................................................................................. 46Answers to Chapter Seven Study Questions ................................................................................. 47

CHAPTER EIGHT: WILLS ............................................................................................................... 48

LEARNING OBJECTIVES: ...................................................................................................................... 48DEFINITION OF A WILL ....................................................................................................................... 48WHO NEEDS A WILL? ........................................................................................................................ 48REQUIREMENTS OF A VALID WILL ..................................................................................................... 49KINDS OF WILLS ................................................................................................................................. 50CHANGING, ADDING AND REVOKING A WILL ................................................................................. 50CONTESTING A WILL .......................................................................................................................... 51PROVIDING FOR MINOR CHILDREN THROUGH A WILL .................................................................... 51

Personal Guardians ........................................................................................................................ 51Property Guardians ........................................................................................................................ 51Trusts .............................................................................................................................................. 51Custodian Accounts ....................................................................................................................... 51

STUDY QUESTIONS CHAPTER EIGHT .................................................................................................. 52Answers to Chapter Eight Study Questions .................................................................................. 53

CHAPTER NINE: AN INTRODUCTION TO TRUSTS ............................................................. 54

LEARNING OBJECTIVES: ...................................................................................................................... 54WHAT IS A TRUST? ............................................................................................................................. 54

Grantor ........................................................................................................................................... 54Trustee ............................................................................................................................................ 54Beneficiary ...................................................................................................................................... 55

HISTORY OF TRUSTS ........................................................................................................................... 55TYPES OF TRUSTS ................................................................................................................................ 55

Revocable Trusts ............................................................................................................................. 55Irrevocable Trusts ........................................................................................................................... 55Testamentary Trusts ...................................................................................................................... 56Living Trusts .................................................................................................................................. 56Other Kinds of Trusts ..................................................................................................................... 56

TRUSTS AND PROBATE ........................................................................................................................ 57STUDY QUESTIONS CHAPTER NINE ................................................................................................... 58

Answers to Chapter Nine Study Questions ................................................................................... 59


CHAPTER TEN: LIVING TRUSTS ................................................................................................. 60

LEARNING OBJECTIVES: ...................................................................................................................... 60WHAT IS A LIVING TRUST? ................................................................................................................. 60LAWS RELATING TO THE LIVING TRUST ............................................................................................ 61PARTIES TO A LIVING TRUST .............................................................................................................. 61

Trustees ........................................................................................................................................... 61Beneficiaries .................................................................................................................................... 62

LIVING TRUST CONSTRUCTION .......................................................................................................... 62A Trust ........................................................................................................................................... 62A-B Trust ........................................................................................................................................ 63A-B-Q Trust ................................................................................................................................... 63

MAKING CHANGES TO A LIVING TRUST ............................................................................................ 63CHAPTER TEN STUDY QUESTIONS ..................................................................................................... 64

Answers to Chapter Ten Study Questions ..................................................................................... 65

CHAPTER ELEVEN: IRREVOCABLE LIFE INSURANCE TRUSTS ....................................... 66

LEARNING OBJECTIVES: ...................................................................................................................... 66WHAT IS AN IRREVOCABLE LIFE INSURANCE TRUST? ....................................................................... 66PARTIES TO AN IRREVOCABLE LIFE INSURANCE TRUST .................................................................... 67

Trustees ........................................................................................................................................... 67Beneficiaries .................................................................................................................................... 67

IRREVOCABLE LIFE INSURANCE TRUSTS AND ESTATE TAXES ........................................................... 67INSURANCE POLICIES ......................................................................................................................... 68RULES FOR GIFTING ............................................................................................................................ 68

“Gift of Present Interest” ............................................................................................................... 68Generation Skipping Transfer Tax ................................................................................................. 69

IRREVOCABLE LIFE INSURANCE TRUSTS VS. LIVING TRUSTS ............................................................. 69REVOCABLE LIFE INSURANCE TRUSTS ............................................................................................... 69

Taxation and Gifting ...................................................................................................................... 70CHAPTER ELEVEN STUDY QUESTIONS ............................................................................................... 71

Answers to Chapter Eleven Study Questions ................................................................................ 72

CHAPTER TWELVE: WILLS VS. LIVING TRUSTS .................................................................. 73

LEARNING OBJECTIVES: ...................................................................................................................... 73PROBATE ............................................................................................................................................. 73COST ................................................................................................................................................... 73PROPERTY DISTRIBUTION ................................................................................................................... 74CONTESTING ....................................................................................................................................... 75TAXES .................................................................................................................................................. 75IMPORTANCE OF A WILL .................................................................................................................... 75

Changing Assets ............................................................................................................................. 75Post-Death Assets ........................................................................................................................... 75Options Through a Will ................................................................................................................. 75

POUR-OVER WILL .............................................................................................................................. 75STUDY QUESTIONS CHAPTER TWELVE .............................................................................................. 76

Answers to Chapter Twelve Study Questions ............................................................................... 77


Chapter One: Estate Planning Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Distinguish between tangible and intangible property • Explain the purpose of appointing a Guardian • Describe general intestacy principles and processes • Define per stirpes and per capita distribution

Estate planning is an important activity for all individuals with property and responsibilities to survivors. A living trust may be a key component of an estate plan. This chapter provides an introduction and overview of estate planning, including its importance, benefits, and the problems that occur if estate planning is not accomplished.

What is an Estate? An estate consists of all the property an individual owns. In addition to being made up of such property as a home and other real estate, an estate is also made up of tangible personal

property, including: • Automobiles • Furniture • Jewelry • Artwork

An estate also consists of intangible property. Examples of this kind of property include: • Insurance policies • Bank accounts • Stocks and bonds • Social Security benefits

Estate Planning Estate planning is essentially the creation of a blueprint outlining where property goes after an individual dies. Commonly, the creation of an estate plan is thought about in terms of distributing property at death through the making of a will. However, there are many other ways that estate property is distributed, such as through a trust, life insurance, and joint ownership, just to name a few. These methods for estate property distribution are commonly referred to as will substitutes. Estate property may also be transferred during the life of the estate holder, such as through gifting. Estate plans may include actions taken during life and upon death.


Lack of Planning Unfortunately, estate planning is grossly underused in the United States today. According to a survey conducted by the legal website FindLaw.com, over half of all Americans do not have a will to specify how property is to be distributed upon their death. Another survey by AARP found that while approximately 60 percent of Americans fifty and over have wills, that number declines drastically among younger people, with only 44 percent of persons age 50-54 drawing up a will. Why the reluctance to create an estate plan? One reason is that many people do not want to think about their own mortality or death. This aversion leads to unwillingness to plan for what happens upon one’s death. Another reason that many people do not create an estate plan is the assumption that one does not need one “yet.” But estate planning is not just for older people. When a young or middle-aged person dies without an estate plan, children are often left behind whose care is not specifically provided for. Also, with the increase in nontraditional families, a deceased’s specific wishes for certain loved ones may not be able to be carried out without an estate plan.

Benefits of Estate Planning An estate plan can accomplish many things for individuals of any age or income. Following is a list of common benefits of estate planning: • Providing for family – An estate plan allows an

individual to provide for his or her spouse, often through the use of life insurance. Also, education for children is assured, as well as the provision of a suitable guardian in the event that both parents pass away. If a guardian is not named through an estate plan, a court appointed guardian is named by the state. An estate plan also allows for an individual to provide for older parents or grandchildren, often through the use of a special trust fund.

• Passing on property quickly – Another purpose of an estate plan is to aid in the transfer of property as smoothly and quickly as possible. An estate plan can help speed up and ease probate, which is essentially the legal process of settling an estate (probate is discussed in the next chapter). This is often done through estate planning devices such as living trusts, insurance, “payable on death” bank accounts, or some other similar means.

• Minimizing taxes – Estate planning helps to reduce the amount of taxes that need to be paid when property is transferred upon death. A good estate plan enables an individual to provide the maximum amount the law allows to beneficiaries. A good plan also provides that only a minimum amount goes to the government.

Probate is a legal process supervised by a court to validate a will and that includes the settling of the deceased’s estate and administration of the property whose distribution is governed by the will.

A Guardian is the person responsible for the care or a minor’s person or property. Generally, a surviving parent is the personal and property guardian for a minor who receives property from a deceased parent’s estate, but sometimes others are named as personal and/or property guardians or custodians for minors. Guardians or custodians should be named in the parents’ wills. If parents die, the selection of guardian or custodian made in the will is normally honored by the courts.


• Providing gifts – Gifts to spouses, charity (religious or otherwise), and for education are also some of the tools used in an estate plan. Life insurance proceeds may also be gifted.

• Arranging for payment of death-related expenses – Another use of an estate plan is to set out funeral arrangements. An individual can also specify how his or her other death-related expenses should be paid in order to help ease the burden for loved ones.

Cost of Estate Planning A professionally drawn-up estate plan varies in cost. The cost increases based upon a plan’s larger size or complexity, in addition to the varying rates a lawyer may charge. Not all estates require professional services such as a CPA or tax attorney, although the larger the estate, the more professional help is required in minimizing taxes. Smaller estates may require no more than a reputable book or software program or app to provide an effective plan.

Dying Intestate When an individual dies without an estate plan he or she is said to have died “intestate.” Dying intestate could happen if no valid will or trust was left, or if no other means of property transfer were provided. When an individual dies intestate, an administrator is appointed by the court to handle the estate. The intestacy laws of the deceased’s state then dictate to whom the estate is distributed. The laws also outline how much of the estate is distributed to each beneficiary. In very rare cases in which a deceased leaves no living relatives, the intestate property goes to the state.

State Intestacy Rules

State intestate distribution plans are usually quite complex. Following is a breakdown of general state intestacy rules: Generally, the first in line to receive property is a surviving spouse. In most states, the surviving spouse and children either share the entire estate, or the surviving spouse receives it all. In cases where the spouse and children share the estate, the spouse usually receives one-half and the children receive the remaining one-half. If an individual dies leaving a spouse but no children, many states require that the estate be inherited entirely by the spouse, to the exclusion of any other blood relatives. If an individual dies and no spouse or children are left, then the estate is inherited by blood relatives of the deceased. If there are numerous individuals who share the same relationship level (such as siblings), then the property must be shared equally among them. In this case, any other relatives falling into a lower relationship level (such as cousins) will not be entitled to receive any portion of the property. If no blood relatives survive upon an individual’s death, then the entire estate passes to the state. No close friends, in-laws, charities or any other kind of organization may receive any portion of the estate. This kind of property transfer falls under the legal doctrine of escheat.


State Intestacy Rule Summary

Following is a summary of the general state intestacy rules: • Surviving spouse/no children: estate goes to spouse • Surviving spouse/surviving children: estate divided • No spouse/surviving children: estate goes to children • No spouse/no children: estate goes to parents or sibling’s or sibling’s heirs • No heirs: estate goes to next of kin • No heirs or nor next of kin: estate goes to the state

Intestacy Laws – By State To show how intestacy laws vary, below are examples of the intestacy laws in some select states. These examples apply to situations in which the heirs are the surviving spouse and children. It should be noted that laws are subject to change and current statutes may be different: Alaska – Fifty thousand dollars and one-half of the balance of the estate goes to the spouse. One-half of the balance of the estate goes to the children. If the children are not the offspring of the surviving spouse, then one-half of the balance of the estate goes to the spouse and one-half goes to the children. California – All of the community property (property considered to be owned equally by each spouse) goes to the spouse. If only one child stands in line to inherit a portion of the estate, then one-half of the separate property (property considered to be owned only by the deceased spouse) goes to the spouse and one-half goes to the child. If more than one child stands in line to inherit a portion of the estate, then one-third of the separate

property passes to the spouse and two-thirds of the separate property passes to the children. The same rules apply regardless of whether or not the children are the offspring of the surviving spouse. District of Columbia – For real estate, the surviving spouse receives one-third of the life estate and the balance goes to the children equally or to their children per stirpes. For personal property, one-third goes to the surviving spouse and two-thirds goes to the children equally or their children per stirpes. If the children are not the offspring of the surviving spouse, the same rules apply.

Community Property: In certain states, property acquired during marriage is owned equally by each spouse. This property is known as community property, and each spouse has a one-half interest in this property. Property acquired by a spouse prior to marriage and property received as a gift or through inheritance is separate property. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. Wisconsin applies modified community property laws in certain circumstances, such as at a spouse’s death.

Per Stirpes is a form of distribution at death where property that is to be passed onto a beneficiary or heir is passed onto that beneficiary’s or heir’s children if that beneficiary or heir is deceased. This legal term means “your children downwards.” For example, if property is to pass to a spouse, per stirpes, and the spouse has passed on at the time of the death of the property owner, the spouse’s children receive the property in equal shares. If there were two children and one is deceased at the time of the death of the property owner, the deceased child’s share is passed on to his children -- to the grandchildren of the property owner.


Hawaii – The surviving spouse receives one-half and either the children receive one-half equally or it will pass to the grandchildren. Idaho – All community property passes to the surviving spouse. Fifty thousand dollars and one-half of the balance of the separate property also passes to the spouse, while one-half of the balance passes either to children or grandchildren per stirpes. If the children are not the offspring of the surviving spouse, then all of the community property will still pass to the spouse, and one-half of the separate property will pass to the spouse and one-half will pass to the children or grandchildren per stirpes. Louisiana – Descendants receive all community property per stripes. The surviving spouse may use the property only until remarried. All separate property passes either to the children equally or to the grandchildren per stirpes. Montana – All property passes to the spouse if the children are the offspring of both spouses. If one child is not the offspring of the surviving spouse, then the spouse will receive one-half and the child will receive one-half. If more than one child is not the offspring of the surviving spouse, then the spouse will receive one-third and two-thirds will pass to the children equally. Texas – The surviving spouse receives one-half of community property, one-third of life estate in separate real property and one-third separate real property. The balance of the estate passes to children or grandchildren per stirpes. West Virginia – All property passes to the spouse if the children are the offspring of both spouses. The surviving spouse will receive three-fifths of the estate if all of the deceased’s children are also children of the surviving spouse and the surviving spouse has other children who are not the offspring of the deceased’s. The balance of the estate goes to the deceased’s child or grandchild per stirpes.


