Principles of Estate Planning, 4th Edition

Principles of Estate Planning, Fourth Edition

Carolynn B. Tomin

Colleen Carcone

National Underwriter Academic Series

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Fourth Edition

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FOREWORD

Technically, Estate Planning encompasses the process of accumulation, conservation, and distribution of an estate in the manner that most efficiently and effectively accomplishes the client’s goals. In short, almost everyone has some estate and every one of those estates are planned – either by the dictates of state law or by a person or couple who takes deliberate and conscious control of the process.

But money and assets are not the whole story. Estate planning is very much about people, the accomplishment of their dreams and hopes, and the vanquishing of their fears. In fact, the people problems are every bit as—if not more so—challenging than the technical tax and other legal aspects. This is why the subject of estate planning is so very important.

Practitioner-educators Carolynn Tomin and Colleen Carcone are uniquely qualified to guide you through your first look at this intellectually, psychologically, and financially rewarding field. They have succeeded in taking a highly complex and astoundingly broad body of information and distilling it into an organized, clear, crisp, and concise tool to help you quickly master the basic concepts. Each term of art is both defined and illustrated by examples. Carolynn and Colleen have provided you with a Rosetta stone to the language of estate planning.

Look at the contents of this book as a door to a mansion filled with fine art. Walk in and wander through the rooms and you will be awed by the treasure that you will find – not just to enrich others’ lives, but also to enrich your own and your family’s.

Stephan R. Leimberg April 2015

FOURTH EDITION

Since we wrote the first edition of this book in 2012, we have seen new legislation implemented in the form of the American Taxpayer Relief Act of 2012 (ATRA) and the Tax Cuts and Jobs Act of 2017 that has vastly changed the estate planning landscape. There has been a doubling of the federal estate tax exemption amount, allowing many to focus less on estate tax planning and more on ensuring their objectives are met.

Principles of Estate Planning, Fourth Edition reflects the very latest tax code laws, rates, and exemptions enacted with the Tax Cuts and Jobs Act. We have also updated the text to reflect other changes that are relevant to estate planning professionals. This includes a thoughtful analysis of the income tax considerations that may come into play when developing a client’s estate plan. These changes are important from a nuts and bolts perspective, but they also remind us that the practice of estate planning involves more than just estate taxes. Estate planning is about helping your clients take stock of what they have accomplished and decide what kind of legacy they will leave behind for those that they care about. We hope you will find this updated version of the first edition most useful in understanding the comprehensive subject of Estate Planning.

Carolynn B. Tomin, CFP®

Colleen Carcone, JD, CFP®

July 25, 2022

PREFACE

Throughout our many years of experience in teaching estate planning, we recognized the need for a textbook that would assist students in learning the complex principles and techniques of estate planning. We observed that students were easily confused by certain legal terms and tax concepts and that they struggled to understand some of the more advanced estate planning strategies they were expected to know. This led us to continually search for effective teaching methods and materials that would help students understand these difficult estate planning topics. Over time, and through experience, we developed better teaching practices and materials that have helped our students with their studies. We decided to share our format, the organization of our materials, and the many client situations and practitioner tips we developed with students and instructors whom we hope will benefit from our work.

The Importance of Learning Estate Planning

Sometimes, a student wonders why he or she needs to learn estate planning when a licensed attorney is the only professional who has the authority to practice law and provide comprehensive estate planning for clients. We explain that estate planning involves the coordination of expertise and special skills of all members of the client’s estate planning team, which often includes financial planners and other financial advisors. Planners must recognize clients’ estate planning issues and should understand how alternative solutions can affect a client’s overall financial plan. Every member of the estate planning team is obligated to be aware of the tools and techniques of estate planning, to understand their limitations as well as their problem-solving potential, and to be knowledgeable enough to discuss them in general terms with clients and their other advisors.

It is important for students to understand that estate planning knowledge can add tremendous value to a client’s life and also to a client relationship. A former student, Thomas C. Schwab CFP® of Santa Fe, New Mexico, contributed this explanation:

"In many client engagements, I have found estate planning knowledge and the ability to make meaningful contributions to a client’s estate planning the most significant aspect of the relationship. This area of knowledge often sets CFP® practitioners apart from other financial advisors, creating opportunities to engage and collaborate with the other important professionals in the client’s life. It also demonstrates to our clients that we are committed to helping them manage and find solutions to often complex intergenerational issues that touch upon their hopes, desires, and values. Because estate planning usually integrates fundamental aspects of our other areas of expertise, such as tax planning, investment planning, and insurance planning, it also creates an opportunity to organize the many pieces of the planning puzzle together with the client into a coherent, comprehensive plan.

"Estate planning inevitably touches upon many (sometimes deeply charged) emotional areas of the client’s life--their family relationships, their charitable motives, their wish to leave a legacy, and their acceptance of their own mortality. Therefore a CFP® practitioner who is skilled in estate planning knowledge can forge a deep and intensely meaningful professional relationship with clients and their families. In my practice, it is not at all unusual for clients to express deep gratitude for the sensitive handling of all of these issues.

Clients are often surprised, having initially contacted me for investment advice, that there is so much more that a knowledgeable CFP® practitioner can contribute to their overall planning. Some clients report feeling immense relief, confidence, and peace of mind that this area of their planning has been addressed thoughtfully and comprehensively. In the process, I often get to know the client’s children and grandchildren and this is a source of enrichment for me and for my clients. In some cases, I am treated as a trusted member of the family. All of this makes a solid grounding in estate planning not only a necessity, but it also creates opportunities for truly intellectually and emotionally stimulating experiences in financial planning that can be life changing for my clients and for myself. I have no doubt that this has contributed to my being considered a trusted member of the professional community and, through word of mouth, has brought many new clients into my practice.

