106-2 TOD, Planning Docs, and Incapacity Planning

Question 1

Probate

Answer 1

The state-adopted method of transferring the ownership of assets from a decedent to heirs at death

Question 2

Testate

Answer 2

When a decedent dies w/ a valid will

Probate necessary for this process

Question 3

Intestate

Answer 3

When the decedent dies w/out a valid will

Probate may also be necessary

Intestacy laws vary from state to state

Question 4

4 Groups of Assets Subject to Probate

Answer 4

1. Individually owned assets of the decedents (and for which no beneficiary designation has been made)
2. Property held concurrently w/ another where no survivorship rights are present
3. The decedents 1/2 interest in community property
4. Assets that pass to the decedent’s estate at death

Question 5

Advantages of Probate

Answer 5

1. Provides clean titling of assets from the decedent to heirs
2. Provides for an orderly administration of the decedent’s assets
3. Implements the objectives of the decedent when there is a valid will
4. Protects the decedent against an untimely filing of claims by the decedent’s lifetime creditors
5. Protects creditors by giving them a forum to have their claims heard

Question 6

Disadvantages of the probate process

Answer 6

1. Cost and complexity of the process
2. Potential delay in distributing the decedent’s assets to heirs
3. Public nature of the process

Question 7

Probate estate vs. gross estate

Answer 7

Probate estate: deals w/ the court transferring ownership

Gross estate: deals w/ estate taxes

Question 8

Ancillary Probate

Answer 8

Real estate in a state other than the decedent’s state of residence is subject to a separate probate proceeding in the state where it is located

A person who owns property in 2 states would be subject to 2 probates

Question 9

3 Types of Transfers that Avoid Probate

Answer 9

1. Transfers by operation of law
2. Transfers by trust
3. Transfers by contract using beneficiary designations

Question 10

Transfer by Operation of Law

Answer 10

A decedent’s assets will avoid probate if they pass to an heir by operation of law
The most common way to pass property using operation of law is titling the property as joint tenancy w/ right of survivorship (JTWROS) or as tenancy by the entirety (TE)

Question 11

Uniform Simultaneous Death Act

Answer 11

Most states have adopted this, it applies when each tenant’s death occurs within 120 hrs of the other’s

Question 12

Transfer by Trust

Answer 12

Generally, both revocable and irrevocable trust assets will avoid probate if the trust is funded before the grantor’s death

Question 13

Living Trust

Answer 13

Trust that is funded during the grantor’s lifetime

Question 14

Transfer by Contract Using Beneficiary Designations

Answer 14

Probate can be avoided by using contractual beneficiary designations

Naming the decedent’s estate as the beneficiary should normally be avoided
If the estate is the beneficiary, the asset no longer avoids probate

Question 15

Stepped-up basis

Answer 15

The rule provides that property inherited from a decedent generally receives a basis equal to a FMV on the decedent’s date of death or the FMV as of 6 months after the decedent’s date of death if the estate elects to use the alternate valuation date (AVD) for federal estate tax purposes

Special rules apply to inherited assets that are considered income in respect of a decedent (IRD)

IRD does not receive a stepped-up basis

Question 16

Last will and testament

Answer 16

A formal legal document that enables the testator (the person executing the will) to transfer property at the testator’s death in the manner desired

Question 17

Advantages to having a valid will

Answer 17

1. The ability to name an executor or personal representative to administer the testator’s estate
2. The ability to designate a guardian to take care of the testator’s minor children
3. The possibility of designating certain personal or real property to pass to specified individuals
4. The ability to effect transfer tax planning through the use of certain legal interests and testamentary trusts
5. Wills have the ability to tailor the estate as the testator wishes

The testator must be 18 or older and not be under the undue influence of another person (e.g. the beneficiary)

Question 18

Holographic Will

Answer 18

If a will is entered into probate in the testator’s own handwriting (and is not witnessed), it is known as a holographic will

Question 19

Noncupative will

Answer 19

Oral will recognized by a few states

Question 20

Executor

Answer 20

The person named in a decedent’s last will and testament to handle the decedent’s affairs after death and, specifically, the management of the probate estate

Question 21

Administrator

Answer 21

If the decedent dies without a will, or for some reason the will is determined to be invalid, the person to handle the decedent’s affairs after death is the administrator

Question 22

Personal Representative

Answer 22

The person or institution who serves as either executor or administrator of the estate, and serves until the decedent’s property is distributed to the heirs or beneficiaries under order of the court

Question 23

Simple Will

Answer 23

Refers to a will that does not involve any transfer (estate) tax planning and leaves all of the testator’s property outright to the surviving spouse