Chapter One Study Questions 1. John’s estate includes an insurance policy, a savings account and stocks and bonds. This type of property is known as:

a. tangible property b. intangible property c. funded property d. unfunded property

2. The creation of a blueprint outlining where property goes after an individual dies is: a. trust building b. will making c. distribution planning d. estate planning

3. Providing for family, passing on property quickly, minimizing taxes, providing gifts and arranging for payments of death-related expenses are all benefits of:

a. estate planning b. setting up trusts c. making a will d. setting up pay-on-death bank accounts

4. Frieda died without having made a will. Fried died:

a. “estate free” b. “distributively” c. “intestate” d. “prematurely”

5. Evelyn died intestate. She was widowed and has three children. Under most state intestacy laws, who will inherit her estate property?

a. the estate of her deceased spouse b. the eldest child c. the youngest child d. her three children equally


6. The type of laws that require that property acquired during marriage be owned equally by each spouse are:

a. separate property laws b. community property laws c. intestacy laws d. distributive laws

7. The legal term for the type of distribution at death that means “your children downward” is:

a. per strata b. per descendants c. per stirpes d. per beneficiaries


Answers to Chapter One Study Questions

1. b. Insurance policies, savings accounts and stocks and bonds are considered part of an estate’s intangible property. Tangible personal estate property includes automobiles and furniture. 2. d. Estate planning is the creation of a blueprint outlining where property goes after an individual dies. 3. a. Providing for a family, passing on property quickly, minimizing taxes, providing gifts and arranging for payments for death expenses are all benefits of establishing an estate plan. 4. c. When a person dies without a will, this person has died intestate, and the person’s property will be distributed to survivors according to state intestacy laws. 5. d. Most state intestacy laws provide that a surviving spouse receive half the estate of a deceased and the children share equally in the remaining half. Evelyn was a widow, so most state intestacy laws mandate that her children share the entire estate equally. 6. b. Community property laws, effective in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington, require that property acquired during marriage be shared equally by spouses. 7. c. “Per stirpes” means “your children downward” and refers to a distribution at death method where a deceased person’s interest in property passes to their children, and if children are deceased, to their children, and so on.


Chapter Two: Probate Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Define probate • Recognize differences between types of probate processes • Explain the role of the administrator in the probate process • Explain the role of the executor in the probate process

One of the primary advantages of a living trust is that the properly titled property within it avoids probate. This chapter explains what probate is, kinds of probate, and the probate process.

What is Probate? Probate is, in essence, the legal process of settling an estate at the estate holder’s death. It is this process that ensures clear title to property in an estate before that property is transferred to beneficiaries upon the death of the property owner. Central to the probate process is the collection and appraisal of assets. The assets are used to pay debts of the deceased and to pay administrative expenses and then are passed onto named beneficiaries.

The collection, appraisal and distribution of assets is effected by an estate executor. An executor is a person appointed in the will of a deceased, and is often the attorney who drew up the will. In cases where the executor is not an attorney, a family member of the deceased is often appointed. If a will is proven to be invalid, or if no will was created, then a court-appointed administrator will carry out the duties of an executor. Probate law varies from state to state.

This can make the process tricky for those individuals with assets in more than one state. Example: Carlos owns a second home in a state that is not his residence state. Upon his death, his will must be probated in his state of residency. However, his second home (which is not owned jointly or held in a trust) must be probated in the state in which it is located. Due to the fact that his will did not meet the requirements of the state in which his second home was located, intestacy laws now apply to the home.

Executor: The person named in the will to administer the estate at the death of the individual who made the will. An executrix is a female executor.

Administrator: The person named by a court to administer an estate at the death of an individual without a valid will.


Kinds of Probate The probate process varies based on the size of the estate and whether complexities exist, such as when the will is being contested: • Supervised Probate– This kind of probate is the most official and costly probate method

available. When supervised probate is used, a court is active in approving every transaction. In some states, supervised probate is optional and is used for contested estates, when an interested party desires it, or when the executor’s ability is doubted.

• Unsupervised or Independent Probate – This kind of probate is not as complex or expensive as supervised probate. The reason for this is that the amount of responsibilities and procedures related to probating the estate are reduced and the court’s role is either reduced or eliminated altogether. Estates that exceed the asset limit for small-estate administration but that don’t require much court supervision may be allowed to use the unsupervised probate method. Unless the will involved specifically requests this kind of probate, the consent of all beneficiaries is usually required.

• Small-Estate Probate – The small-estate probate method is the simplest and quickest form of probate. However, this kind of probate process is not available in all states. In states that allow it, this method applies to estates that range from $1,000 to $100,000 in value (depending on state law), and property is usually transferred via affidavit. Small-estate probate usually only takes a few weeks.

History of Probate English common law is the basis for common and constitutional law in the United States and is the bases for our probate laws. Early in America’s history, the founding fathers adopted the English probate system, in which land was probated in three courts. The first courts to handle probate cases were king’s courts (called “common law courts”) in medieval England. “Ecclesiastical courts” were established later to handle personal property more simply and quickly. Later, “equity courts” were created to speed title transfer of fiduciary property (property such as stocks and bank accounts). The American founding fathers bundled the English probate process into one system: “probate court.” The main purpose of this court system was to guarantee that all claims creditors had to an estate were paid.

The Probate Process Although probate laws do vary by state, the probate process follows a general pattern. Following are the general duties an executor has during the probate process regardless of the state in which it occurs: • Opening the Estate

o The executor locates the will o The executor files the will with the local probate court o The executor has the will “proved” valid (e.g. the court determines whether or

not the document is actually the will of the deceased) o The executor chooses a type of probate: supervised, unsupervised, or small-

estate


• Managing Property o The executor identifies the estate’s property o The executor inventories the estate’s property o The executor has the estate’s property appraised

• Paying Debts and Taxes o The executor publishes a notice to creditors and pays debts o The executor files to pay the federal estate tax (for estates whose value exceeds

the threshold) o The executor files income tax returns on the deceased for the tax period before

death • Closing the Estate

o The executor files a final report summarizing receipts, disbursements and all other acts

o The executor does final accounting of the estate’s assets (the assets minus expenses)

• Distributing Property o The executor identifies and locates heirs o The executor distributes assets to beneficiaries based upon final accounting

Non-Probated Property

It should be noted that not all property in an estate must go through probate. Property that does not go through probate includes property that is in a trust, jointly held property (although not community property) and property that is given away by a gift before death. Other property that avoids probate includes death benefits from the government, from insurance policies, and from employers. The reason this property does not go through probate is because the structure of the property ownership or governing contract allows for the direct passing of the property to beneficiaries. For example, the trust document governs what happens to the property upon the death of a grantor. A life insurance contract includes the naming of beneficiaries who receive the proceeds at the death of the insured. A probate court is not involved in the distribution of this type of property.


Chapter Two Study Questions 1. Jake has a written will witnessed by one person. He has real estate in a state that requires two witnesses to a valid will. Since the state considers Jake’s will invalid, upon Jake’s death the home will be transferred to heirs based on:

a. Jake’s will b. the beneficiary designation on Jake’s bank accounts c. the beneficiary designation on Jake’s retirement accounts d. the state’s intestacy laws

2. An estate’s property is going through probate. The court is actively approving each transaction occurring through the probate process. The type of probate process going on is:

a. unsupervised probate b. supervised probate c. independent probate d. small-estate probate

3. A life insurance contract includes the naming of the insured’s spouse as the primary beneficiary. When the insured dies:

a. the spouse receives the death benefit directly from the insurance company b. the policy must be probated before a death distribution may be made to the spouse c. one-half of the death proceeds from the policy must be probated before being distributed to the spouse d. the spouse may only be paid the death proceeds if the insured lived in a non-community property state


Answers to Chapter Two Study Questions

1. d. If a will is deemed invalid by a state, it cannot be used to govern distribution of the deceased’s property. Therefore, the distribution of Jake’s real estate would be governed by the state’s intestacy laws. 2. b. Supervised probate involves the court actively approving each transaction that occurs in the probate process. 3. a. Life insurance policy death distributions avoid probate and are paid directly to the beneficiary if there is a surviving named beneficiary on the contract when the insured dies.


Chapter Three: Pros and Cons of Probate

Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Recognize advantages and disadvantages of probate • State the number of months within which a creditor may generally make claims

against a probated estate • Calculate the cost of probate using a general rule

Often, the probate process is something that many people believe should be avoided at all costs. However, it is not true to say that probate is without its advantages. Following is a summary of the common pros and cons involved with the probate process.

Expense The expense of probate is one of its negative aspects. Probate is subject to fees that are determined by individual state statutes. Some states use the statutory and extraordinary fee structure. Statutory fees are established by a state legislature. They apply to the normal duties of an executor and/or attorney during the probate process. Extraordinary fees are charged for additional services beyond those covered by statutory fees. They must be approved by the probate court. Both statutory and extraordinary fees are often charged by attorneys for services relating to the probate process. Not all states use the statutory and extraordinary fee structure. Some states require that legal fees relating to probate be based upon certain specific factors. These factors include the amount of time it takes the attorney to settle the estate, the complexity of the estate and the activities that result from that complexity, and the amount of responsibility an attorney is required to assume to carry out decisions. The actual cost of probate varies significantly from estate to estate. However, probate is generally estimated to cost from five to ten percent of the gross estate (the value before any liabilities are subtracted). The size of an estate impacts whether or not it will be required to go through probate and state laws will vary in their size requirements. However, most states have simplified probate procedures for smaller estates (usually under $100,000), so that smaller estates do not incur the fees associated with hiring a lawyer that are needed to work out the complexities of a larger estate.

Length of Time Full distribution of property from an estate cannot occur until the probate process is complete. Generally, the process takes from six months to two years, although it can take much longer if the will is contested or claims are brought. The length of the probate process is determined by the amount of time it takes for property to be appraised and sold, for beneficiaries to be located, for debts and taxes to be paid, etc.


The length of time the probate process takes is seen as necessary to ensure property is properly appraised and creditors are accurately paid. However, while an estate is going through probate, it is possible that heirs cannot access the estate’s assets. And while probate procedures have been reformed in many states so that a surviving spouse, minor children and disabled children may obtain needed money almost immediately (regardless of whether the entire estate has cleared probate or not) these reforms are not universal. The length of the probate process can affect the value of the property. If certain property is subject to changes in price (such as stocks, bonds or mutual funds), any delay in sales of this property due to the probate process may be detrimental to its value. Also, if any property declines in value during the probate process, the tax requirement that property’s value be based upon its fair market value at the time of an individual’s death may mean that taxes paid are based on a higher property value than estate beneficiaries actually receive.

Privacy A will becomes a public record when it enters the probate process. All the assets of an estate are made public and filed at the local County Clerk’s office in order to give notice to any creditors with claims against the estate. All documents involved in the probate proceedings are considered public record and may be accessed by anyone. This can be viewed by some as a significant loss of privacy.

Claims of Creditors The probate process limits the time a creditor has to file a claim against an estate. This is generally seen as a positive aspect of the probate process. A claim must generally be filed from three to six months after the beginning of the probate process or the publication of the notice of death, and after that time has elapsed no further claims may be brought. This protection against claims has special value if a decedent was involved in any activities that could cause long-term susceptibility to lawsuits, such as the practice of medicine or law.

Property Distribution The probate process provides that improper distribution of an estate’s assets is guarded against by a probate court. It helps to assure that the estate is distributed only to those persons who are entitled to a share of the estate. This court oversight is a primary purpose of probate and is one of its benefits.

Probate Avoidance For those individuals for whom the disadvantages of probate on their estates outweigh the advantages, there are numerous ways of avoiding probate. Some of those ways include: • Using joint tenancy • Naming beneficiaries on life insurance products • Making gifts • Using “pay-on-death” bank and securities accounts • Establishing a Living Trust • Establishing an Irrevocable Life Insurance Trust


Chapter Three Study Questions 1. The executor must fly to another state in order to have property in the estate appraised by an expert. The expense of this trip is not part of the statutory fee structure of the state’s probate laws in the state in which the deceased resided. The probate court must approve this expense as a(n):

a. ordinary fee b. extraordinary fee c. non-statutory fee d. primary fee

2. The fair market value of stocks owned individually by the deceased on the date of his death was $57,000. After the probate process was complete, the stocks, because of market fluctuations, were worth $49,000. For tax purposes, the stocks must be valued in the estate at:

a. $49,000 b. -$8,000 c. $57,000 d. $8,000

3. Making a lifetime gift, naming beneficiaries on life insurance contracts and establishing a living trust are all ways to:

a. avoid probate b. increase the value of an estate c. completely avoid estate taxation d. avoid having to make a will


Answers to Chapter Three Study Questions

1. b. Some states use the statutory and extraordinary fee structure in their probate laws. If fees outside the statutory fee structure are incurred by the executor or administrator, the probate court must approve the payment of these fees as extraordinary fees to the estate. 2. c. The stocks are valued based on their fair market value for tax purposes on the date the deceased passed away. The value of the stocks are likely to change over time while the probate process is going on. The beneficiaries may receive the stocks when they are a higher or lower value than they were on the date of the deceased’s death. The value of the stocks on the date the beneficiaries actually receive them is not their value for tax purposes. 3. a. Probate may be avoided by making lifetime gifts and thereby moving the assets to someone else’s estate, naming beneficiaries on life insurance contracts, retirement accounts, bank accounts and securities accounts and by establishing living trusts. Types of joint ownership may include a right of survivorship that also causes property to avoid probate, at least until the death of the last surviving owner.


Chapter Four: Estate Planning and Taxes Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Know the lifetime exclusion amount for gifts • Determine when estate tax may be due based on the lifetime exclusion amount for

estate tax • Identify the required elements of a completed gift of present interest

An important part of an estate is the tax liability it will incur upon the property owner’s

death. Living trusts can be used with a variety of estate tax reduction tools. One of these tools is removing property from the estate while the property owner is living by making gifts. This chapter describes the federal estate tax system, gifting to reduce estate tax liability, state taxes at death and generation skipping transfer taxation.

Federal Estate Tax An estate is liable for the federal estate tax when it exceeds the “available exemption amount.” This amount is simply the value of assets that may be passed to beneficiaries without incurring federal estate taxes. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) set the amount for 2008 at less than $2,000,000. This amount increased to $3,500,000 in 2009. In 2010, under EGTRRA, the excludible amount would become unlimited, meaning that no estate tax would apply. The federal estate tax rates that apply to the amount of an estate that exceed the available exemption amount have decreased steadily since 2001. In 2009, the maximum rate is 45%. According to EGTRRA, at the end of 2010, the estate tax

rate would become 0%.

Potential Repeal of EGTRRA

EGTRRA included a provision that the terms of the Act would not apply to tax, plan or limitation years beginning after December 31, 2010. This provision is known as a “sunset provision.” According to the sunset provision, Congress had to specifically act in order to continue the estate tax repeal and any other provisions in EGTRRA after 2010. If Congress did not act, then the tax law would have returned to laws applying to the years before 2001. The Taxpayer Relief Act of 1997 applies if EGTRRA were allowed to expire. According to this 1997 act, the federal estate tax exemption amount becomes $1,000,000. The maximum estate tax rate becomes 55%.