Unique Features of Principles of Estate Planning

Principles of Estate Planning is written specifically for estate planning students and financial planning practitioners, as well as other advisors who want to provide greater value for their clients by offering more comprehensive financial planning services.

This textbook is, in essence, a practitioner’s guide to estate planning. The topics covered in this book include all of the CFP® Certification Examination Principle Topics and subtopics related to estate planning at the highest academic level. Our objective is not only to explain the topics in great detail, but to emphasize their practical application in planning situations and in the context of a comprehensive financial plan. Each topic is broken down into smaller components and illustrated with client situations to reinforce the concepts and facilitate the student’s learning experience.

Learning objectives are provided for each chapter. They emphasize the most important information that students need to know. Chapter learning objectives have specific learning outcomes linked directly to CFP Board principal topics. Students should test their understanding of chapter material by using the learning objectives as academic benchmarks in their studies. Many of the learning objectives are taken from the CFP Board resource document Student Centered Learning Objectives based upon CFP Board Principal Topics.

Client situations are interspersed throughout the book and are intended to demonstrate how topic information is applied to financial planning and estate planning situations. Students often find that topic content is difficult to understand, but when an explanation is combined with a client situation, the material is better understood. Client situations in this book are not necessarily based on real-life examples, but they can be applied to real-life planning situations.

Practitioner tips are included throughout the textbook because they provide advice and practical guidance to students and financial planning practitioners when working with clients. We want our readers to understand how the information is used in practice and have emphasized points that a practitioner would want to know.

Chapter highlights emphasize the most important material presented in the chapter and are included at the end of each chapter. Students must have a thorough understanding of the information presented here and can use this feature as a summary and a review of chapter information.

Key terms are bolded throughout the text and are listed in alphabetical order at the end of each chapter. The meaning of these terms can be found in the context of the chapter material, and definitions can be found in the glossary.

Review questions are the last component of each chapter and are intended to test a student’s knowledge of the chapter information. We encourage students to test themselves on the questions provided, because practice questions will help students understand the material better. The answers are provided in Appendix A, located in the back of the book, so that students can read an explanation of the correct answer and understand why other answer options are incorrect.

Finally, for simplicity’s sake, we have opted to use the pronoun he in this book to represent all genders.

We believe that the format and structure of our textbook will allow students to learn not only the estate planning concepts essential for practitioners to know, but will provide them with an understanding of how these concepts work in the real world of financial planning. We are proud of this textbook and hope that our readers will be educated and enlightened by it.

With best wishes for your professional success,

Carolynn B. Tomin, CFP®Colleen Carcone, JD, CFP®July 25, 2022

ABOUT THE AUTHORS

Colleen Carcone, CFP®, is a financial planning professional and attorney specializing in comprehensive estate and tax planning matters. Since 2008, Ms. Carcone has taught estate planning at Boston University’s Program for Financial Planning. Ms. Carcone also serves as a Wealth Planning Strategist for TIAA, where she provides wealth transfer, estate planning, and tax planning services for the company’s client needs.

Prior to joining TIAA, Ms. Carcone worked with Atlantic Trust Company, where she advised high-net-worth clients on all aspects of estate planning including basic planning, asset ownership, charitable gifting, multigenerational transfers, and other sophisticated estate planning strategies while working with clients’ outside advisors to implement these techniques. Formerly, Ms. Carcone worked with Atlantic Benefit Group, an insurance firm, advising high-net-worth individuals and business owners and providing assistance with the implementation of advanced estate and business planning techniques utilizing life insurance.

Carolynn B. Tomin, CFP®, specializes in financial education. She is the Program Director for Boston University’s classroom and online financial planning programs and has augmented curriculum for the online program for fifteen years. She has taught estate planning courses, virtual reviews, and CFP® Certification Exam reviews for twenty years at colleges in Massachusetts and Florida, and for many banks and financial service companies in both states.

As cofounder of a financial education company, Beacon Hill Financial Educators, she developed and presented continuing education courses to many financial service corporations and financial planning organizations.

Ms. Tomin served as a member of CFP Board’s Council on Education from 2009–2012, and was appointed Chair in 2012. She has also served on the board of directors for the southwest Florida chapter of the Financial Planning Association (FPA). She is a former member of the Boston Estate Planning Council.

ABOUT THE EDITOR

Danielle Tralongo is an editor with the Insurance and Tax Division of ALM Media. She has worked on their Tools & Techniques publications and helped to edit and develop instructor materials for ALM’s publications. Danielle is a graduate of SUNY New Paltz and holds an M.A. from the same university.

ACKNOWLEDGMENTS

Writing a textbook is a very time-consuming process. When we began writing the first edition back in 2011, we found that all of our precise planning and self-imposed deadlines were quickly overturned as events in our lives took center stage and demanded our full time and attention. Over the years, we have both experienced the deaths of loved ones, the illness of close friends, and the birth of grandchildren, nieces, and nephews. These events made us recognize how truly important estate planning is and appreciate what it can accomplish, as we dealt with estate planning issues within our own families.

We want to extend a very special thank you to our families, who have supported us and encouraged us throughout the writing of this book. Carolynn would especially like to recognize and thank her husband, Nigel Tomin. Without the love, understanding, and support of our families, this book would never have been written.

We wish to further acknowledge the many colleagues who provided us with advice and especially acknowledge many of Colleen’s colleagues at TIAA and in the Boston legal community who made significant contributions to this book.