Question 24

Complex Will

Answer 24

Involves transfer (estate) tax planning

Question 25

Codicil

Answer 25

Used to make a simple addition to or deletion of previous will provisions

Question 26

Side Letter, or letter of personal instruction

Answer 26

A very useful but often overlooked estate planning document from the decedent to the personal representative of the estate

Often includes directions regarding the decedent’s funeral

Question 27

Testamentary Trust

Answer 27

A trust that is created in a will

Does not take effect until the testator’s death

Because the trust is funded w/ assets that pass under the testator’s will, the assets transferred to the trust through the decedent’s will are subject to probate

Question 28

Pourover Will

Answer 28

A will that is used w/ a revocable living trust to catch any assets that were not transferred into the living trust while the decedent was alive and to transfer those assets into the trust at the decedent’s death

Question 29

Marital Property Agreement

Answer 29

i.e. a prenuptial agreement, or prenup

A legally binding agreement between 2 future spouses

Often implemented in marriages between people who have children from previous marriages to protect the children’s rights to participate int he distribution of their parent’s estate

The agreement often provides for restrictions on subsequent transfers of property between 2 future spouses in exchange for the relinquishment of marital property rights in the event of divorce or death

Question 30

Conservatorship

Answer 30

A fiduciary relationship created by law for the purpose of enabling 1 person (the conservator) to manage the property of another (the ward)

Unlike a trustee, the conservator does not take title to the ward’s property

Title to the ward’s property remains w/ the ward, and the conservator takes custody only as an officer of the court and under the authority granted to him by the local judge

Question 31

Guardianship

Answer 31

A fiduciary relationship created by the law to enable 1 person (the guardian) to manage the personal care and well-being of another (the ward)

Question 32

Revocable Trust

Answer 32

The most prevalent use is for avoidance of probate but, to achieve this purpose, a revocable trust needs to be funded during the grantor’s lifetime

Question 33

Special Needs Trust

Answer 33

A trust that is established by clients who have a dependent who is developmentally disabled and is receiving Supplemental Security Income (SSI) benefits or other forms of governmental assistance

The purpose of the trust is to pay for the beneficiary’s supplemental needs that are not covered by such assistance while, at the same time, protecting assets from governmental attachment

These trusts are not permitted in all states

Question 34

Incapacity

Answer 34

Defined as the absence of a legal ability to act

Common examples of individuals who possess legal incapacity (or incompetency) are minors and people w/ severe mental dementia such as Alzheimer’s disease

Question 35

Disability

Answer 35

Narrowly defined as the physical inability to perform an act

Question 36

Durable Power of Attorney (DPOA)

Answer 36

Recognized in all 50 states

Preferable in planning for incapacity because the powers granted to the attorney-in-fact survive the principal’s legal incapacity
Not the case with the nondurable power of attorney, which becomes legally invalid at the onset of the principal’s incapacity or, practically speaking, when the power is needed most

Question 37

2 Common Types of Durable Power of Attorney (DPOAs)

Answer 37

1. Springing

2. Nonspringing

Question 38

Springing Power of Attorney

Answer 38

If the attorney-in-fact’s authority to act is delayed until the principal actually becomes incapacitated or incompetent, the power is a springing power of attorney

Question 39

Nonspringing Power of Attorney

Answer 39

May be more practical given that the agent or attorney-in-fact is frequently the principal’s spouse

Question 40

Durable Power of Attorney for Health Care (DPOAHC)

Answer 40

Always springing in effect
That is, as long as the principal is able to give informed consent regarding health care decisions, the medical community will look to the principal to do so

Question 41

Living Will

Answer 41

Provides for the suspension of medical care if a person becomes terminally ill, as determined by 1 or more physicians
A living will does not appoint a surrogate decision maker but is a direct instruction from the patient to his physician

The living will addresses only the situation of terminal illness, whereas the durable power of attorney is much broader in scope and addresses a multiplicity of health care situations

Question 42

2 Types of Assets for Medicaid Purposes

Answer 42

1. Countable Assets - counted when determining the ability to pay for the care
2. Exempt Assets - not counted when determining the ability to pay for the care

Question 43

Medicaid

Answer 43

The healthy spouse is usually entitled to half of the assets for his own use, making only 1/2 of the assets countable
Attempts to spend down the assets or transfer the assets to others are subject to a “look-back” period of 60 mths

If the client is married, it is important to remember the residence is not a countable asset

Real estate assets other than the couple’s primary residence are countable