Impact of TRA 2010

In December 2010, President Obama signed the Tax Reform, Unemployment Insurance Reauthorization and Job Creation Act (TRA 2010) into law. This law made retroactive


changes to estate tax laws. It provided that certain estates may opt to apply the 0% estate tax rate, or they may apply a 35% tax rate and a $5,000,000 estate exemption amount. TRA 2010 applied a 35% top marginal estate tax rate to estates of decedents dying in 2011 and 2012 and a $5,000,000 estate exemption amount in both these years. The exemption amount was subject to increase for inflation in 2012 under TRA 2010, and was increased to $5,120,000.

Estate Exemption Portability

TRA 2010 included a provision called “portability” that applies to the lifetime exemption for married couples. This provision allows a surviving spouse to utilize the unused portion of a deceased spouse’s lifetime exemption. For example, assume a couple has an estate valued at $7,500,000 and Spouse A died in 2012. All of Spouse A’s assets pass to Spouse B, and there is no estate tax or exemption utilized because of the unlimited marital deduction, which allows the assets to be passed to Spouse B without taxation. Spouse B receives the $7,500,000 estate from Spouse A without estate taxes reducing its value. Now, because of portability, Spouse B is able to use Spouse A’s $5,120,000 exemption amount in effect for 2012 in addition to Spouse B’s exemption amount, for a total of $10,240,000, to shield the estate from taxation. The $5,120,000 exemption is not “lost” because Spouse A’s estate did not utilize it. The $7,500,000 estate value now owned by Spouse B has a $10,240,000 exemption available, more than needed to shield it from taxes. The estate value can grow and be used to pass onto heirs, charities and so on through lifetime gifts and at death without gift and estate taxation, due to the portability law.

American Taxpayer Relief Act of 2012

On January 2, 2013, President Obama signed the American Taxpayer Relief Act of 2102 (ATRA 2012) and it became law. ATRA 2012 set the lifetime exemption amount for estate, gift and generation skipping transfers permanently at $5,120,000, subject to inflation adjustments. In 2014, the lifetime exemption amount increased to $5,340,000. In addition, ATRA 2012 set the maximum estate, gift and generation skipping transfer tax rate permanently at 40% beginning in 2013. In 2015, the lifetime exemption amount increased to $5,430,000 and in 2016 was $5,450,000. In 2017, the amount was $5,490,000. The Act itself uses the term “permanent,” perhaps with a nod to the adage that nothing is certain but death and taxes. The portability law remained in effect under ATRA as well.

Tax Cuts and Jobs Act

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. It makes several significant changes to the tax code, including raising the lifetime exemption amount significantly. For 2018, the lifetime exemption that applies to estate, gift and generation skipping transfers is $11,200,000. For spouses, this amount is double, $22,400,000. The law retains portability of the lifetime exemption. This amount is subject to adjusted for inflation, until the year 2026. If Congress takes no action, in 2026, the lifetime exemption amount reverts to $5,000,000. The marginal tax rate remains at 40% under the TCJA.


Assets Subject to Federal Estate Tax

The federal estate tax includes the probated estate and any property owned by the deceased when ownership transfers to another individual. The assets subject to the tax may include: • Cash • Real estate • Stocks and bonds • Life insurance • Jewelry • IRAs • Benefits found under employee benefits plans

Spousal Exemption

Let’s turn to the marital deduction. The federal unlimited marital deduction allows a deceased spouse to pass his or her entire estate to the surviving spouse without incurring any federal estate taxes. The estate may be passed estate tax free regardless of its size. Commonly, a bypass trust will be used in conjunction with the marital deduction. A bypass trust contains assets equal to the amount of applicable exclusion to allow a transfer of at least double the exemption amount free of estate taxes to children and other beneficiaries. For example, if a married couple has an estate valued at $22,400,000 at the first spouse’s death in 2018, $11,200,000 of the property is placed in a bypass trust (or “B” trust) to pass on to non-spouse beneficiaries. The other $11,200,000 of property is placed in an A trust and is used to pay for the surviving spouse’s needs during life. At the surviving spouse’s death, the proceeds are paid to beneficiaries. Since the value of both trusts is within the applicable exclusion amount against estate value, estate taxes are avoided. In 2018, an A and B trust may be used to shelter a spousal estate of up to $22,400,000 ($11,200,000 for each spouse) from estate taxation.

Federal Income Taxation Federal income taxes do not apply to the receipt of an asset received from a deceased individual. However, when such an asset generates income, it is subject to income tax on the beneficiary’s tax return. A beneficiary may also be required to pay income taxes on income received by that beneficiary that was originally received by the deceased’s estate and was eventually paid to that beneficiary.

Federal Gift Tax The federal gift tax is a tax on the transfer of a property accomplished by gifting. All gifts made during an individual’s life are usually taxable to that individual at gift tax rates. But annual gifts of “present interest” may be made up to a certain amount and are excluded from such taxation. Present interest means that the recipient of the gift must be able to use the gift immediately, not at some time in the future


Annual Gift Tax Exclusion The annual exclusion amount for gifts $15,000 in 2018. This means that an individual may give up to $15,000 annually to each of any number of donees, free from gift tax. Gifts of present interest of $15,000 or less do not have to be reported to the IRS. Any gift above this amount is required to be reported to the IRS annually and may be subject to taxation. Spouses may make “split gifts,” equal to $30,000 in 2018, to donees. Also, it should be noted that certain gifts are not subject to gift taxes, no matter in what amount they are given. Such gifts include:

• Payment for medical care (including insurance premiums) • Payment for tuition

In order for the gifts to avoid gift tax treatment they must be paid to the medical care provider or educational institution directly.

Gift Tax Credits

All qualified gifts that are made within the annual gift tax exclusion amount may be repeated without limitation year after year. For gifts that exceed or do not qualify for the exclusion, a gift tax is applied. However, every individual is allowed a credit toward a gift tax before actually being required to pay that tax. As soon as a gift exceeds the exclusion amount, the individual’s tax credit must be applied against it. Once the tax credit is exceeded by the total of taxable gifts, then all taxable gifts begin to generate an out-of-pocket gift tax. In 2012, a cumulative lifetime $5,120,000 tax-free gift was allowed, and a $5,340,000 lifetime tax-free gift was allowed in 2014. The lifetime tax-free gift amount in 2015 was $5,430,000 and in 2016 was $5,450,000. The amount was $5,490,000 in 2017. In 2018, the exemption is $11,200,000. The top rate of tax on the excess above this amount was 35% in 2012. In 2013 and forward the top marginal tax rate is 40%. For example, John and Mary Smith gift $40,000 to their granddaughter in 2017. This is the first gift they’d ever given over the gift tax annual exclusion amount. Since this gift exceeds the split gift amount of $30,000 by $10,000, John and Mary must report it to the IRS. Their lifetime tax exemption amount of $22,400,000 is reduced by $10,000, and is now $22,390,000.

Donee: The individual or entity who receives a gift.


Requirements of Gifts

A gift must be “complete” in order for gift tax treatment to apply (this is also true for tax-free gifts). A complete gift:

• Must be a gift in which the donor has parted with dominion and control • Must be a gift that is capable of ownership and transfer,

such as money, real estate, a life insurance policy, etc. • Must be a “gratuitous transfer,” (the property gifted must

have been transferred for less than its actual value) • Must be given by a competent donor, and accepted by a

competent donee It should be noted that whether or not taxes are reduced by a gift, gifting removes assets from the probatable estate if the gift is “complete.” So, every complete gift made, regardless of size, reduces the size of the probatable estate. This reduction will generally reduce the amount of estate tax. For gift-tax purposes, the amount of the gift is considered to be its “fair value” on the date the gift is given. The purchase price paid by the donor is not a factor in its valuation at the time of transfer.

Gift and Other Estate Tax Deductions Certain gifts may be given that allow deductions to apply to an individual’s estate for estate tax calculation purposes. Following are a summary of some of the more common deductions used in estate planning:

• Marital Deduction - No gift-tax limit is applied to the amount spouses may give one another. Also, the applicable exclusion amount is not affected by gifts given from one spouse to another. However, when gifts are given to a spouse through a trust, the trust must meet certain requirements in order to maintain the gift’s tax-free status. Such requirements include full withdrawal power held by the spouse acting as the donee, or if the trust qualifies as a Q-Tip trust (this type of trust is discussed later in the course).

• Charitable Deductions – Any gifts made to a qualified charity are entitled to a charitable deduction from an individual’s taxable base. These gifts may be made through a will, through a trust, or through life arrangements that are paid by an estate or a trust.

• Debt Deductions – All debts owed by an individual are deductible against his or her taxable base at his or her death. This includes debts such as a home mortgage or bills that were unpaid at death.

• Funeral Deductions – The expenses incurred for a funeral are also deductible for estate tax purposes.

• Administration Deductions – After an individual passes away, there will be numerous costs involved in administering his estate, such as filing, attorney fees, and the like. These costs are deductible from the estate’s value for tax purposes.

State Taxes State estate taxes take varying forms. A “pick-up” tax is charged by most states, equaling the maximum credit that the Internal Revenue Code allows to the taxpayer for state inheritance

Donor: The individual or entity that makes a gift.


taxes. This kind of tax does not charge a taxpayer amounts in addition to the federal estate taxes owed; it simply reflects the state’s percentage of the federal estate tax. In other words, no additional taxes are required, but the pick-up tax outlines how the state and the federal government divide up the amounts paid. Some states charge numerous additional taxes, rather than simply a pick-up tax. Those taxes include: • Inheritance taxes – These are taxes on the receipt of assets from an estate charged to each

beneficiary • Estate taxes – These state taxes resemble federal estate taxes in that they are charged on

the net estate of a deceased. • Gift taxes – These taxes are imposed when wealth above a certain limit is transferred

during an individual’s life. Taxes on intangible personal property (such as stocks and bonds, copyrights, patents and the like) and their rates depend upon an individual’s state of domicile. Taxes on real estate and tangible personal property are governed by the state in which such property is located.

Generation Skipping Transfer Tax When an individual transfers assets to individuals two or more generations below himself, a “generation skipping transfer” has been made. These kinds of transfers are subject to the generation skipping transfer tax (GSTT), in addition to any federal estate or gift taxes applicable. In 2010, under TRA 2010, the GSTT was 0% and a $5,000,000 exemption applied. The GST exemption amount is the same as the lifetime estate and gift tax exemption we have been discussing. The GST exemption amount was $5,000,000 in 2011 and $5,120,000 in 2012, and the top marginal tax rate was 35%. Under ATRA 2012, the GST exemption amount was $5,340,000 in 2014, $5,430,000 in 2015, $5,450,000 in 2016, and $5,490,000 in 2017, and the top marginal tax rate is 40%. Due to the TCJA, in 2018, the GST exemption amount is $11,200,000. Generation skipping transfers are taxed at the highest federal estate tax level, and the exemption applies to lifetime transfers or transfers at death. When the annual exclusion rule applies to generation skipping transfers, then the GSTT is not applied to it. The exclusion limit of $15,000 applies to qualifying generation skipping transfers.


Chapter Four Study Questions 1. TRA 2012 established a “permanent” maximum rate for estate tax, gift tax and generation skipping transfers tax of:

a. 0% b. 25% c. 35% d. 40%

2. The type of trust often used in conjunction with the unlimited marital deduction to allow transfer of double the exemption amount free of estate taxation to non-spousal beneficiaries is:

a. the living trust b. the estate tax evasion trust c. the irrevocable living trust d. the bypass trust

3. In order for a gift to qualify for the annual exclusion amount and be free from gift tax, the gift must be:

a. one of present interest b. one of future interest c. one of past interest d. $3000 or less

4. The lifetime gift tax exemption amount is $11,200,000. Mary makes a gift of $30,000 to her brother. She also made a gift of $15,000, equal to the annual gift exclusion amount, to her brother earlier in the year. The $30,000 gift she made was the first gift she’s ever made that exceeds the annual gift exclusion amount. Her lifetime gift tax exemption amount is now:

a. $11,170,000 b. $11,200,000 c. $5,000,000 d. $11,230,000

5. Jake puts $50,000 in a bank account in the names of both himself and is son with the condition that the son use the money for college. If the son does not use the money for college, Jake will remove his son’s name from the account. This transaction:

a. is a complete gift b. is not a complete gift c. qualifies as a gift to charity d. qualifies as a gift for gift tax treatment purposes

6. A transfer of assets during life to individuals two or three generations below the transferor is:

a. a gift transfer b. an inheritance c. a generation skipping transfer d. a trust


Answers to Chapter Four Study Questions

1. d. The maximum tax rate for estate, gift and GST tax is 40% under ATRA 2012. 2. d. A bypass trust is used in conjunction with the unlimited marital deduction to shield assets to be passed on to non-spousal beneficiaries from estate taxation. 3. a. To qualify for the gift tax annual exclusion amount, a gift must be one of present interest 4. a. The lifetime gift exemption amount was $11,200,000. A gift was made up to the annual exclusion amount of $15,000 to her brother, which does not impact the lifetime gift exemption amount. The $30,000 gift to her brother in the same year reduces the lifetime gift exemption amount by this amount, leaving the remaining exemption amount at 11,170,000. 5. b. Since Jake retained control over the amount in the bank account and could revoke the naming of his son on the account if his son did not comply with his condition that the funds be used to pay for college, the gift was not a completed gift, and therefore would not qualify as a gift for gift tax treatment purposes. 6. c. A generation skipping transfer is a transfer of assets to two or more generations below the transferor’s generation.


Chapter Five: Life Insurance and Estate Planning Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Recognize life insurance product characteristics • Indicate when life insurance proceeds avoid probate • State when life insurance proceeds are included in an estate

Life insurance is a flexible estate creation and planning tool. Most people should use a life insurance policy in their estate plan in order to take care of their survivors. By structuring

the policy properly, it will avoid probate. Its value can also be kept out of the purchaser’s estate. This chapter describes life insurance and how it can effectively be used within estate plans.

What is Life Insurance? Life insurance is a type of insurance that pays out a death benefit upon the death of an insured individual. The owner makes all decisions relating to the life insurance policy. It is the owner who names those individuals (the beneficiaries)

who are to receive the death benefits upon the death of the insured. The owner also makes decisions about how the policy’s proceeds are paid to the beneficiaries, and owns all of the policy’s benefits. Life insurance policies can be divided into two categories: term and cash value. There are many variations within these two categories.

Term Insurance

Term life insurance is simple insurance: its only advantage is a death benefit and no cash value is built up by accumulated premiums. A premium is paid for the policy’s term (usually one year), and if the insured dies while the term insurance is in effect, then the insurance company will pay the death benefit to the beneficiaries of the policy. If the insured does not pass away while the term insurance is in effect, all premiums paid revert to the insurance company. The policy owner may choose whatever death benefit amount he desires, but this amount may not be borrowed against. Term insurance may be annually renewable. It may also be level, which means that coverage is guaranteed to have level premiums for a set term. Other term policies are available with decreasing coverage (although the premiums remain the same). Group term insurance is also available. Employers provide this kind insurance for their employees or make it available to them, generally at lower premiums than if individual term policies were purchased.