We are also grateful to the folks at the National Underwriter Company, especially Jay Caslow, for the support and confidence they have shown in us and in this project.

We want to specifically acknowledge CFP Board for allowing us to reprint their materials in this textbook. Finally, we want to extend a very sincere and special thank you to Stephan Leimberg, who graciously allowed us to adapt and incorporate into this textbook parts of The Tools & Techniques of Estate Planning.

Chapter 1

Introduction to Estate Planning

TOPICS COVERED IN THIS CHAPTER:

Estate Planning Process

Seven steps in the estate planning process

Fiduciaries

Types of fiduciaries

○ Executor/Personal representative

○ Trustee

Duties of fiduciaries

Breach of fiduciary duties

Learning Objectives

Explain the importance of estate planning and what it can accomplish.

Describe the unauthorized practice of law.

Identify the financial planning practitioner’s role and responsibilities in the estate planning process.

Define fiduciary duties and identify the parties that would be subject to them.

Chapter Contents

Overview

Who Needs an Estate Plan?

Situations that Require Advanced Estate Planning

The Estate Planning Process

Step 1: Understanding the client’s personal and financial circumstances

Step 2: Identifying and selecting goals

Step 3: Analyzing the client’s current course of action and potential alternative courses of action

Step 4: Developing recommendations

Step 5: Presenting recommendations

Step 6: Implementing recommendations

Step 7: Monitoring progress and updating the plan

The Unauthorized Practice of Law

The Financial Planner’s Role

Financial Planner Responsibilities

Fiduciaries

Executor Responsibilities

Trustee Responsibilities

Chapter Highlights

Key Terms

Review Questions

1.1 OVERVIEW

Estate planning is the process of planning for the accumulation, conservation, and distribution of an estate in a manner that most efficiently and effectively accomplishes a person’s goals. Most people spend a lifetime accumulating assets and want to distribute them to their loved ones in a manner that reduces transfer taxes and distribution costs. They also want to protect their assets from financial, economic, and creditor risks that might diminish value and affect their ability to achieve their financial planning goals. These common estate planning objectives are addressed in the estate planning process through the development of a comprehensive estate plan that is integrated with a client’s overall financial plan and personal goals.

The client’s estate planning team is led by an attorney. The estate planning attorney is the person primarily responsible for developing the plan and for drafting the legal documents. Financial planners and other advisors will also have an important role to play in the estate planning process, and they can provide better service and greater value to their clients by understanding the fundamental principles of estate planning. This knowledge will help planners recognize deficiencies in a client’s estate plan that can be addressed in collaboration with the client’s estate planning team. Planners can also use their knowledge to assist clients in determining realistic estate planning goals and priorities, and they can ensure that the estate plan is properly implemented and monitored once recommendations have been developed.

The financial planner and other professionals, such as insurance specialists, trust officers, and accountants serve the client with specialized expertise. Planners can contribute to the development of an estate plan with their unique knowledge of a client’s personal and financial situation, as well as their grasp of estate planning techniques and strategies. The client is best served when all team members work together to formulate, execute, and maintain a plan that meets a client’s needs and accomplishes his estate planning objectives.

1.2 WHO NEEDS AN ESTATE PLAN?

An estate is defined as the rights, titles, or interests that a person, living or deceased, has in real or personal property. An estate plan addresses the transfer of property during life or at death and the methods and risks of effecting those transfers. Every estate is planned – either by the individual or by the state and federal governments. Therefore, every adult older than age 18 should have an estate plan.

The manner in which assets are owned determines how they will pass at death, and to whom they will pass. Absent a will or other estate planning documents, individually owned property will pass to others according to state distribution rules, known as state laws of intestacy. Without proper planning, property could pass to the wrong person in the wrong manner.

Estate planning is essential for people who want to care for and provide financial support for spouses, domestic partners, minor children, parents, or other relatives or dependents during their lifetime and after their death. Proper estate planning can preserve a client’s assets for the benefit of others. Estate planning is especially needed for:

spouses, partners, children, or other dependents who cannot handle or do not wish to handle money, securities, or a business;

children, spouses, or other dependents who have special needs: spouses, children, or other dependents who are expected to have their own significant wealth;

elderly parents who are dependent on their children to provide them with financial support or care; and

pets that need to be cared for after an owner’s death.

Estate planning is also needed to prepare for incapacity. Legal documents such as durable powers of attorney, health care proxies, living wills, and trusts can be used to make legal, financial, and healthcare decisions for the benefit of an incapacitated person. Trusts are important estate planning instruments because they can provide continuity of income and asset management in the event the trust creator, the grantor, becomes incapacitated. In the absence of documents such as a power of attorney, the courts will appoint a guardian or a conservator to make these types of decisions on behalf of an incompetent person.

1.3 SITUATIONS THAT REQUIRE ADVANCED ESTATE PLANNING

A simple will may be appropriate to meet many clients’ needs, but more sophisticated planning is indicated for people who own substantial assets. A common estate planning goal is to reduce taxes when property is transferred to others. Such taxes take the form of gift taxes, estate taxes, and generation-skipping transfer taxes. Because the estate tax exemption amount has increased significantly over the past several years, many clients will focus on income tax planning within their estate plans. Estate planning is essential for individuals with:

Estates that exceed $12,060,000 in 2022. Estate planning can minimize estate taxes and consequently transfer more family wealth to beneficiaries.

Highly appreciated or other unique assets. Understanding the income tax consequences of transferring assets during life or at death has important consequences for an estate and will be an important component of planning.

