You are on page 1of 51

Wills, Trusts, and Estates

Week 2
Spring 2015

Defining this Course

Estate = all that a person or entity owns,
including both real and personal property;
the collective assets and liabilities of a
dead person.
Estate Planning= accumulation,
management, conservation and transfer of
wealth considering legal, tax, and personal

History of Estate Planning

Thomas Jefferson
The earth belongs in usufruct to the living:
the dead have neither powers nor rights
over it. The portion occupied by any
individual ceases to be his when he
himself ceases to be, and reverts to
society. (Letter to James Madison dated
Sept. 6, 1789)

Why is Estate Planning

Minimization of transfer taxes
Providing for family

Healthcare directives
Succession or sale of a family business

Information needed from a client

for an Estate Plan:
Personal information
Important people
Owned property and how it is titled
Property one expects to acquire in the future
Anticipated future financial needs
Clients wishes/goals about the disposition of their

Estate Planning Process from a

CFP standpoint
Step 1: Establish/Outline Relationship with
Step 2: Collect Data
Step 3: Analyzing the Data and Identify
Influential Factors that will Influence which
Estate Planning Techniques should be Used
Step 4: Selection of Techniques
Step 5: Implement the Plan
Step 6: Monitor the Plan

Unauthorized Practice of Law

What is meant by the practice of law?

Drafting or selecting legal documents?

Rendering legal advice?
Representing clients in legal negotiations?
Informational matters?

Sample Question
John is a financial planner in the state of
Tennessee. Although he attended law
school, he never passed the bar exam.
What is John NOT allowed to do?
a) Explain the probate process
b) Draft a will
c) Direct a client to seek legal advice
d) Act as a trustee for a clients trust

The Function and Objective of an

Estate Planner
Function of an estate planner is to develop a plan
for a clients financial holding that will maintain and
enhance the financial security of clients and their
Objective of an estate planner is to preserve and
enhance the clients estate.
An estate planner is an agent of the client and
owes a fiduciary duty to the client to act in the
clients best interests.

Ethical Concerns for Estate


Encourage accurate exchange of information
Cell phones and other medians of communication

Fee for service; Commission on products sold; Packaged billing
Referral fees

Conflicts of Interest
Multiple representation (husband and wife) define the relationship in the

Utilize the appropriate experts
Dont give legal advice

Company, industry and legal rules

Full and honest disclosure, integrity, patience


How it all fits together

States govern the creation and
implementation of wills and trusts
Both States and the Federal Government
levy taxes

Sources of Estate Laws

Internal Revenue Code (IRC)
Title 26 U.S.C.
Uniform Probate Code (UPC)
VA Wills and Decedents Estates:
Uniform Trust Code (UTC)
VA Trust Code:

Tax Concerns in Estate


Internal Revenue Code (IRC)

Transfer taxes (right to transfer ones property): Estate Taxes (value of
decedents estate ), Gift Taxes, Generation-Skipping Transfer Taxes
Individual states estate tax
Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland,
Massachusetts, Minnesota, New Jersey, New York, North Carolina,
Ohio, Oregon, Rhode Island, Tennessee, Vermont, and Washington
Individual states gift tax
Connecticut, Tennessee
Individual States inheritance tax (who receives a decedent's property and
how the beneficiary is related to the decedent)
Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey and
Income taxes


Anything capable of being owned

Having a property interest Includes:
Actual ownership of material objects
Right to possess
Right to enjoy
Right to use
Right to transfer
Right to direct who will enjoy or possess something
When there is present possession or the right to come into possession
of property sometime in the future
One can own the entire property or a limited portion of it in conjunction
with others
Property can be owned absolutely, with no restrictions or owned subject
to condition or limitation such as time or use restrictions in the present
or future

Ownership Interests
Fee Simple Absolute
Life Estate
Estate for Term of Years
Future Interests
Tenancy in Common
Joint Tenancy with Right of Survivorship
Tenancy by the Entirety

Why does this matter?

You are limited only by your own
imaginations as to what property interests
you convey either in life or death.
You can only convey and enforce that
property interest that you own.

Real Property v. Personal

Real Property = land or anything permanently attached or
affixed to it
Personal Property = all property other than land or an interest
in land
Tangible = anything touched seen and felt; it represents
itself intrinsic value
Intangibe = object is representative of something else; the
value of the intangible exceeds the physical object
Stock certificates

Fee Simple
The most expansive property interest allowed by
Holder has the right to sell, gift, or devise their
interest without seeking anyone else's consent.
Fair Market Value (FMV) of the whole Fee
Simple is included in the Gross Estate, but if
transferred to ones spouse then its FMV is
eligible for the unlimited marital deduction
Included in the Probate Estate
Fee Simple Absolute: To A and As heirs.