Cash Value Insurance

Cash value insurance has both a death benefit and cash value. Many cash value policies have a savings feature that provides variable investment returns.


Cash value policies are available as whole life insurance, which means that the coverage is guaranteed to remain at a fixed amount and level premiums must be paid. A portion of each premium earns a return at a predetermined amount and investment return. Policies are also available as universal insurance. This kind of policy has term and cash value portions that are divided into two separate accounts. The insurance may increase or decrease depending on where the insured is located. Cash value growth may be based on the return of the insurance company’s investments or based on insurance company separate accounts, similar to mutual funds, from which the insurance owner selects. The type of insurance with cash values based on the performance of separate accounts is variable life insurance.

Life Insurance and Probate Life insurance is a common tool used to pass on an estate to beneficiaries. The proceeds from life insurance avoid probate through the selection of a beneficiary.

Individuals as Beneficiary

If the life insurance policy is payable to a person, then the death benefit will not be subject to probate. Rather, as soon as a beneficiary files a claim with an insurance company and the claim is approved, then the insurance company will make payments directly to that beneficiary. If more than one beneficiary is designated on a policy, then the insurance company pays the death benefit to those beneficiaries in a proportion designated by the policy owner.

Estate as Beneficiary

If the policy is payable to an estate (the death benefit is paid to the executor of the estate to distribute), then the death benefit will be subject to probate. An estate might be named beneficiary if the policy is meant to be used to cover funeral or administrative expenses. An estate may also be named as a beneficiary under most state laws if the policy owner divorced the named beneficiary on the life insurance policy, but failed to change the designation before he or she passed away. Trust as Beneficiary When an irrevocable life insurance trust is used to hold life insurance, it is considered to be the beneficiary of the insurance policy. This is due to the fact that upon the transfer of the policy the beneficiary of the policy becomes the trustee of the trust. When an irrevocable trust is not used, a living trust may be named as the beneficiary of a life insurance policy. When a trust is designated as beneficiary on a life insurance policy, probate is avoided.

Life Insurance and Taxes

Income Taxes When the death benefit of a life insurance policy is paid to a beneficiary upon the death of an insured, the proceeds are exempt from income taxes. But any interest earned on the policy after the insured’s death is not exempt from those taxes.


It should also be noted that if an insurance policy was transferred for value while the insured was alive, then the beneficiaries must pay income taxes on the death benefit. For instance, an individual is the insured and owner on a life insurance policy, but can no longer afford to pay the policy’s premiums. So his uncle buys the policy from him and names himself as the new beneficiary. This would be considered a transfer for value, and would be subject to income taxes.

Estate Taxes

A life insurance policy’s cash value may count as an asset of the estate of the owner. This means that it could be subject to the federal estate tax, depending on the size of the estate and the year of the owner’s death. Here is a summary of recent estate tax rules:

• An estate of over $3,500,000 was subject to federal estate tax in 2009 • There was no estate tax in 2010 unless an estate opted to apply the 35% rate and the

$5,000,000 exemption amount • An estate of over $5,000,000 was subject to federal estate tax in 2011 • An estate of over $5,120,000 was subject to estate tax in 2012 • An estate of over $5,340,000 was subject to estate tax in 2014 • An estate of over $5,430,000 was subject to estate tax in 2015 • An estate of over $5,450,000 was subject to estate tax in 2016 • An estate of over $5,490,000 was subject to estate tax in 2017 • An estate of over $11,200,000 is subject to federal estate tax in 2018

If the insured is also the owner on the policy, at that individual’s death, the cash value is part of his or her estate. For example, John is the owner and insured on a life insurance policy. His nephew is the beneficiary. At John’s death, the cash value of the policy is includable in John’s estate. His nephew receives the death benefit tax-free. If the owner and insured are different people, and if the owner dies before the insured, the cash value of the policy is includable in the owner’s estate. If the owner and insured are different people and the insured dies before the owner, the cash value is not includable in the insured’s estate, and the beneficiary receives the death benefit tax free. For example, Sam is the owner of an insurance policy and his brother is the insured. Sam is the primary beneficiary and his sister is the secondary beneficiary. If Sam predeceases his brother, the cash value of the policy at the time of his death is includable in his estate, and the secondary beneficiary, his sister, receives the death benefit tax-free. If his brother predeceases Sam, the cash value is not includable in an estate, and Sam receives the death benefit tax-free.

Life Insurance and Gifting

Charities

When life insurance proceeds are gifted to a charity, a tax deduction is created that reduces federal estate tax liability for the estate of the individual making the gift. The charitable deduction is not subject to any federal limit; but rather may be used to reduce (or even completely eliminate) the federal estate tax to the degree the individual chooses.


Gifting a policy during life to a charity can result in an income tax deduction for the donor. When the charity is listed as a beneficiary of an insurance policy and the owner of the policy pays the premiums the owner gets an income tax deduction for present interest gifts. This holds true as long as the beneficiary designation is irrevocable or the charity is named as the owner as well as the beneficiary of the policy.

Transfer of Ownership

Estate tax liability can be reduced when the ownership of life insurance policies is transferred from the insured to another party. There are different methods of transferring ownership. The federal estate tax may be avoided by transferring ownership of the insurance policy from the insured to an irrevocable life insurance trust. A transfer must be made more than three years before an insured’s death or the policy’s value will be included in the gross estate of that insured. Ownership may also be transferred to a beneficiary of a life insurance policy. In this case, a policy would be taken out by an owner/insured, who would then place ownership of the policy in the name of his beneficiary(ies). The insured may continue to give the beneficiaries annual assets for premium payments gift tax free, as long as the total gift to each beneficiary is less than the annual exclusion amount of $15,000.

Loss of Control

Note that when ownership is transferred to beneficiaries or to any other entity or person, control over the policies transfers as well. This means that certain rights now belong to the new owners, including the rights to change beneficiaries and change death benefit settlement options.


Chapter Five Study Questions 1. Renee owns a life insurance policy that accumulates no cash value and pays a death benefit upon the insured’s death. Her life insurance policy is what type of insurance?

a. whole life insurance b. term insurance c. variable life insurance d. universal life insurance

2. The beneficiary on the life insurance policy is “the estate of Martha Ann Thomas.” The death proceeds from this policy:

a. will avoid probate b. will be taxable to the insured c. will not avoid probate d. cannot be paid out until all of Martha Ann Thomas’ heirs have been located

3. When the insured died on a life insurance policy, the beneficiary had the death benefit held at the insurance company, where it earned interest for six months until it was paid out as a lump sum to the beneficiary. The interest earned on the death benefit for these six months:

a. is includable in the estate of the insured b. is not taxable as income to the beneficiary c. is kept by the insurance company d. is taxable as income to the beneficiary

4. John is the insured on a life insurance policy and pays the premiums on the policy. The owner and beneficiary on the policy is his church and the church is an irrevocable beneficiary. John is making a:

a. gift that qualifies for a charitable income tax deduction and has reduced his taxable estate value b. gift that does not reduce his taxable estate value c. gift that does not qualify for a charitable income tax deduction d. future interest gift

5. Becky was the owner and insured on her life insurance policy, and her daughter is the beneficiary. She transferred the ownership of the policy to an irrevocable life insurance trust on May 1, 2006. Becky passed away in August 2017. The value of the life insurance policy in the irrevocable life insurance trust:

a. is includable in Becky’s estate b. is includable in Becky’s estate and taxable as income to the trust c. is not includable in Becky’s estate d. is taxable as income to the trust


Answers to Chapter Five Study Questions

1. b. Life insurance that pays a death benefit and has no cash value is term insurance 2. c. When an estate is named as a beneficiary on life insurance, the proceeds are paid to the estate and probated along with the other assets in the estate 3. d. Interest earned after the death of the insured on a life insurance death benefit is taxable to the beneficiary. 4. a. this gift is a complete gift and the value of the life insurance is a gift of present interest. Therefore, the gift reduces John’s estate value and also results in a charitable income tax deduction for John. 5. c. Since the transfer of the life insurance policy to the trust was over three years before Becky’s death, the value of the life insurance is not includable in her estate.


Chapter Six: Joint Ownership and Estate Planning


• Define and distinguish among various joint ownership forms • Determine when jointly owned property passes through probate • Describe unique issues related to community property distribution at death • Identify the impact on the estate when simultaneous death occurs to owners of jointly

held property Establishing a living trust is not the only way to avoid probate. Another one of the most popular ways of avoiding probate is to establish joint ownership of property. There are numerous forms of joint ownership. However, it is important to understand that not all

forms of joint ownership avoid probate. This chapter explains joint ownership forms and the impact of the death of an owner of jointly held property on the estate of the deceased.

Forms of Joint Ownership

Joint Tenants

If property is held in joint tenancy with two owners, both parties are considered to have co-ownership of the property with one another. Upon the death of one of the co-owners, the surviving owner takes up full ownership in the property (this component of joint tenancy ownership is known as a “right of survivorship”). This ownership transfer occurs without the property being required to go through probate. However, when the surviving joint tenant passes away, the property will be subject to probate if a new joint tenant was not named during the surviving joint tenant’s lifetime.

Tenancy-By-the-Entirety

Some states recognize tenancy by the entirety, which is a special form of joint tenancy. Under this form, tenants-by-the-entirety must be a husband and wife, and the agreement is only allowed to be terminated by both owners during their lifetimes. The husband and wife co-own the property, and the property passes to the surviving spouse upon the death of the first spouse to die.

Tenants-in-Common

Tenancy-in-common differs significantly from joint tenancy. In joint tenancy, both owners are considered co-owners of property, and must each agree when property is sold. However, in a tenants-in-common ownership, each owner only owns a share of any property (this could be an equal or unequal share), meaning that each share may be sold without the other owner’s


consent. In addition, when one owner dies, his or her share passes as outlined in a will or trust, rather than being fully assumed by the surviving owner.

Community Property

Another form of property ownership is community property. This form is between spouses who live in a “community property state.” These are states such as California, Arizona, Texas, and Washington, each of which has community property rules that require that property is equally owned by each spouse. Specific rules include:

• Upon one spouses’ death, the survivor keeps his or her half of the assets, and the deceased’s half becomes part of his or her probate estate

• Each spouse is entitled to one-half of the income of both spouses • Pensions of either spouse are considered community property of each • Community property is usually divided equally upon a divorce

Joint Tenancy and Probate As noted earlier, the joint tenancy form of joint ownership avoids probate; at least at the death of the first joint tenant to die. Because the property of the surviving owner is given by “operation of law” (this means that property already belonged to the survivor), it is not considered to be inherited. “Operation of law” also allows the transfer of ownership automatically, and no probate court is required to verify the transfer. There are some situations, though, where probate still occurs in this form of joint ownership:

• Last Death – Joint tenancy avoids probate initially: for example, after the first spouse dies. But when the second joint tenant passes away, the property is required to go through probate.

• Simultaneous Death – The simultaneous death of joint owners effectually converts a joint tenancy into a tenancy-in-common. This means that one-half of the property would pass through the probate estate of each tenant (unless the will or trust of either of the tenants contains a simultaneous death provision).

• Tax Clearance – Some of the expense and delay of probate may still be borne by a surviving joint tenant when a “tax clearance” (which may only be obtained through a probate court) is levied. A tax clearance occurs in certain states in order to transfer real property or security to a surviving joint tenant.

• Additional Property – There is usually some property owned by a deceased that is not held under a joint tenancy ownership and that must go through probate.

Important Considerations of Joint Tenancy

Irrevocability

Most types of property placed in a joint ownership agreement have been done so based on an irrevocable decision. While it is possible to remove another person as a joint tenant, property placed in joint tenancy may not be transferred to another person, including to the other joint tenant without the permission of all tenants.


Role of a Will

It is extremely important to understand that a will does not affect joint property. Even if a will expressly contradicts joint tenancy, it is the joint tenancy ownership that will be upheld. For example, real estate is owned in joint tenancy by two sisters. The will of one of the sisters states that her share of the property will pass to her son at her death. If she dies before her sister, the real property will pass to her sister, not to her son, as the joint tenancy ownership dictates.

Creditors

Under joint tenancy agreements, creditors are allowed to attach the individual share of property owned by an indebted joint tenant only. Shares owned by other, non-indebted joint tenants are not allowed to be attached. It is important to note, however, that a court may order an entire property held in a joint ownership to be liquidated so that the share of the indebted tenant may be paid to a creditor. Surviving joint tenants usually take possession of property after the death of the other joint tenant without any consideration of the debts of that tenant. But certain states allow a creditor to make a claim against property held by the deceased under specific circumstances. For instance, if the property had been pledged as security for a loan during the life of the deceased and the creditor had successfully sued to claim the deceased’s interest in the property prior to his or her death, then the surviving tenant would have no choice but to forfeit that interest.

Joint Tenancy and Taxes While any number of joint tenants may be included in a joint tenancy ownership agreement, certain tax consequences apply. When a joint tenancy is created with a spouse alone, no gift taxes are required due to the unlimited marital deduction. However, when joint tenancy is created with any other person, it is considered to be an irrevocable gift, and thus is subject to gift taxes and applicable rules. (There is an exception for bank accounts held in joint tenancy that will be discussed in the next chapter.)

Joint Tenancy and Cost Basis Currently, the term used to describe to the system of determining the cost basis of inherited property contained in a decedent’s gross estate is “stepped-up basis.” A fair market value of property received is assigned based on the date of death of the decedent. Property may be “stepped-down” if its value is lower at the date of death than the previous cost basis. The amount of property held in joint tenancy (and includable in the decedent’s gross estate) is subject to the stepped-up basis treatment based on numerous factors. Such factors include whether or not the joint tenant is a spouse or a relative of the decedent, and the contribution amount in the property made by the surviving joint tenant.

Cost Basis: Generally, the fair market value of property when it was acquired. The cost basis is used for determining taxable gains or losses on property when it is disposed o or transferred. There are special tax rules for determining cost basis in certain situations, such as when a spouse dies and property was held in joint tenancy.


In 2010 only, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) replaced the stepped-up basis with a modified carryover basis system. This system provides that an executor or personal representative of an estate is allowed to step-up the basis of assets obtained by beneficiaries. These assets may be stepped-up to a total of $1.3 million for beneficiaries who are not surviving spouses and $3 million for surviving spouses. The cost basis in property that is valued above the $1.3 million or $3 million is usually the lesser of:

1. The decedent’s adjusted basis in the property; or 2. The property’s fair market value on the decedent’s date of death

Under TRA 2010, certain estates could opt to apply EGTRRA rules. For decedents who die after December 31, 2009 and before January 1, 2011, an estate may elect to apply a 0% estate tax rate and the modified carryover basis at death rules for property transferred from the estate. Generally, this means that the income tax basis of property is carried over from the decedent to the recipient. The property then has a value equal to the lesser of the adjusted basis of the property as if the decedent still held it, or the fair market value of the property at the date of the decedent’s death. This gives the estate the ability to increase the basis of property up to $1,300,000, or in the case of transfers at death to a surviving spouse, up to $3,000,000. Or, an estate may apply the 35% top marginal tax rate and a $5,000,000 estate exemption amount. Under ATRA 2012, all estate transfers are subject to step up basis rules. The inherited asset is valued at its market value at the time of the deceased owner’s death. The step up rules remain under the TCJA. The estate exemption amount is $11,200,000 in 2018 and the top marginal tax rate is 40%.