Closely held business interests. Estate planning can provide for the orderly transfer of a business to a key employee or a competent family member.

Charitable objectives.

Property owned in more than one state.

Special property such as fine art or a coin, gun, or stamp collection.

Asset protection concerns for heirs.

Estates that need sufficient liquidity to pay debts, expenses, and taxes owed at death.

1.4 THE ESTATE PLANNING PROCESS

There are seven steps in the estate planning process:

Understanding the client’s personal and financial circumstances

Identifying and selecting goals

Analyzing the client’s current course of action and potential alternative courses of action

Developing the estate planning recommendations

Presenting the estate planning recommendations

Implementing the estate planning recommendations

Monitoring progress and updating the plan

Each step in the estate planning process is related to the seven steps outlined in CFP Board’s Practice Standards for the Financial Planning Process. These steps must be followed when a CFP® professional provides financial planning or financial advice that integrates the client’s personal and financial circumstances in order to act in the client’s best interest.

1.4.1 Step 1: Understanding the Client’s Personal and Financial Circumstances

The financial planner and the client must mutually determine the scope of engagement, which identifies the services to be provided and each party’s responsibilities in developing and implementing the financial plan. This step refers to services that the financial planner will provide with respect to a client’s estate plan, and these responsibilities should be coordinated with other members of the client’s estate planning team. For example, while only an attorney can draft legal documents, including estate planning documents, the financial planner might be involved only in implementing the client’s estate plan. Therefore, it is important to clarify the financial planner’s role in providing estate planning services to a client.

The financial planner must obtain both documents pertaining to the engagement and sufficient qualitative and quantitative information from the client. Examples of qualitative information include the client’s and family members’ health, life expectancy, family circumstances, values, attitudes, expectations, earnings, and risk tolerance. Quantitative data includes legal documents such as wills, powers of attorney, trusts, etc., in addition to tax returns, insurance policies, deeds, and account statements for investment, bank, and retirement accounts. Beneficiary designation forms are also very important for planners to review.

Practitioner Tip: The ability to gather accurate, comprehensive, and useful information in a logical and orderly manner is most efficiently developed through the use of a data-gathering system.

1.4.2 Step 2: Identifying and Selecting Goals

The practitioner and the client should work together to identify the client’s personal and financial goals, needs, and priorities. The planner should note the impact of selecting a particular goal on other goals, and how reasonable assumptions and estimates may affect the estate plan. These may include life expectancy, inflation rates, tax rates, investment returns, and other factors.

1.4.3 Step 3: Analyzing the Client’s Current Course of Action and Potential Alternative Actions

The attorney must assess a client’s current course of action to determine the likelihood of meeting his estate planning goals. Deficiencies should be identified and the client should be informed of how assets are scheduled to transfer, and at what cost, under the current estate plan. Attorneys will then consider alternative courses of action and develop strategies and techniques to maximize the potential of meeting a client’s estate planning goals.

1.4.4 Step 4: Developing Recommendations

A client’s estate planning attorney will develop alternatives to the existing estate plan in an effort to reasonably meet the client’s estate planning objectives and priorities. Recommendations are developed based on selected alternatives to the current course of action. Techniques that do not meet the client’s goals are eliminated, as are techniques that are inconsistent with the client’s financial needs and priorities. A financial planner can identify problems with a client’s current financial situation that might affect the proposed estate planning recommendations. Recommendations should be communicated to clients by the attorney in a manner that will help clients make an informed decision about implementing the new or revised estate plan.

Some factors that can affect the selection of a particular estate planning technique include:

the current and projected value of a client’s estate;

the net amount of estate or gift tax liability;

the client’s health and life expectancy;

the client’s financial needs during their lifetime;

the types of property the client owns and how it is owned;

the beneficiaries’ ability to manage transferred assets;

the client’s marginal income tax bracket; and

the laws of the client’s state of domicile (permanent residence).

1.4.5 Step 5: Presenting Recommendations

The estate planning attorney should then present the client with the recommendations, as well as the information that was considered when developing the recommendations.

1.4.6 Step 6: Implementing the Recommendations

The client, the planner, and members of the estate planning team determine implementation responsibilities for the plan. The planner helps the team select products or services to implement the recommendations that are suitable for the client and consistent with the client’s goals, needs, or priorities.

Practitioner Tip: Be aware that clients do not always implement their estate plans for many different reasons. A study found that nine out of ten wealthy clients did not follow through on their estate plans because they believed their plan did not deal with their goals, wishes and objectives. Clients want help thinking through the issues to determine what is truly important to them. Other reasons given for not implementing these plans included the belief that plans are too complicated, that clients feel too nervous and not in control of the process in any meaningful way, and that other professionals advised against implementing the estate plan.

1.4.7 Step 7: Monitoring Progress and Updating the Plan

The financial planner’s role in monitoring the estate plan and client responsibilities must be clearly defined. The plan might need to be revised if changes occur that render it or certain provisions ineffective or outdated. Circumstances that can affect an estate plan include:

changes in a client’s objectives;

changes in a client’s personal situation, such as the birth of a child or grandchild, divorce in the family, illness, death of a beneficiary, etc.;

relocation to another state or accumulation of property in another state;

substantial changes in a client’s wealth, income, or business interests; and

changes in federal or state tax laws.

Practitioner Tip: A client’s estate plan should take into account his current financial situation and projected financial needs. The estate planning recommendations and techniques selected for implementation should be appropriate to accomplish both the client’s tax and non-tax estate planning objectives. Finally, the estate plan should be flexible enough to include amendments or revisions that will accommodate a client’s changing personal circumstances as well as changes to future tax laws and policies.