Chapter Six Study Questions 1. Sam and Lisa owned some land in joint tenancy with rights of survivorship. When Sam passed away, his ownership interest in the land passed to:

a. Lisa b. his estate c. his children d. the state

2. Under tenants-by-the-entirety ownership, the owners must be:

a. siblings b. husband and wife c. in the same immediate family d. in the same extended family

3. Arnie, Noah and Josh own property in tenants-in-common ownership. Arnie has a 50% ownership interest and Noah and Josh each have a 25% ownership interest. Noah wants to sell his interest. In order to do this:

a. he must get Arnie’s consent only b. he must get both Arnie’s and Josh’s consent c. he must get Josh’s consent only d. he doesn’t have to get the other tenants-in-common owners’ consent in order to sell his share of the property

4. Ed and Ellen are getting a divorce. They own $400,000 worth of community property. Normally, this property will be divided in what way under the divorce?

a. $200,000 of property to Ed and $200,000 property to Ellen b. $300,000 of property to Ed and $100,000 property to Ellen c. $100,000 of property to Ed and $300,000 property to Ellen d. $400,000 of property to Ed and $0 to Ellen

5. Greg and Hannah are joint tenants in owning their home. They die simultaneously in an auto accident. Neither of their wills has a simultaneous death provision. How will the home be dealt with in terms of probate and distribution?

a. the home will be 100% includable in Greg’s probated estate and then will be passed on as the will dictates b. the home will be 100% includable in Hannah’s probated estate and then will be passed on as the will dictates c. the home must be sold, then will be distributed according to the will d. one-half of the value of the home will be included in each of the deceased joint tenant’s probated estates, then will be passed on as their wills dictate


6. In order to add another owner to property owned in joint tenancy, consent: a. does not have to be obtained from other tenants b. must be given by the existing joint tenants c. must be given by any joint tenant that has a share of at least 1/3 ownership in the property from other tenants d. the property must be transferred to another ownership type

7. Judith owns a boat worth $50,000. She adds her son as a joint tenant to the ownership of the boat. Judith:

a. has made no gift b. has made of gift of $25,000 to her son c. has made a gift of $50,000 to her son d. has made a gift of $12,500 to her son


Answers to Chapter Six Study Questions

1. a. As joint tenants, the ownership interest of the first joint tenant to die passes to the surviving tenant or tenants, in this case to Lisa. 2. b. Tenants-in-the-entirety must be husband and wife 3. d. Under tenants in common ownership, each tenant may sell their ownership interest without the consent of the other tenants. 4. a. Under community property laws, community property involved in the divorce is generally divided equally between the spouses 5. d. When joint tenants die simultaneously, if their wills do not have a simultaneous death provision addressing this issue, one-half of the property held in joint tenancy is included in each of their respective estates. 6. b. When another owner is added to a joint tenancy, a share of the existing joint tenants’ interest in the property is transferred to the new joint tenant. Therefore, consent must be given by all joint tenants to add another tenant. For example, if two joint tenants own property and two more are added, the original two tenants each give up 25% of their share in the property to the two new tenants. 7. b. When Judith adds her son as a joint tenant owner on the boat worth $50,000, she has given him a gift valued at $25,000 at the time of adding him as an owner.


Chapter Seven: Other Estate Planning Tools


• Evaluate income and estate tax ramifications of retirement plan beneficiaries • Understand the beneficiary designations on life insurance contracts in terms of

distribution at death • Define the characteristics of payable-on-death bank accounts related to naming and

changing beneficiaries

There are assets that do not have to be placed in a living trust in order to avoid probate because they are placed in forms and accounts that allow the naming of beneficiaries. These assets will pass directly to beneficiaries without being probated. This chapter describes these types of accounts and the passing of their proceeds to beneficiaries upon the death of the asset owners.

Retirement Accounts Retirements accounts, found in a vast variety of forms such as IRAs and 401(k)s, are all subject to probate in the same way. Funds in retirement accounts must pass through probate only if the deceased’s estate was named as beneficiary, or if the named beneficiaries have passed away. Named beneficiaries may claim the funds in a retirement account directly from the account’s custodian. Beneficiaries will pay income taxes on the full amount of the taxable IRA distributions they receive after the account owner has passed away. It is important to remember that the full value of an IRA as of the date of death of the owner is included in his or her federal estate tax base. In many cases, a spouse is named the beneficiary on a retirement account. Because of the unlimited marital deduction from the estate value, these proceeds often avoid estate taxation at the retiree’s death. However, at the surviving spouse’s death, any remaining retirement funds are includable in that spouse’s estate.

Bank Accounts

Joint Bank Accounts

Joint bank accounts are used to avoid probate. A joint bank account can be seen as a contractual agreement that is similar in many ways to joint tenancy. These accounts usually allow either owner to make deposits or withdrawals. However, if a joint tenant is put on a bank account, and the tenant has not contributed to the account (or contributed less than one-half of the account) then a gift is not considered to have been made until that tenant makes a withdrawal, if ever.


Payable-on-Death Bank Accounts

A payable-on-death bank account (also known as a Totten Trust or bank trust account) also avoids probate. It is essentially an informal trust account that allows for the naming of a beneficiary. A payable-on-death bank account itself may be set up, or a payable-on-death designation may be added to any kind of new or existing account, including savings, checking and certificate of deposit accounts. Since the account is informal, it may be revoked or closed and the beneficiary may be changed at any time. The beneficiaries of a payable-on-death bank account have no right to the funds in the account until the owner has died. Upon the owner’s death, the beneficiary automatically receives the account balance without the involvement of the probate court. However, in certain states that have death taxes, tax liens may be placed on the account when the owner dies. If this occurs, a tax clearance must be obtained before the beneficiary can receive the funds.

Transfer-on-Death Nearly every state has adopted the Uniform Transfer-on-Death Securities Registration Act that allows individuals to name someone to inherit stocks, bonds, and brokerage accounts (such as mutual funds) without being subject to probate. Transfer-on-death securities are similar to payable-on-death bank accounts. When ownership is registered, a beneficiary on the account may be named. The beneficiary has no rights to the security as long as the owner is alive. Upon the owner’s death, the beneficiary claims the securities without going through the probate process.

Naming Beneficiaries All of the estate planning tools we have just summarized, in addition to life insurance policies, allow for the designation of beneficiaries. It is vital that care be taken when naming a beneficiary. Assets will become part of an estate upon an individual’s death if he or she does not take the care to name an individual as beneficiary and keep the designation current. If beneficiaries have passed away, the property may pass directly to the owner’s estate, and therefore be included in its value. When life insurance policies, retirement accounts, joint and payable-on-death bank accounts and transfer-on-death securities are established, a beneficiary designation is made at the time of application. Most allow for the naming of a primary beneficiary or beneficiaries and a secondary beneficiary or beneficiaries. If all the primary beneficiaries have passed away at the time of the owner’s death, the secondary beneficiary or beneficiaries receive the death proceeds.

Percentage or Fractional Distributions

Beneficiary designations can be set up in a variety of ways. If more than one beneficiary is named as a primary or secondary beneficiary, for example, a percentage or fractional share may be specified for each beneficiary. For example, Steve is the insured on a life insurance policy and his wife Louise is the primary beneficiary. Their three children are named as secondary beneficiaries and are to share equally in the death benefit as follows:


Secondary Beneficiaries: Jane Renee Jones 1/3, Ralph Adam Jones 1/3 and Christopher Robert Jones 1/3

If Louise is alive when Steve passes away, she will receive the death proceeds of the policy. If Louise passes away before Steve, upon Steve’s death, the children will share equally in the death proceeds.

Per Capita Distributions

Generally, if not specified otherwise, beneficiary designations are assumed to be “per capita.” This means that all surviving beneficiaries share equally in the distribution at death. Assume the same scenario as before, except that the secondary beneficiary designation is as follows:

Secondary Beneficiaries: Jane Renee Jones, Ralph Adam Jones and Christopher Robert Jones

If Louise has passed away and if all three of the children are alive at Steve’s death and the insurance company assumed “per capita” distribution, all three would share equally in the death proceeds. If only two of the children were still alive at Steve’s death, the two surviving children would share the death proceeds equally. The term “per capita” can be added to a beneficiary designation to ensure this type of distribution occurs at the owner’s death:

Secondary Beneficiaries: Jane Renee Jones, Ralph Adam Jones and Christopher Robert Jones, per capita

Per Stirpes Distributions

Another type of beneficiary designation that may be made is “per stirpes.” As defined in Chapter One, per stirpes is a distribution that passes on a deceased beneficiary’s share to that beneficiary’s heirs. Assume three beneficiaries were named on a life insurance policy (with per stirpes distributions, there is no need for secondary beneficiaries):

Primary Beneficiaries: Jane Renee Jones, Ralph Adam Jones and Christopher Robert Jones, per stirpes

If all three beneficiaries are alive at the time of the insured’s death, the three beneficiaries will share the proceeds equally. If Jane has passed away at the time of the insured’s death, and she has 2 living children, her two children will share one-third of the death benefit and Ralph and Christopher will each receive one-third of the death benefit. Some insurance companies and other financial institutions do not accept “per stirpes” beneficiary designations because of their potential complexity and resulting delay in distribution. The financial institution acting as the trustee or administrator of the property is responsible for properly locating beneficiaries. It may be difficult to locate all heirs of beneficiaries in a per stirpes arrangement. No payout may be made while the beneficiary situation is being investigated. So, some entities just won’t allow this designation.


Chapter Seven Study Questions 1. At the death of the owner, retirement account funds:

a. always go through probate b. go through probate if the owner’s estate is the account’s beneficiary c. go through probate if the spouse’s estate is the account’s beneficiary d. go through probate if the children are the account’s beneficiaries

2. Edgar places his son, Mark, as a joint owner on his bank account. Mark never makes a withdrawal from this account. Edgar:

a. made a gift at the time of naming Mark as joint owner b. made a gift at the time he makes the next deposit to the account c. has not made a gift to Mark as long as Mark doesn’t make a withdrawal from the account d. made a gift at the time Edgar takes the next withdrawal from the account

3. The Act that provides a method for naming beneficiaries on stock ownership is: a. the Uniform Transfers to Minors Act b. the Uniform Securities Beneficiaries Act c. the Uniform Stock Ownership Act d. the Uniform Transfer on Death Securities Registration Act

4. Steve is the insured on a life insurance policy. The beneficiaries are listed as his three children, as follows: Steve Ross Smith, Jr., son: 50%, Sally Rose Smith, daughter: 25%, and Susan Roberta Smith, daughter: 25%. When Steve dies, the policy has a death benefit of $500,000. How much will each beneficiary receive?

a. Steve, Jr. will receive all $500,000 b. Steve, Jr: $250,000, Sally: $125,000 and Susan: $125,000 c. The beneficiary designation won’t be named because all beneficiaries must share equally in death benefit proceeds d. Sally: $250,000, Steve, Jr:$125,000, and Susan: $125,000

5. What type of beneficiary designation may not be allowed by a financial institution because of its potential complexity?

a. a percentage distribution b. primary and secondary beneficiaries c. per stirpes d. per capita


Answers to Chapter Seven Study Questions

1. b. if a beneficiary is named on the retirement account rather than the owner’s estate, the retirement account funds avoid probate. If the estate is named, the funds will be probated with the rest of the estate property. 2. c. A gift is not made by adding a joint owner to a bank account with funds belonging to one owner unless the added joint owner makes a withdrawal. 3. d. The Uniform Transfer on Death Securities Registration Act provides a method for naming beneficiaries on securities instruments and brokerage accounts 4. b. Steve , Jr. has a 50% share of the death benefit, or $250,000 ($500,000 x 50%) and both Sally and Susan have a 25% share of the death benefit, so receive $125,000 ($500,000 x 25%). 5. c. A per stirpes beneficiary designation requires that the entity holding the property locate heirs of the deceased, which can be time consuming and complicated for that entity. Therefore, some entities will not allow this designation.


Chapter Eight: Wills Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Define “will” • Recognize the required elements of a valid will • Identify how a will may be changed • Understand the basic form and use of testamentary trusts • Indicate differences in various types of wills

Everyone of majority age with property should have a will. Without a will, the state dictates how property is distributed at the death of the property owner. Even when a living trust is used, a will is needed. This chapter provides an overview of what a will is, who needs a will, what makes a valid will, kinds of wills, and special considerations in providing for minors through a will.

Definition of a Will A will is a document of revocable transfer that outlines who receives property upon the property owner’s death. Wills are

not a recent development, but have been used for thousands of years; hieroglyphics dating back 4,500 years have been found in Egyptian tombs that specify to whom property passes after an individual’s death. In more recent millennia, a will was simply a statement given to a priest on a deathbed. This practice evolved to include the presence of witnesses and eventually the statement given became a written document. States have different laws relating to the specific language of a will. The number of witnesses required at a will’s signing to establish its validity also varies by state. It is important to pay close attention to requirements, lest the will be declared invalid. If a will is deemed invalid, state intestacy laws apply to the deceased’s property.

Who Needs a Will? As noted in an earlier chapter, estate planning and the use of wills is significantly lacking in the United States today. While it is true that different circumstances will necessitate varying will structures, it is vital that any individual who has specific desires for the distribution of his or her property draw up a will. Besides “traditional” families comprised of a married couple, a will is also very important for:

• Single People With Children – Many unmarried people leave behind minor children, and a will can outline provisions for their guardianship that would not be provided by state intestacy laws.

• Single People Without Children – The majority of individuals, whether married with children or not, have people they care for that would not be able to receive any part of


their estate without a will. Also, provisions for incapacity or terminal illness can be outlined in a living will (this will be discussed later in the chapter).

• Unmarried Couples – State intestacy laws require that blood relatives inherit property after an individual’s death, regardless of partnership situations.

• Same-Sex Couples – Although the law does not universally recognize same-sex relationships, a will allows individuals to leave property to anyone, regardless of the nature of any relationship entered into.

A will is not simply for the rich and famous, nor should it be presumed that it is only for the “common” man. Imagine the headaches avoided had Abraham Lincoln or Howard Hughes died with a will rather than without one. Abraham Lincoln was famous, but not wealthy and Howard Hughes was both, but the problems with their estates are not limited to those with wealth and fame. Abraham Lincoln’s widow was provided with very little income until his estate was finally settled and Howard Hughes’ estate went through 15 years of legal battles. These problems can happen to any estate whose owner dies without a valid will.

Requirements of a Valid Will Not all wills must follow a specific formula in order for their validity to be maintained. In a later section we will look at the myriad types of wills considered valid. However, a will must contain certain essentials. Following is a summary of those essentials:

1. The testator or testatrix (i.e. the property owner whose possessions are being transferred through the will) must be of legal age to make a will. This age is usually eighteen, but some states allow younger people to make a will, while other states require that the testator or testatrix be older than eighteen.

2. The testator or testatrix must be of a sound mind. Usually, this means that he or she must understand the general nature and extent of their property, and also must know the objects of their bounty (this could be a spouse, descendants or other relatives).

3. The will must show intent to transfer property. This requirement demands that the will contain at least one “substantive provision” that bequeaths property.

4. The will must be written. While oral wills are permitted in some states, they are usually only allowed under very limited circumstances and apply only to personal property.

5. The will must be properly witnessed. Most states require that the signing of a will be witnessed by at least two competent adults. These adults are also usually required to be disinterested parties, which means that they are not beneficiaries of the deceased’s property.

6. The will must be properly signed. The testator or testatrix must voluntarily sign the will, unless illiteracy, illness or an accident prevents such a signature (in which case a lawyer or one of the witnesses is allowed to sign for the testator). An invalid signature could cause a will to be voided, so it is imperative that this step be completed correctly.

7. The will must appoint an executor.

A testator is the person who makes a will. A testatrix is a female who makes a will.


8. The will must be properly executed. This entails including a date and place of signing, in addition to a statement attesting that the named testator or testatrix drafted the will.

Kinds of Wills The most common structure for wills is the “simple” will. This kind of a will provides for the distribution of assets for an estate that is uncomplicated. It includes provisions for the appointment of an executor, who may be either a family member, close friend or a legal professional. It also includes detailed bequests and payments of debts and expenses of the estate. The will provides for the transfer of the estate to the surviving spouse and/or surviving children, and appoints personal and property guardians for any minor children. There are many other kinds of wills in addition to a simple will:

• Testamentary Trust Will – This kind of will establishes at least one trust for some estate assets. It can also be categorized simply as a testamentary trust. All assets placed in the trust must go through probate before they are placed in the trust (trusts will be discussed at length in later sections).

• Pourover Will – A pourover will leaves some estate assets in a trust (such as a living trust) that had been established before the Testator’s death, and the will governs the distribution of the property not in the trust.

• Holographic Will – This type of will is in the Testator’s handwriting and is unwitnessed. It is only recognized in about half the states.

• Joint Will – A joint will is created by a husband and wife, and provides that each spouse’s property goes to the other upon death. It also outlines what happens to property when the second spouse dies.

• Statutory Will – A statutory will is a form created by state statute and is generally very limited in scope. This kind of will is only available in some states.

• Living Will – This kind of will does not exactly conform to the definition of a will as presented at the beginning of this section. Rather than being a document that outlines who receives property upon the property owner’s death, a living will is in force while the property-owner is alive and it does not dispose of property. It informs doctors and hospitals of the Testator’s wishes should he have to be on life support in the case of terminal illness. It also provides directions on what to do if he cannot be restored to consciousness due to an accident or illness.

Changing, Adding and Revoking a Will Any changes to a will are accomplished through an amendment called a “codicil” A codicil must be drafted subject to the same requirements a will is subject to in order for it to be considered valid. A will may be changed, added to or revoked at any time during the testator’s lifetime as long as he is physically and mentally competent to make any change. At times it may be necessary to revoke a will. This could be due to a major life event such as a marriage, having children, or a substantial change in economic circumstances. A new will revokes a pre-existing will only if the new will specifically states this. Otherwise, the new will may not be considered any more valid than the old.


Contesting a Will When a will is contested a formal objection has been brought about its validity. Estate beneficiaries or any interested party may contest that the will does not reflect the intent of the testator. The testamentary capacity of the testator may also be questioned, as well as the contention that he was subject to undue influence. The will may also be alleged to contain forgery or fraud. It is estimated that as many as one-third of all wills are contested successfully.

Providing for Minor Children Through a Will

Personal Guardians

If both parents die, the law requires that minor children have a personal guardian who can assume “parental duties” for the children. If no guardian is appointed through a will or standalone legal document (other than a trust), either a friend or relative may request guardianship from a court, or the court will choose the guardian (usually this is the nearest adult relative).

Property Guardians

While a personal guardian assumes the parental guidance of minor children, it is a property guardian who manages property left to children. The law states that children under eighteen cannot legally own more than a minimum amount of property without adult supervision. The person who takes responsibility for managing all property above that minimum amount for the benefit of the children is known as the property guardian. Often, the property guardian and the personal guardian are the same person, but this does not always have to be the case. A property guardian is also named through a will or standalone document (other than a trust).

Trusts

While a guardian may not be named through a trust, a trust may be established to provide property itself to minor children. A trust could be funded by life insurance policies on each parent’s life. A testamentary trust (a trust that is created through a will) allows parents to transfer assets to a trustee to manage for the benefit of the children. Conditions are set forth in the trust under which the money is paid to the children, and the trustee has the authority to spend, sell, or invest the assets, all for the children’s benefit. Any other properly drafted and funded revocable trust accomplishes these same outcomes.

Custodian Accounts

A custodian account may be established for children while parents are still alive. Funds may be bequeathed to that account through a will. This is allowed under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), which have been adopted in nearly all the states. It should be noted that before the property is gifted to children through a will through these mechanisms, the property is subject to probate.


Study Questions Chapter Eight 1. The type of individual who needs a will is:

a. one with net worth of over $100,000 b. one with net worth of over $1,000,000 c. individuals with property d. one who is married only

2. In order for a will to be valid, it must have all the following characteristics, except:

a. be made by a testator of legal age b. transfer property with a value of at least $15,000 c. be made by a testator of sound mind d. be properly signed

3. The type of will used along with a living trust that governs the distribution of property not in the trust is:

a. a pourover will b. a holographic will c. a statutory will d. a living will

4. Wills are charged through amendments called:

a. additions b. retractions c. codicils d. trust additions

5. Because minors cannot own a specified amount of property without adult supervision:

a. a property guardian must be named for the minor b. a personal guardian must be named for the minor c. no more than a specified amount may be passed onto the minor d. if more than a specified amount is passed onto the minor through the will, the will is considered invalid


Answers to Chapter Eight Study Questions

1. c. Anyone with property or responsibilities to survivors needs a will. 2. b. A valid will must be made by a testator of legal age, be made by a testator of sound mind, be properly signed, show the intent to transfer property, be written and witnessed, appoint an executor and be properly executed. It is not a requirement of a valid will that property of a certain value be the subject of the will. 3. a. A pourover will is used along with a living trust and governs the distribution of property not in the trust, as well as being used to appoint guardians for children and other functions for which a living trust may not be used. 4. c. A codicil is a change to a will. 5. a. Property guardians manage property on a minor’s behalf, and are named in a will or appointed by a court when a minor inherits more than a specified amount of property.


Chapter Nine: An Introduction to Trusts Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Define “trusts” • Indicate the differences between a revocable and irrevocable trust • Recognize the role and responsibilities of trustees, grantors and beneficiaries of trusts • Identify the purpose of various forms of estate planning trusts, including power of

appointment trusts and Q-tip trusts Trusts are used for many purposes and allow very specific control over property. Trusts may be used for gifting purposes, to reduce taxation, to control property for the benefit of others, and for estate planning purposes. This chapter provides foundational information concerning the creation of trusts, the parties in a trust, types of trusts, uses of trusts and trusts and probate.

What is a Trust? A trust is a legal relationship in which one entity, a “trustee,” holds the title to property for the benefit of him- or herself or for another entity known as a “beneficiary.” Unlike a beneficiary of a life insurance policy, retirement account or savings account, a beneficiary of a trust often receives benefits from the trust during life. The kind of property held may be either real or personal property. So money, real estate, life insurance, vehicles, jewelry, stocks and bonds and the like may be placed in a trust. The legal term often used for trust property is “corpus.” A trust usually involved at least three people: the grantor, the trustee, and the beneficiary(ies).

Grantor

The “grantor” is the person who creates the trust. The terms “settlor” or “donor” are also used to refer to the grantor. The grantor and trustee may be the same person in certain trusts.

Trustee

The trustee is named in a trust document and holds and manages the trust property for the benefit of the grantor and others. The trustee is required to act according to the dictates of the trust, and is seen as having a fiduciary responsibility. Simply, this means that the trustee needs to act in the best interest of the beneficiaries.

Trust


A trustee has legal title to the trust property and is responsible to: • Invest and reinvest property • Pay expenses relating to the trust • Pay income required from the trust • Gather income payable to the trust • Pay taxes and file the returns • Keep records of acquisitions and assets sold

A trust can be thought of as an agreement between a grantor and trustee in which the grantor makes property available to the trustee for specific purposes. Depending on the type of trust, a trustee may have very broad powers to carry out trust-related transactions. In other cases, a trustee may only have very limited powers.

Beneficiary

A beneficiary may be either a person or an organization. Either way, the term beneficiary is used to refer to anyone who is named in a trust and who receives benefits from the property in the trust. A beneficiary may receive benefits from trust property at its inception or at a later time. Beneficiaries are said to retain “equitable title,” which is the right to benefit from the property in the trust.

History of Trusts Trusts, like wills, have their origins in English common law. In the twelfth century the English adopted the idea of the trust from Roman law. The purpose of trusts during this time was to protect property from abuses imposed by the king. After the king and his nobles challenged the use of trusts in the sixteenth century, the common law judges of England ruled that their use was valid. The use of trusts in the United States dates back to its use by colonists in the eighteenth century. Until fairly recently, trusts were mainly used by wealthy individuals, but they have become commonly used in all social strata today.

Types of Trusts

Revocable Trusts

There exists a type of trust form under which the trust may be legally changed or canceled by the trust’s grantor: a revocable trust. Generally, the grantor is the only person who may change a revocable trust; beneficiaries or a trustee may not change it. This kind of trust allows great flexibility for the grantor, but it does not offer any tax benefits. Under revocable trusts, the right to property placed in the trust is still seen as belonging to the trust’s grantor. Also, any gift of property is not considered a gift to the trust; rather, the transfer is completed when the gift is complete (perhaps at the death of the grantor).

Irrevocable Trusts

In contrast to a revocable trust, an irrevocable trust may not be changed or cancelled before a time specified in the trust. This type of trust, although lacking in flexibility, does provide certain tax savings not found in a revocable trust.


Under irrevocable trusts, the grantor does not retain the rights to the trust property; the trust itself now specifies how the property may be used and distributed. Property in an irrevocable trust is usually seen as a gift to the trust. But in order for this to remain true, a grantor must not retain any right to the property. If the grantor does retain any right, then he or she may be forced to pay income taxes on taxable income that had been paid to the trust.

Testamentary Trusts

A testamentary trust is created through a will, but is not a separate document. It allows the grantor of the trust to retain the title to the property during his or her lifetime. Upon the grantor’s death, the property is transferred to the trustee and distributed to beneficiaries. In essence, a testamentary trust does not contain any assets because it is not in effect during a person’s lifetime; rather, it is only effectual after a grantor’s death and after the assets have gone through probate.

Living Trusts

In contrast to a testamentary trust, a living trust allows a grantor to place assets in a trust while he or she is still living (hence the designation as a “living” trust). Under a living trust, the grantor, trustee and beneficiary may all be one individual (although this is not universal). Living trusts are available in revocable and irrevocable forms. Living trusts will be discussed at length in a later section.

Other Kinds of Trusts

Trusts come in all shapes and sizes and to fulfill a myriad of purposes. Following is a brief description of some common kinds of trusts:

• Charitable Trusts – Some trusts are used to support charity. Some charitable trusts are types of split-interest trusts. This means that a trust grantor reserves income from a trust or gives the income to a non-charitable beneficiary, while other interest goes to a charity. Charitable Remainder Trusts and Charitable Lead Trusts are two such split-interest trusts and are normally found in an irrevocable form in order to comply with gift taxation laws.

• Grantor Retained Interest Trusts – These kinds of trusts allow a grantor to retain an interest in a trust’s property for a specified amount of time, after which the principal goes to a beneficiary. This kind of trust is similar to trusts outlined above, except the beneficiary(ies) of a Grantor Retained Interest Trust are noncharitable.

• Spendthrift Trusts – Spendthrift trusts are generally created because the grantor of a trust does not believe that a beneficiary is capable of managing the use of the trust’s assets. This could be a younger beneficiary, a beneficiary who is extravagant, or a beneficiary who lacks certain mental capabilities. These kinds of trusts are also useful in a situation where a beneficiary is subject to creditors.

• Insurance Trusts - In insurance trusts, life insurance policies are purchased using the trust’s assets. The policy’s proceeds benefit the beneficiaries of the grantor. These kinds of trusts are used to reduce estate taxes and are also used for paying estate and death taxes. Insurance trusts may be revocable or irrevocable, the more common kind being irrevocable. One type of insurance trust, an irrevocable life insurance trust, will be discussed in great detail in a later section.


• Power of Appointment Trusts – A power of appointment trust is used for married spouses. It is formed so that one spouse gives a trustee property to be held for the benefit of the other spouse. When the first spouse dies, a power of appointment right allows the surviving spouse to decide where the property should go after his or her death. This kind of a trust is also known as an “A” trust, referring to its qualification as a marital deduction trust.

• Bypass Trusts – Bypass trusts are not marital trusts (therefore, they have the designation of “B” trusts). Bypass trusts contain assets equal to the amount of applicable exclusion so that they may be used against estate taxation. The exemption amount bypasses the surviving spouse’s taxable estate and goes directly to a trust that benefits children, grandchildren or other beneficiaries. The beneficiaries receive benefits only when the second spouse dies.

• Estate Trusts – Estate Trusts are used for married spouses. The property in estate trusts passes to the surviving spouse upon his or her death, and not to beneficiaries the surviving spouse appoints (this is different from the “A” trust). Commonly, an estate trust is used when a surviving spouse does not need the entire income from a marital trust during his or her life.

• Q-Tip Trusts – Q-Tip (qualified terminal interest property) Trusts are used for married spouses. They are structured so that the property in the trust is included in the surviving spouse’s estate at his or her death, and does not give a surviving spouse power of appointment.

• Generation-Skipping Trusts – These kinds of trusts provide benefits for numerous generations of the grantor’s descendants. They are tax-saving trusts in that they use the federal tax exemption to leave the available amount to descendants.

• Totten Trusts – Totten Trusts are types of bank accounts. They are passed to the trust’s beneficiary(ies) upon the death of the grantor.