1.5 THE UNAUTHORIZED PRACTICE OF LAW

An attorney who specializes in estate planning is the most important member of a client’s estate planning team. The attorney should take the lead in developing plan recommendations and establishing implementation priorities. The estate planning team can work together with the client to ensure that recommendations are completed in a timely manner.

It is sometimes difficult to draw the boundaries of professional responsibility in an area as complex and sophisticated as estate planning. Special skills and learning are necessary prerequisites not only for the attorney, but also for a CFP® practitioner, CPA, ChFC, CLU, trust officer, or other individuals serving a client in an advisory capacity.

Yet it is clear that regardless of how knowledgeable an advisor is, only an attorney is legally authorized to practice law. The practice of law is regulated and limited for a number of reasons:The public needs and deserves protection against advice by nonattorneys who have been neither trained nor licensed to practice law.

Many nonlawyers who are highly skilled in specific areas such as tax law might lack the broader viewpoint and depth provided by law school or legal experience.

The preparation of an estate plan involves the proper coordination of how assets are distributed. This process requires specialized training and knowledge, and this task is best coordinated by a lawyer.

Estate planning is an art, not a science; it involves the coordination of special skills and expertise from all members of a client’s estate planning team. The very idea of an estate planning team implies that each member serves the client. It is often the financial planner who motivates the client to take action—and then follows through to make sure the plan is implemented. However, when any member of the team usurps the province of another, the client loses.

What can—and cannot—be safely discussed with a client? There are few redline tests, but practitioners can follow some common-sense guidelines. Essentially, when a statute or legal interpretation has become so well-known and settled that no further legal issue is involved, there should be no problem in suggesting its simple application on a general basis. This is known as the general-specific test; no violation arises from the sharing of legal knowledge that is either generally informatory or, if specific, is so obvious as to be common knowledge.

Only when legal rules (which are general in nature) are applied to specific factual situations is the line crossed. Providing advice involving the application of legal principles to a specific situation is clearly the practice of law under the general-specific test. When the application of basic legal principles to specific and actual facts or the resolution of controversial or uncertain questions of law is required in an actual case, the practice of law is involved. Each state has the right to decide—independently from all other states—what is meant by the unauthorized practice of law.

No safety can be found in an argument that the nonlawyer is both a specialist and an acknowledged expert in the field. The rationale is that the public interest is not protected by the narrow specialization of a person who lacks the broad perspective and orientation of a licensed attorney. That dimension of skill and knowledge comes only from a thorough understanding of legal concepts, processes, and the interaction of all the branches of law. In other words, the nonlawyer may have learned the rules, but often the full meaning and import of the rule and its components—and the impact of that rule on other seemingly unrelated rules—may not be fully understood by someone who is not a licensed attorney. For instance, a proposed arrangement might work in terms of its tax implications, but it could violate other laws such as ERISA or securities laws.

Almost everyone agrees that the actual drafting of a will or trust or the preparation of the instruments and contracts by which legal rights are secured is the practice of law. Definitive solutions, i.e., the choice of which specific tools or techniques to use in a given case or the decisions regarding how they should be used, must be considered only by the client, together with his attorney. Likewise, the drafting or adoption of instruments needed to execute the techniques or utilize the tools discussed in this book is exclusively the province of a lawyer.

Practitioner Tip: Financial planning practitioners should avoid most problems by working closely with a client’s attorney at the earliest opportunity.

Every member of the estate planning team is obligated to be aware of the principles of estate planning and to understand the problem-solving potential of specific tools and techniques, as well as their limitations. Financial planners must be knowledgeable enough to discuss them in general terms with clients and with a client’s other advisors.

1.6 THE FINANCIAL PLANNER’S ROLE

CFP Board’s Standards of Conduct address duties owed to clients. The duty of Competence states, A CFP® professional must provide Professional Services with competence, which means with relevant knowledge and skill to apply that knowledge.¹

The single most important skill of a financial planner is the ability to understand who the client is, where that client stands in relation to the objectives he may have, and what things have to be done to move the client closer to the realization of these goals. Knowledge of the client, his fears, hopes, dreams, family circumstances, and relationship to other family members is essential for the financial planner to apply this skill.

The estate planning interview is important far beyond the data gathered, because it is probably the first time in a client’s life that he will be confronted with his property, his loved ones, his mortality, and the relationship of each to the others. The planner must actively listen to the client to gain a thorough understanding of what is truly important to him.

Practitioner Tip: The goal of the financial planner should be to help his client come to his own realizations and conclusions.

The financial planner should work with a client to help formulate estate planning goals that are measurable, relevant, and realistic considering the client’s resources and time frames. The financial planner should help the client prioritize his goals.

When constructing a financial plan or reviewing an existing plan, the planner should review the client’s legal, financial, and tax documents to ensure coordination and compliance with the client’s goals. This review also serves to identify any weaknesses in the current estate plan. If problems are discovered, the planner can inform the client about the consequences of not taking corrective action and persuade him to obtain legal advice. If necessary, the planner can assemble a team of experts to work with the client, the planner, and the client’s attorney to develop alternative estate planning solutions that reflect the client’s wishes.

Practitioner Tip: The financial planner may need to assume a counselor’s role when encouraging a client to make changes to his current plan or convince him that the proposed estate planning recommendations are suitable and appropriate for his needs.

1.6.1 Financial Planner Responsibilities

There are many actions a financial planner can take to implement, or assist in updating, a client’s estate plan. The financial planner can:

Ensure the client understands the intricacies of his current estate plan and the tax and non-tax aspects of the plan.