Trusts and Probate One of the principal benefits of trusts is how they relate to probate (remember that probate is the legal process of settling an estate). Property owned by a trust is not subject to probate law because the trust property is not owned by an individual. Placing assets in trusts is one of the principal means used today to avoid probate.


Study Questions Chapter Nine 1. Trust property is referred to by the legal term:

a. “granted” b. “corpus” c. “ benefits” d. “investments”

2. Trina established a living trust and placed many of her property within it. Trina is the trust:

a. grantor b. grantee c. donee d. administrator

3. The type of trust with provisions that can be changed is:

a. an irrevocable trust b. a changeable trust c. a revocable trust d. a moving trust

4. A will states that at the testator’s death, $2,000,000 of property will be placed in an irrevocable trust for the benefit of the testator’s children. The trust created by the will is:

a. a living trust b. a testamentary trust c. a revocable trust d. a pourover trust

5. The type of trust established because a beneficiary is not capable of managing the trust’s assets is:

a. an insurance trust b. a charitable trust c. a bypass trust d. a spendthrift trust


Answers to Chapter Nine Study Questions

1. b. The property in a trust is called the trust “corpus.” 2. a. The person who establishes a trust and places property in it is the trust grantor. 3. c. The provisions of a revocable trust may be changed 4. b. Trusts created by wills are called testamentary trusts 5. d. Spendthrift trusts are used when the trust beneficiary is incapable of managing the trust assets. This may be because the beneficiary is young, because the beneficiary is extravagant or lacks full mental capacity.


Chapter Ten: Living Trusts Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Define Living Trusts • Describe the role of the grantor, trustee and beneficiary in a living trust • Understand the consequences of the death of the grantor of a living trust on the trust

assets • Recognize characteristics of various types of trustees of living trusts • Know the “rule of perpetuities” • Indicate the use of an A-B-Q trust in estate planning

A living trust is a trust created during the life of the grantor that is used to distribute property upon the grantor’s death without the delay and expense of probate. This chapter provides the fundamentals of living trusts, including what they are, what laws apply to their formation, the parties to the living trust and their functions, and the types of living trust structures utilized in estate planning.

What is a Living Trust? As noted earlier, a living trust allows a grantor to place assets in a trust while he or she is still living. Under a living trust, the grantor, trustee and beneficiary may all be one individual. The individual (or couple) who sets up a trust retains the power to change or cancel a trust (as grantor) and also has the ability to control the trust’s property (as trustee). Almost all living trusts are revocable during the lifetime of the grantor. This means that the grantor of a living trust is allowed to change the structure and terms of the trust while he or she is still living. This allows the trust to reflect the best methods of meeting changing desires and conditions. However, once the grantor has passed away, the trust becomes irrevocable and may no longer be altered. Irrevocable living trusts are rare, but are occasionally used by people (usually wealthy individuals) to avoid certain taxes. A living trust may contain property (assets) of almost any type, usually placed in the trust while the grantor is still living (although they may also be placed in the trust upon the death of the grantor through a pour-over will). These assets may be personal property, real estate, stocks and bonds, heirlooms and the like.

Revocable Trust: A trust whose provisions may be changed after it is created.

Irrevocable Trust: A trust whose provisions may not be changed after it is created.


Laws Relating to the Living Trust A living trust is not required to be established under the laws of the state in which the grantor is living. Rather, a living trust may be configured according to the laws of a state named in the trust. This is in contrast to a will, which is subject to the applicable laws of the domicile state of the testator. It is important that the selection decision to use any state’s laws to set up a living trust takes into account statutes that relate to the rights of creditors, the requirements for serving as trustee, charitable gift restrictions, and the rights of spouses. However, although the laws of the domicile of a grantor do not apply to the formation of a living trust in the same way that they apply to a will, the laws of the domicile state or the state in which property is located may still apply to the management of the trust property. For instance, the validity of a living trust as it relates to real estate is determined by the laws of the state in which the grantor has principal residence. If a trust contains any real estate outside of the grantor’s state of domicile, then the laws of that state will direct the disposition of that real estate.

Parties to a Living Trust In addition to providing stipulations relating to asset management and how and when income and capital are paid, a living trust is designed to provide the designation of and authority of the trustees and the designation of beneficiaries.

Trustees

For a revocable living trust, a trustee is usually the grantor of the trust, or, when spouses are involved as grantors they are usually named as co-trustees. However, not all revocable living trusts name a grantor as trustee. There are certain duties involved in the office of trustee that may best be carried out by the relative or friend of a grantor, rather than the grantor himself. When this is the case, the relative or friend generally has more knowledge or time to devote to the office of trustee. A corporate trustee may also be named on a living trust. Such a trustee usually has a great deal of professional experience. Corporate trustees are impartial and provide management stability. These kinds of trustees charge a fee that ranges from one-half percent of the assets of the trust (if the trustee is only holding assets and providing record-keeping services) to one and one-half percent of the assets (if the trustee makes investment decisions). If a grantor names himself as trustee, a “successor” trustee is also named on a living trust. Such a trustee is the personal representative of the grantor and is responsible for seeing that the wishes of the grantor (as outlined in the trust) are fulfilled after the grantor’s death. A successor trustee also takes over the management of a living trust should the grantor become incapacitated. The successor trustee could be a spouse, close family member or trusted friend, lawyer or corporate trustee. The primary beneficiary of the trust may also be named as successor trustee. The duties of a successor trustee include:

Successor Trustee: A trustee who administers a trust if the named trustee is no longer able to act as trustee, such as due to incapacity or death. In a living trust, the grantor may be the trustee. A successor trustee is named in the trust who will take over as trustee at the grantor’s death.


• Knowing the contents of the living trust agreement • Taking an inventory of all trust property • Paying bills and taxes • Distributing property to beneficiaries according to the dictates of the trust

Beneficiaries

The beneficiaries of a living trust may be any person or organization the grantor chooses, including the grantor himself, to receive the benefits of the trust. Beneficiaries are required to be an identifiable and specific group, and should always be described in a particular manner (i.e. “my daughters Elise Marie Jones and Ella Rose Smith”).

Rule Against Perpetuities There is a “rule against perpetuities” that applies to the naming of living trust beneficiaries. This rule requires that the beneficiaries be in existence for a certain time period that meets applicable state laws. It refers to certain state statutes which limit the period a trust is allowed to retain property, for example, statute that provides a trust must vest (give ownership to property) no later than twenty-one years after the grantor’s death.

Charitable Beneficiaries Some states also have certain restrictions on property left to charity and churches in the form of time limits and percentage limits. The time limit restriction establishes a certain period prior to death when changes to a living trust that leaves large amounts of assets to a charitable organization are allowed. The percentage limit restriction puts a cap on the amount of a grantor’s estate that may be left to charity (usually fifty percent). The reason for these restrictions is to prevent the abuse of the mental state of a dying person by any organization.

Living Trust Construction A living trust may be constructed in different forms: as an A trust, an A-B trust and an A-B-Q trust.

A Trust

A living trust may be set up as an A Trust for either single persons or married couples with estates under the applicable exclusion amount (recall that this is the amount of property which may be transferred that is excluded from both gift and estate tax calculation). However, in many situations, married couples will use an A-B trust no matter what the value of their estate. An A Trust is organized so that all property placed in the trust remains in the trust or is distributed upon the death of the grantor. An A trust does not reduce potential estate taxation, but the property in the trust does avoid probate due to the fact that the property is not owned by an individual, but rather by the trust itself. This can save any heirs the expense of the probate process.


A-B Trust

The A-B Living Trust is always used for couples. When the first spouse dies, the property in the trust is usually split in half. The deceased spouse’s half goes to Trust B and the surviving spouse’s half goes to Trust A. Any estate taxes are paid on the property in Trust B. When the surviving spouse dies the estate taxes are paid on Trust A’s property. No estate taxes will be due if the combined estate for the couple using the A-B Trust is beneath the applicable exclusion amount. In addition, no probate expenses are incurred. This means that the estate’s heirs receive the entire estate value. It should be noted that the B Trust is not included in the surviving spouse’s estate. This means that he or she may not change the beneficiaries of the trust, although the right to use the property in the trust is given.

A-B-Q Trust

This type of trust is used for married couples whose estate exceeds double the applicable exclusion amount. In an A-B-Q Trust, at the death of the first spouse, half of the estate goes to the surviving spouse’s A Trust. The applicable exclusion amount goes into the B Trust. Any remaining amount of the estate is placed in the Q-Tip Trust. This means that no estate taxes are due upon the first spouse’s death, but are deferred until the death of the second spouse. In order for this type of trust to qualify as a Q-Tip (qualified terminal interest property) Trust, the surviving spouse must have a right to all the income from the Q Trust for his or her lifetime. In addition, certain power of appointment rules apply. Neither the trustee nor any other power may appoint (or have the power to appoint) any part on the trust property to anyone other than the surviving spouse during his or her lifetime.

Making Changes to a Living Trust When it comes to making changes, a living trust is not subject to the formalities of a will. Most states do not require any witnesses to make an amendment to a living trust. However, the grantor must be competent in order for the amendment to be valid. Also, if real estate is involved in an amendment then it may be necessary to have any relating documents notarized.


Chapter Ten Study Questions 1. Living trusts are generally:

a. revocable b. irrevocable c. testamentary d. not taxable

2. The grantor of a living trust is also the trustee. When the trustee/grantor dies, the trust states that her brother will be the trustee. Her brother is known as:

a. a corporate trustee b. a forfeiting trustee c. a beneficiary trustee d. a successor trustee

3. The rule that applies to trust beneficiaries that requires that property be vested to beneficiaries within a certain period of time (e.g., no later than 21 years after the grantor’s death) is called:

a. the “rule of beneficiaries” b. the “rule against perpetuities” c. the “rule of benefits” d. the “rule of distributions”

4. When an A-B trust is established through a living trust, estate taxes, if any, are paid on the property in which trust upon the death of the first spouse?

a. Trust A b. Trust B c. both trusts d. neither trust


Answers to Chapter Ten Study Questions

1. a. Living trusts are usually revocable 2. d. The person who becomes the trustee upon the death of the grantor/trustee is the successor trustee 3. b. The rule against perpetuities requires that property in a trust be vested to beneficiaries within a certain period of time. 4. b. When an A-B trust is established through a living trust, at the grantor’s death, the married couple’s property is divided into two trusts, and A trust and a B trust. The B trust includes the property from the deceased spouse and any estate taxes due on the property are paid.


Chapter Eleven: Irrevocable Life Insurance Trusts Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Define “irrevocable life insurance trust” • Identify the structure of an irrevocable life insurance trust based on whether the trust

is created before or after the purchase of a life insurance contract on the life of the grantor

• Know the ramifications of gifting life insurance to an irrevocable life insurance trust within three years of the grantor’s death

• Recognize general life insurance valuation rules for irrevocable life insurance trust transfers

• Define “sprinkle and spray” powers

Another important estate planning tool is the irrevocable life insurance trust. This tool is used primarily to pass death proceeds from life insurance policies to beneficiaries without the inclusion of the policy’s value in the estate of the deceased. This chapter provides an explanation of what an irrevocable life insurance trust is, the parties of this type of trust and their functions, how estate taxes are impacted by their use, gift tax treatment of these trusts, and the differences between an irrevocable life insurance trust and a revocable life insurance trust.

What is an Irrevocable Life Insurance Trust? An irrevocable life insurance trust owns life insurance on the

trust grantor’s life. It is made (either completely or partially) of life insurance that has been gifted to the trust. It can also be made up of cash contributions from the grantor. If this is the case, the trustee of the trust uses the contributions to purchase life insurance on the life of the grantor. Another way an irrevocable life insurance trust is created is to place an existing life insurance policy into the trust. In this case, after the trust is created, the ownership of the life insurance policy is transferred from the grantor to the trustee. The grantor is still considered to be the insured on the policy, although he will not be considered the owner. The trust will also be named the beneficiary of the policy. As a trust, all the insurance in an irrevocable life insurance trust avoids the probate process. As an irrevocable trust, it may not be changed or revoked. Once a grantor has created the trust and placed an insurance policy inside it, the policy ownership may not be transferred back into the grantor’s name. However, the grantor controls the construction of the trust, such as the naming of initial beneficiaries and how those beneficiaries will receive benefits. The grantor may also name the trustee who manages the trust.


Parties to an Irrevocable Life Insurance Trust

Trustees

The trustee of an irrevocable life insurance trust may not be an insured on the insurance policy owned by the trust. If the trustee were to be an insured on the policy, the IRS could determine that the policy did not leave the estate of the grantor, and could count the policy as a part of the estate. This would impact estate tax liability. A financial advisor, family member, trusted friend, or a spouse (as long as the spouse is not insured on the policy) may be named as trustee. The duties of an irrevocable life insurance trustee include the following:

• Pay insurance premiums with the money transferred to the trust while the grantor(s) live

• Oversee the annual notification of beneficiaries • File the trust’s tax return • Oversee distribution of the policy proceeds

Beneficiaries

The grantor may name whomever he or she chooses as a beneficiary on the trust. Generally, the grantor will name a spouse and children as beneficiaries. The irrevocable life insurance trust may be structured to provide income to beneficiaries in the form of sprinkle and spray powers (the trustee is given the authority to provide income and/or capital to the beneficiaries based on their needs and the grantor’s wishes), income and principal for the surviving spouse’s support, and a limited power of appointment for the surviving spouse (allowing the spouse to allot assets to a class of beneficiaries).

Irrevocable Life Insurance Trusts and Estate Taxes At death, everything owned in an individual’s name, including death benefit proceeds of life insurance policies, is includable in his or her estate and as such is subject to estate taxes. If the amount of life insurance death benefits for one policy is several hundreds of thousands or millions of dollars, the estate tax liability for the beneficiaries of the individual who owned that policy could be tremendous. Irrevocable life insurance trusts are used to ease the burden of estate tax on life insurance proceeds. When property is transferred to an irrevocable trust, it is generally considered to be a completed gift. Since a life insurance policy is not owned by the grantor of an irrevocable life insurance trust, the property of the trust is not included in the grantor’s estate at his or her death. This eliminates estate tax liability on the value of the policy at the grantor’s death. It is important to note that if a gift of life insurance is made within three years of an insured’s death, it will be included in the gross estate of that insured. In order to avoid this requirement, the grantor may gift cash contributions or income producing property to the

Sprinkle and Spray Powers are provisions in trusts that give the trustee the power to make unequal distributions to trust beneficiaries.


trust, rather than gifting existing life insurance policies. Once the cash contributions are gifted, the trust will then purchase insurance on the life of the grantor/insured.

Insurance Policies Individual life insurance policies (policies that insure just one individual) may be used for an irrevocable life insurance trust. Second-to-die or survivorship policies (policies that pay out a death benefit only when both spouses have passed away) may also be used. Existing policies may also be used to fund the trust. However, recall that if the insured dies within three years of transferring the existing policy, then the policy will be included in the insured’s estate. Gift-tax considerations also apply when an existing policy is used.