Work with the client to correct improper or outdated beneficiary designations found on life insurance policies, investment accounts, IRAs, or other retirement accounts.

Offer to assist the client in funding revocable trusts to avoid probate and to obtain professional management of trust assets in the event of the client’s incapacity.

Determine the value of the client’s assets and liabilities to determine whether the estate has a federal or state estate tax liability.

Review life insurance policies to determine whether there is sufficient coverage for family protection and estate liquidity needs. Determine the effect the death benefit will have on the client’s estate tax liability.

Review all insurance policies, including disability and long-term care policies, to determine whether coverage and benefits are sufficient to protect the client, his family, and his assets.

Work with the client to divide jointly owned property into individually owned assets if this is needed to fund specific trusts that save estate taxes for the client and his spouse.

Review the client’s will, trusts, asset titling, and deeds to ensure that bequests of property and titles of ownership are coordinated.

Review the will to determine whether beneficiaries, executors, or guardians need to be changed or contingent executors or guardians added.

Make sure all property interests the client owns can pass by will, trust, or automatically to a joint owner.

Create spreadsheets that show how assets are currently owned, how they are transferred to beneficiaries at death, how much each beneficiary will receive, and the net amount of the client’s and spouse’s estate tax liability.

Provide the client with a written summary of the documents included in his estate plan and a list of all of his financial accounts.

Assist in implementing estate planning recommendations.

Monitor the client’s progress in implementing the plan.

Conduct periodic reviews of the estate plan to identify whether updates are needed based on changes in tax laws or the client’s goals and personal circumstances.

Practitioner Tip: Financial planners might prefer to refer clients to estate planning attorneys to handle all of their estate planning needs. But planners have invaluable personal knowledge of a client and his financial situation, and when that information is combined with an attorney’s estate planning expertise, the client is better served. Knowledge of estate planning increases a financial planner’s level of competency and distinguishes the planner as a valuable advisor to his clients. This can also give the planner a competitive edge over other advisors, because attorneys prefer to work with competent professionals who understand estate planning issues.

1.7 FIDUCIARIES

Clients need to carefully select the right people whom they trust to execute their estate plan. These people are known as fiduciaries and they have specific responsibilities and roles in executing an estate plan. Fiduciaries often include executors, trustees, guardians, and agents.

A fiduciary has a responsibility to place a beneficiary’s interests first, before his own. Fiduciaries have the authority to perform special acts or specific duties for others. Depending on the type of fiduciary selected and the scope of his authority, fiduciaries can carry out directives set forth by a principal to manage that person’s property or affairs.

Practitioner Tip: CFP Board’s Standards of Conduct imposes a fiduciary duty on CFP® professionals. Standard of Conduct A.1 states At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client.² CFP® professionals have a Duty of Loyalty, a Duty of Care, and a Duty to Follow Client Instructions under the Fiduciary Duty.

Fiduciaries must perform their duties with utmost care and loyalty toward the beneficiaries they serve. Fiduciaries who manage property interests should make every effort to preserve and protect the property and make prudent investment decisions with the goal of increasing the property’s value. Fiduciaries can be sued for breach of fiduciary duty in civil and criminal courts.

The proper selection of a fiduciary begins with an understanding of the tasks and duties of each member of the client’s estate planning team and how each fiduciary interacts with others.

1.7.1 Executor Responsibilities

An executor is a fiduciary designated under a will to serve as the client’s personal representative. An executor is responsible for collecting and valuing estate assets, paying the decedent’s debts and taxes, and distributing assets to the beneficiaries named in the will. The probate process typically lasts from nine months to two or three years, and an executor must be willing to serve throughout that period until the estate has been probated.

A person may want to choose a close relative or another caring individual who is sensitive to the emotional and financial needs of the beneficiaries to serve as his executor. A trusted family member is preferable in this role, but only if the person selected has the skills and abilities to handle the responsibilities of administering an estate. If family members do not have the necessary skills, a person should know which professional to turn to for help. Family members chosen as executors must remain impartial and should avoid taking actions that provide them with distinct advantages over other estate beneficiaries.

In some circumstances, it may be necessary or appropriate to name a corporate fiduciary as executor. Corporate fiduciaries, such as banks and trust companies that specialize in estate administration, can be named as executors or co-executors under the will. These entities should be considered for administering large or complex estates because they can provide professional management for all types of property interests, including businesses, investments, and real estate.

Practitioner Tip: It is the executor’s responsibility to choose an attorney to probate the estate. Any attorney that specializes in estate planning can be selected for this role—it does not have to be the same attorney that drafted the will.

1.7.2 Trustee Responsibilities

Trusts have many uses and often provide assets or income to trust beneficiaries. The trustee is a fiduciary who holds title to the trust assets and manages them on behalf of the beneficiaries according to the terms specified in the trust instrument. A trustee is chosen by a grantor and can be an individual or a corporate trustee. A trust can also have co-trustees—for example, one or more family members can serve as co-trustees with an institutional trustee, such as a bank or a trust company.

An advantage to having a corporate trustee is its availability to serve for many generations, whereas individual trustees cannot. Corporate trustees can also provide professional investment management, business advice, tax-planning expertise, and accounting services that individual trustees may not be capable of providing.

Practitioner Tip: It certainly makes sense to choose a corporate trustee rather than an individual trustee when a client has complex investments and extensive property holdings.

As part of the selection process, a grantor should consider the manner in which a beneficiary might be permitted to remove a corporate trustee and appoint successor trustees. The grantor should also name successors to step in should the original trustee be unavailable or unable to serve. The trust document should address conditions and circumstances that would lead to the trustee’s dismissal.

Practitioner Tip: Often, changes within corporations can change the nature of the relationship between a corporate trustee and individual co-trustees or beneficiaries. For example, a bank named as corporate trustee might merge with a larger bank and the manner in which they handle a trust could change. For this reason, it may make sense to allow trust beneficiaries the flexibility to remove the corporate trustee and replace it with another corporate trustee.

1.8 CHAPTER HIGHLIGHTS

Estate planning is the process of planning for the accumulation, conservation, and distribution of an estate in a manner that most efficiently and effectively accomplishes a person’s goals.

An estate is defined as the rights, titles, or interests that a person, living or deceased, has in any property.

Estate planning is essential for people who want to care for and provide financial support for spouses, domestic partners, minor children, parents, or other relatives or dependents during their lifetime and after their death.

Advance planning is needed to protect an individual and his property in the event of incapacity or untimely death.

Estate planning can minimize gift and estate taxes, protect assets, transfer a business or other property interests to others in a proper manner, accomplish charitable objectives, and plan for the final distribution of a person’s estate.

Seven steps are involved in the financial planning and estate planning process, and they are aligned with the CFP Board’s Financial Planning Practice Standards.

The financial planning practitioner must avoid the unauthorized practice of law and must work with the client’s estate planning attorney at the earliest opportunity.

The financial planner can help the client determine estate planning goals and priorities and spot weaknesses in a current estate plan. The financial planner can help assemble a team of professionals to make estate planning recommendations and identify specific circumstances that might adversely affect those recommendations. Other members of a client’s team might include an accountant, an investment manager, an insurance agent, and, of course, an attorney.

The planner should take action to implement any recommendations that he has agreed to, and he should monitor the implementation of the plan.

The types of fiduciaries involved in estate planning include executors, trustees, guardians, and agents who are holders of powers of attorney.

1.9 KEY TERMS

corporate trustee

domicile

fiduciary

grantor

principal

estate

executor

state laws of intestacy

trust

trustee

1.10 REVIEW QUESTIONS

1-1. Which of the following statements correctly describes what estate planning can accomplish?

Estate planning can provide financial support and security for spouses, partners, children, and other dependents.

Estate planning is needed only for individuals with estates that exceed $12,060,000.

Estate planning ensures that the courts will select proper guardians and conservators to manage an incapacitated person’s affairs.

1-2. Which of the following situations does not constitute the unauthorized practice of law?

When a nonlawyer is both a specialist and an acknowledged expert in the field.

When legal rules are applied to specific client situations.

When a statute or legal interpretation has become so well-known and settled that no further legal issue is involved.

When the resolution of controversial or uncertain questions of law is required in an actual case.

1-3. Which of the following statements does not correctly describe the financial planner’s role in the estate planning process?

The practitioner and the client mutually define a client’s personal and financial goals, needs, and priorities that are relevant to the scope of the engagement.

The planner must assess a client’s current and projected future financial situation to determine the likelihood of meeting his financial planning and estate planning goals.

The financial planner must analyze a client’s current estate plan and make recommendations to correct any known deficiencies.

The financial planner can assemble a team of experts to work with the client, the planner, and the client’s attorney to develop alternative estate planning solutions that reflect the client’s wishes.

1-4. Which persons or institutions have a fiduciary responsibility to the client?

A CERTIFIED FINANCIAL PLANNER™ professional

A bank trustee

An agent with a durable power of attorney

An executor

1-5. The financial planner can assume all of the following responsibilities in an estate planning engagement, except:

Gather the client’s personal, financial, and tax information.

Act as captain of the estate planning team.

Calculate the value of the client’s assets and liabilities to determine whether the estate has a current or projected federal estate tax liability.

Assist in implementing the estate planning recommendations.

1-6. Which of the following statements correctly pertains to a trustee?

The trustee manages trust assets according to directives in the trust document.

An institutional trustee in conjunction with a co-trustee who is a family member can make distributions of trust assets to a beneficiary.

The trustee must collect a decedent’s assets at death to pay debts, taxes, and expenses attributable to the decedent’s estate.

A trustee typically specializes in estate administration.

¹. https://www.cfp.net/docs/default-source/for-cfp-pros---professional-standards-enforcement/CFP-Board-Code-and-Standards

². CFP Board, Code of Ethics and Standards of Conduct, March 2018.

Chapter 2

Property Interests

TOPICS COVERED IN THIS CHAPTER:

Characteristics and Consequences of Property Titling

Sole ownership

Tenancy in common

Joint tenancy with right of survivorship (JTWROS)

Tenancy by the entirety

Trust beneficiaries: Income and remainder

Learning Objectives

To ensure that you have a solid understanding of the various forms of property ownership and how the title of property affects transfer taxes and probate, the following learning objectives are addressed in this chapter:

Compare and contrast the most common forms of property ownership and how they affect the gross estate, the probate estate, marital deductions, and step-up in basis.

Recommend the appropriate property title, given the client’s lifetime and estate distribution objectives and tax situation.

Understand the implications of how property ownership affects the manner in which assets will be distributed at a decedent’s death.

Explain how the contribution rule applies to property titled JTWROS.

Recognize the uses and tax implications of life estates and remainder interests held in real property and trusts.