Rules for Gifting When an insurance policy is transferred to a trust, a gift is considered to have been made. If the policy premium payments are made from any source other than a trust beneficiary or income producing assets within the trust, a gift may also be considered to have occurred. If a beneficiary makes premium payments, the value of the gift is the part of the premium that benefits other beneficiaries. If no other beneficiaries have received any benefits, then no gift is considered to have been made. When policies are transferred, a gift valuation is based on the value of the policies on the date of transfer:

• For policies transferred to the trust immediately: gift valued at the value of the net premiums paid

• For policies paid up (not new): gift valued at the cost of replacing the policy • For policies requiring additional premium to stay in force: gift valued at the cost of

replacing the policy • For policies close to maturity at the date of transfer: policy valued at/near face

amount Currently, the annual gift tax exclusion is $15,000. If a policy is transferred to an irrevocable life insurance trust that exceeds this amount, then the policy could be divided into numerous smaller policies so that each policy could be transferred annually under the exclusion rules. This same principal applies to the transferring of multiple policies. Rather than transferring all of the policies in the same year, the transfers could be spread out over a number of years to take advantage of the annual gift tax exclusion. Premium payments may also be structured so that they take advantage of the exclusion.

“Gift of Present Interest”

It should be noted that in order for a gift to qualify for the annual gift tax exclusion, “present interest” must be given in the gift. This means that the recipient of the gift must be able to use the gift immediately, not just at some time in the future. Premium payments in an irrevocable trust do not result in the ability of immediate use. So in order to create a present interest to qualify for the tax exclusion, the trust must include special provisions for any beneficiary making premium payments.


Crummey Power One such provision that creates present interest for beneficiaries making premium payments is called “Crummey Power.” This provision is named after Mr. Crummey, a man who structured his trust so that his beneficiaries had the limited right to demand trust income. This right resulted in the ability of the beneficiaries to use the annual exclusion for gifts made to the trust. The very existence of this right held by the beneficiaries creates present interest. The requirements the Crummey Power is subject to include a notification to beneficiaries. This notification is in the form of a letter sent to all beneficiaries outlining when money was deposited into the Irrevocable Life Insurance Trust. It also gives a specific period in which the money may be withdrawn for the trust. If the beneficiaries do not withdraw money after the specified period, then the Trustee may use the funds to pay the annual insurance premium, thus ensuring that the payments are not subject to the gift tax.

Generation Skipping Transfer Tax

Irrevocable life insurance trusts generally do not qualify for the Generation Skipping Transfer Tax (GSTT) annual exclusion (recall that the generation skipping transfer occurs when an individual transfers assets to individuals two or more generations below himself. This is because non-skip beneficiaries are involved. However, when no non-skip beneficiaries are involved and the trust is organized so that it meets the GSTT annual exclusion requirements ($15,000 in 2018), it may take advantage of both the annual exclusion for gift taxes and the annual exclusion for the GSTT on any transfers from the trust. If the $15,000 transfer is used to purchase life insurance insured in the trust, this advantage is compounded. The GSTT exemption of $11,200,000 (2018) can be used for life transfers or for transfers at death to offset the original transfer of property to the trusts and the following premium payments. The exemption can also be used at death against transfers subject to the GSTT.

Irrevocable Life Insurance Trusts vs. Living Trusts An irrevocable life insurance trust generally has more complex provisions than a living trust, therefore it will usually be more expensive to create and maintain. However, this is not always the case. If an irrevocable life insurance trust is created with few complex provisions, then its cost could be very similar to that of a living trust. Property distributed from an irrevocable life insurance trust follows nearly the same process as property distributed from a living trust. This is due to the fact that assets distributed from living trusts are placed in irrevocable trusts upon the grantor’s death. An irrevocable life insurance trust usually provides protection from claims or attachments from creditors. A living trust does not provide this protection.

Revocable Life Insurance Trusts A revocable life insurance trust, unlike an irrevocable life insurance trust, is a living trust. A revocable life insurance trust is named as a beneficiary on life insurance policies. It could also be named as the owner. The property in the revocable trust, like property in all living trusts, avoids probate.


As a revocable trust, the policy owner retains the rights of policy ownership on the policy in the trust. The owner may take loans, access cash values and must pay premiums. If the trust owns the life insurance policy, a provision will usually be included that requires the trustee make premium payments. This function is only possible if the trust is funded with income producing assets, not just life insurance.

Taxation and Gifting

Revocable life insurance trusts are subject to estate taxation. But when the grantor dies, a bypass, power of appointment, estate and/or Q-Tip trust can be created through the revocable life insurance trust’s terms. When property is transferred to a revocable life insurance trust, no gift is considered to have been made. The grantor keeps ownership rights to the property. But if the life insurance premiums are not paid for by the grantor, then those payments are considered to be a gift. Also, if the owner, insured, and beneficiary are all different parties, then a gift occurs as well.


Chapter Eleven Study Questions 1. The trustee of an irrevocable life insurance trust:

a. may be the insured of the life insurance held by the trust b. must be the insured of the life insurance held by the trust c. may not be the insured of the life insurance held by the trust d. must be a relative of the insured of the life insurance held by the trust

2. The powers given in a trust to a trustee to make unequal distributions to beneficiaries are known as:

a. Sprinkle and Spray powers b. Irrevocable powers c. Revocable powers d. Special powers

3. A life insurance policy is transferred to a life insurance trust when it is first established, and the value of the net premiums paid is $27,000. The value of this gift of insurance to the trust is:

a. $0 b. $27,000 c. $13,500 d. $13,000

4. The existence of the right to demand trust income by a trust beneficiary from an irrevocable trust creates:

a. a future interest by the beneficiary b. a method for making premium payments c. an exclusion from gift tax d. a present interest by the beneficiary

5. A revocable life insurance trust:

a. cannot be legally created b. automatically avoids estate taxation c. are subject to estate taxation, but this can be reduced through the use of bypass trusts or other estate tax reduction tools d. does not avoid probate upon the insured’s death


Answers to Chapter Eleven Study Questions

1. c. If the insured is the trustee on an irrevocable life insurance trust, the IRS could determine that the policy did not leave the estate of the grantor, and so the value of the policy could be includable in the insured’s estate upon the insured’s death. 2. a. Sprinkle and spray powers are powers in a trust that allow the trustee to give unequal distributions to beneficiaries. 3. b. The gift is valued when made, and the value of the policy at that time was its net premiums paid, in this case $27,000. 4. d. The fact that a beneficiary could demand payment from the trust gives the beneficiary present interest in the trust. 5. c. Revocable life insurance trust property avoids probate, but may be subject to estate taxation.


Chapter Twelve: Wills vs. Living Trusts Learning Objectives: Upon completion of this Chapter, the student will be able to:

• Compare and contrast the features, benefits and limitations of wills and living trusts • State the primary advantage of a living trust when compared to a will • Know the basic estate tax ramifications of the death of the testator and the death of the

living trust grantor • Identify the use of a pour-over-will used with a living trust • Recognize the use of living trusts as a vehicle for lifetime gifting • Indicate the legal process that comes into play when there is a dispute over a will

and/or a dispute over a living trust A will may be used in estates without a living trust and a will is needed even when a living trust is used. This concluding chapter sums up the course’s discussion of estate planning and the use of living trusts by explaining the differences between the uses of living trusts and wills in an estate plan. It describes the differences and similarities in the use of these two important tools in the probate process, in their respective cost, in the distribution of property, in the likelihood of being contested, and in their tax treatment. The chapter includes with a description of the importance of a will in an estate and a will’s use in conjunction with a living trust.

Probate The biggest advantage of a living trust over a will is the trust’s ability to avoid the expense and delay of probate. Through the proper use of a living trust, the disposition of all property has been planned in advance by the grantor, and takes place automatically upon his death. Recall from a previous chapter that the cost of probate is usually from five to ten percent of the gross estate. It can also take from six months to two years (or perhaps even longer) for the probate process to be completed; by using a living trust, this delay is avoided. A trust also avoids the publicity of probate. When a will is used, the assets and liabilities of the deceased are made public. But when a trust is used, that information is kept confidential. Only a successor trustee is required to know the specifics of the estate plan both before and after a grantor’s death. However, in the probate process there is a cutoff date for the filing of creditor’s claims against the estate of a deceased. However, since a living trust is not subject to the probate process, it is also more vulnerable than a will to creditor claims.

Cost The cost of a living trust varies according to its complexity. Some “simple” living trusts can be set up with the aid of a self-help book, rather than a lawyer (although most professionals discourage using this kind of tool without the help of a legal professional).


However, usually even a “simple” living trust will cost more than a “simple” will, at least initially. This is because the grantor of the trust must transfer ownership of each piece of property from his name to the trustee’s name. Some example of property that must be transferred includes: • Real Estate – A deed is needed to transfer real estate. Most professionals recommend that

an individual have a lawyer prepare a new deed to transfer the real estate, rather than preparing a deed without legal aid. The cost of this preparation varies according to how complicated the real estate arrangement is.

• Bank Accounts – Most bank accounts may be transferred by completing a transfer form with a bank, although a bank may require that a grantor close an existing account and open a new one in the name of the trustee. A lawyer is not generally needed in this instance, although it can be a time-consuming process.

• Brokerage Accounts – Brokerage accounts may be transferred in the same manner as bank accounts.

• Stock Shares – Any shares of stock held in an individual’s name are nearly impossible to transfer simply by changing the name on the stock certificate. Rather, usually a brokerage account will need to be opened in a trust grantor’s name (with the grantor as trustee). This service is occasionally offered free-of-charge by brokerage firms.

• Life Insurance and Retirement Accounts – For life insurance and retirement accounts, a trust grantor must decide whether or not he wants the trust to be the beneficiary or owner.

Although living trusts usually cost more to set up than a will, they are not always more expensive over time. This is due to the fact that a will is generally changed numerous times during an individual’s lifetime. Each time a change is made, a lawyer is used to draw up each codicil. But living trusts are not usually changed as often as a will, and can sometimes be changed by a grantor, rather than a lawyer. This can save considerable expense in the long run.

Property Distribution Distributing property under a living trust can be relatively simple, as long as the trust has been kept up to date and all assets have been titled under the name of the trust. The trustee (or successor trustee) follows the instructions in the trust at the death of the grantor, and distributes the property according to those instructions. A living trust provides much more flexibility when distributing property than is found under a simple will. For instance, while a living trust allows a grantor to make gifts over an extended period of time, a simple will cannot. Remember, however, that a will, as subject to probate, goes through a court process that ensures that an estate’s assets are properly distributed. A trust has no such security; it is not administered in court, so if disputes arise about distribution of assets, there is no swift way to settle them. Rather, a separate legal case will have to be filed in order for a court to help settle the dispute; this involves a summons, expense, and certain delay.


Contesting As noted in a previous chapter, it is estimated that as many as one-third of wills are successfully contested. But since living trusts are changed more easily than wills, it is not nearly as easy for beneficiaries to contend the trust. Since these trusts can be easily changed, there is a better chance that the trust actually reflects the intentions of the deceased at his time of death than there would be when a will is used alone.

Taxes A living trust and a properly prepared will are subject to the same amount of income and estate taxes. Note that property in a living trust is counted as part of an estate for tax purposes. A successor trustee is required to pay income taxes on any income generated by property in the trust just as the executor of a will has to pay these taxes on property disposed of in a will.

Importance of a Will A living trust by no means replaces a will. Even if an individual believes he has transferred the entirety of his property to a trust, a will is still needed:

Changing Assets

One reason for the necessity of a will is because of the inability to know exactly what will be owned and how long it will be held. An individual is unlikely to transfer asset ownership to a trust rapidly enough in all circumstances to avoid subjecting some assets to intestacy distribution if no will is in place. For instance, if an individual’s grandmother died and left him property, this means that he now has another asset in his name. Unless he transfers this asset to his trust before he dies, then his probated estate will include the inheritance. Without a will, intestacy laws govern the distribution of this asset he inherited from his grandmother.

Post-Death Assets

Another reason a will is important is because of the property or rights that could arise immediately after or as a result of the death of an individual. Probate cannot be avoided when these kinds of assets are involved. One example of such an asset is a death benefit from an employer that is payable to an estate. A will must be used to pass this onto any heirs. In addition, proceeds recovered from lawsuits, over which a trust has no legal rights, could fall under the terms of a will.

Options Through a Will

One final reason a will is necessary when a living trust has been created is because a will contains provisions that are exercisable through a will and not a living trust’s provisions. This includes such options as the naming of a guardian for minor children. It also includes the naming of an executor who will be responsible for settling an estate.

Pour-Over Will Commonly, a pour-over will is used in conjunction with a living trust. A pour-over will leaves some estate assets in a trust that had been established before the Testator’s death. A pour-over will has only one primary beneficiary: the living trust.


This kind of will only controls probated assets (those assets which are not in the trust or held in joint tenancy, in a retirement account, etc.). The use of a pour-over will prevents estate assets from being required to be distributed using intestacy rules: any property that has been intentionally or inadvertently left out of the living trust at the time of the grantor’s death is governed by the will. It should be noted that if a trust is funded through a pour-over provision in a will, any items transferred from the estate to the trust are made public.

Study Questions Chapter Twelve 1. The cost of probate is usually from:

a. 15 – 25% of the gross estate b. 1 - 2% of the gross estate c. 5 – 10% of the gross estate d. 35 – 40% of the gross estate

2. In order to transfer real estate to a living trust:

a. experts recommend not using a legal professional b. the grantor just needs to state in the trust that the real estate is included in the trust property c. the grantor must sell the real estate to the living trust d. experts recommend that a lawyer prepare a new deed to transfer the real estate to the trust

3. If a living trust has been kept up-to-date and assets are titled under the name of the trust, when the grantor dies:

a. distributing property from the trust will be difficult b. distributing property from the trust will be relatively simple c. all the trust property will have to go through probate d. the trust property remains in the living trust

4. The naming of a guardian for minor children:

a. can be made in a living trust b. can be made in an irrevocable life insurance trust c. can be made in a living trust if a “pourover” provision is included in the trust d. can be made through a will, and not through a living trust


Answers to Chapter Twelve Study Questions

1. c. The cost of probate is usually from 5 – 10% of the gross estate 2. d. Experts recommend that a lawyer prepare a new deed to transfer real estate to a living trust 3. b. The distribution of property from a living trust upon the grantor’s death is relatively simple if the trust has been kept up-to-date and the grantor’s property has been titled in the name of the trust. 4. d. Naming a guardian for a minor child may not be done through a living trust, but may be done through a will.

understanding living trusts · 2018-03-20 · understanding living trusts this document will help...

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