Chapter Contents

Overview

Sole Ownership

Income Tax Considerations

Estate Tax Considerations

Tenancy in Common

Income Tax Considerations

Gift Tax Considerations

Estate Tax Considerations

Joint Tenancy with Right of Survivorship

Considerations during Lifetime

Considerations at Death

Joint Tenancy with Right of Survivorship with Spouses

Income Tax Considerations

Gift Tax Considerations

Estate Tax Considerations

Joint Tenancy with Right of Survivorship with Nonspouses

Income Tax Considerations

Gift Tax Considerations

Estate Tax Considerations

Tenancy by the Entirety

Life Estates and Remainder Interests

The Life Tenant’s Interest

The Remainder Beneficiary’s Interest

Income Tax Considerations

Gift Tax Considerations

Estate Tax Considerations

Estate for a Term of Years

Digital Assets

Chapter Highlights

Key Terms

Review Questions

2.1 OVERVIEW

Asset ownership is one of the most important—and often one of the most overlooked—aspects of an estate plan. A client may have the most intricate estate plan; however, if asset ownership has not been coordinated with the plan, then estate planning objectives may not be met. To plan an estate, it is necessary for a financial planner to understand the ways in which property is owned and how it is transferred. The way in which property can be transferred depends on the form of ownership, and there may be certain limitations on how a person can transfer property based on how the property is owned. A person must not only own property to make gifts during his lifetime or to dispose of an asset at death, but the form of ownership must also allow him to transfer his interest.

The financial planner must recognize the income tax, gift tax, and estate tax implications of property ownership in order to recommend the most appropriate title to meet his clients’ objectives.

2.2 SOLE OWNERSHIP

Sole ownership is the simplest form of ownership. The owner has complete lifetime and testamentary control of property that he owns; it is outright ownership of the asset. When someone owns an asset in his own name, he owns the property in fee simple or fee simple absolute. This is the most comprehensive form of ownership, and there are no restrictions on how the property holder can use the asset while he is alive. This includes the owner’s ability to make gifts of the assets to others or to charity. For example, if you own a bank account, you can withdraw assets from the account and the money is yours to spend as you wish or to give away to others or to charity. Solely owned assets are subject to creditor claims.

Just as an individual can do whatever he wants with the assets that he owns during his lifetime, he can leave the assets to whomever he wishes at death. The assets will pass per the terms of his will; if he does not have a will, they will be transferred per his state’s laws of intestacy, and therefore the property will be subject to probate.

2.2.1 Income Tax Considerations

When an individual owns an asset, all income that is generated from that asset is attributed to him and reported on his federal income tax return.

2.2.2 Gift Tax Considerations

An individual may give away any solely owned assets either to individuals or to charity during their lifetime. Transfers are subject to gift tax rules.

2.2.3 Estate Tax Considerations

The full fair market value of an asset is included in an owner’s gross estate at death and subject to probate. Generally, the asset will receive a step-up in basis to the value on the decedent’s date of death.

Practitioner Tip: Solely owned property located in a state that is not the owner’s state of domicile is subject to ancillary probate at the owner’s death. Out-of-state property may be owned by trusts to avoid ancillary probate.

2.3 TENANCY IN COMMON

Tenancy in common is a form of co-ownership of property. Tenants in common own an undivided right to possess property. Each tenant owns a separate, fractional interest in the same property. When individuals own an asset together as tenants in common, that ownership can be either equal or unequal.

As with individual ownership, each tenant can use and has full control of his fractional interest both during his lifetime and at his death. Each tenant is generally free to transfer his interest in the property as a lifetime gift or as a bequest at death to whomever he chooses. There is no obligation to transfer the property to the other tenants in common. When property is held as tenants in common, there is some loss of control over the asset. For example, it may be more difficult to sell, transfer, or mortgage a fractional share of property.

2.3.1 Income Tax Considerations

Income is received and taxed based on each individual’s fractional share of ownership. If ownership is not split equally but income is split equally, a gift is made to the tenant(s) receiving more than his (or their) fractional share of interest.

2.3.2 Gift Tax Considerations

If an individual owns property in sole title and converts that ownership to tenancy in common, then the value of the property transferred to the other property holder(s) is a gift.

An individual can also make gifts of his fractional interest in property that he owns as tenants in common during his lifetime. Transfers are subject to gift tax rules.

2.3.3 Estate Tax Considerations

At death, the fair market value of the decedent’s fractional interest in property held as tenants in common will be included in his estate. The fractional share will receive a step-up in basis at the owner’s death. As with individual ownership, the decedent’s interest in an asset is subject to probate and will pass per the terms of the owner’s will or according to his state’s laws of intestacy.

2.4 JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

Another form of co-ownership of property is a joint tenancy with right of survivorship. Joint tenants have an undivided right to the enjoyment of property. Unlike a tenancy in common, joint tenants own property equally, even if there are more than two joint owners. Joint ownership is a very common form of ownership; however, certain considerations should not be overlooked both during the property holders’ lifetimes and at the time of their deaths.

2.4.1 Considerations during Lifetime

While a joint tenant is alive, he can generally sever (or divide) the joint tenancy or transfer his interest to another person without the consent of the other joint owners. This will form a tenancy in common between the remaining property owners. If the proportional interests remain the same, there will be no gift tax consequence. Although a joint owner has the ability to dissolve the joint tenancy or to sell his interest in the property, he will need the other joint tenants’ consent to sell the property or to take a loan against it.

A further consideration with regard to joint tenancies is that one tenant’s undivided interest can be reached by creditors. If property is held in joint tenancy, and one owner gets sued, liability will attach to the property. The joint owner’s interest will be attached as well. If the jointly held asset is a bank account or securities, only the tenant who was sued will be affected.

2.4.2 Considerations at Death

Unlike a tenancy in common, when a joint tenant dies, that person’s