Life Estate

A life estate gives the owner the absolute right to possess, enjoy, or derive
income from the property for the span of the measuring life.
Holder of Life Estate has a duty to the Remainderman (whoever takes after
the Life Estate) to not create waste:
Fails to pay property taxes
Fails to insure the property against foreseeable losses
Destruction of the propertys income-providing source

To A for life.
A has a Life Estate; Grantor has an indefeasible vested interest since at As
death the property interest reverts back to Grantor
If A sells the property for which they have a Life Estate, such property interest will
revert back to the Grantor once A dies

To A for the life of B

A has a life estate as long as B is alive

To A for life, then to B.

A has a Life Estate; B is a Vested Remainder Beneficiary who takes a Fee
Simple Absolute upon the death of A

Life Estate Example 1

Under his fathers will, Adam has been
given the exclusive use and possession of
his fathers residence for Adams lifetime.
When Adam dies, the residence will be
transferred to the beneficiary named
under his fathers will.
What can Adam do with his property
interest in his fathers estate?

Answer to Example 1
Adam can live in the house until he dies,
allow others to live in it, or rent it.
Adam can sell his life estate interest to
another, but the buyers interest in the
house terminates upon Adams death.

Estate for Term of Years

An interest in property established for a
specific duration.

Estate for Term of Years

Example 1
Instead of receiving a Life Estate, Adam
was given exclusive rights to the
residence for 10 years, but after which the
property would go to Bob.
What happens if Adam dies within the 10

Estate for Term of Years

Example 1
If Adam dies within the 10 years, the right
to possess the property for the remainder
of the term will be determined by Adams
will or the states intestacy laws.
If Adam is alive at the end of the 10 years,
he no longer has a property interest in the

Future Interests
Is a present right to possess or enjoy
property in the future.
Remainder Interests
Reversionary Interests

Remainder Interests
Is a present right (property interest) to future enjoyment
of property.
The remainder interest must take effect immediately
upon the expiration of another estate. (Ex. expiration of
Adams 10 years)
2 types of Remainder Interests:
Vested Remainder
Contingent Remainder

Vested Remainders
The right to receive the property in the
future is presently fixed and absolute;
receiving the property is inevitable by the
remainderperson and cannot be taken
away by anyone
Indefeasibly vested
Presently vested property interest!

Vested Remainder Example

Testator: To Don for life, then to Tom in
fee simple.
Don = Life Estate
Tom = Indefeasibly Vested Remainder

Contingent Remainders
May or may not come into effect (possessory
interest) at some future date, depending on the
occurrence or nonoccurrence of an event or
Defeasible property interest/defeasible estate
Fee Simple Determinable
Fee Simple subject to a Condition
Fee Simple subject to an Executive Limitation

Contingent Remainder Example

Testator: To Don for life, then to Tom only
if Tom survives Don, then to Ed.
Tom will only receive his property interest
if he survives Don. If Tom dies before
Don, then the property goes to Ed upon
Dons death.
What property interests does Don, Tom,
and Ed have?

Contingent Remainder Example

Don = Life Estate
Tom = Contingent Remainder (contingent
upon surviving Don)
Ed = Contingent Remainder (contingent
upon Tom predeceasing Don)

Reversionary Interests
Owner/grantor of an estate transfers a lesser estate to
Reversionary interest gives the owner Grantor the right to
have all or part of the property that he or she originally
owned returned to the Grantor or the Grantors estate.
In other words: a present retained right to future
Reversions are always vested.
Occurs when less than the estate interest owned is then
conveyed (owner A has a Fee Simple Life Estate to B
with no named remainderman)

Reversionary Interest Example

Testator: To Sara for life.
Sara = Life Estate
Testators estate = Reversionary Interest

Legal v. Equitable Ownership

It is possible to have different types of rights in the same property

held by different parties.
Legal ownership means one holds legal or actual title and has the
rights and obligations connected with the ownership
Equitable ownership is the economic right to enjoy the use of the
Right to use and benefit from the property
Right to enjoy the property
Right to receive income from the property

In a Trust, the trustee holds legal title and must invest and manage
the trust property (fiduciary relationship with beneficiaries). The
income generated by the trustees efforts is then distributed to or
held for the benefit of the beneficiaries who hold equitable title.

Legal v. Equitable Examples

A mother who takes title as custodian of a
bank account established for her childs
benefit under the Uniform Transfers to
Minors Act has legal title, but the
equitable/beneficial interest is owned by
the child.
If a friend lends you her car while your car
is in the shop, you have a beneficial
interest in the car without having title.

Complete v. Incomplete Transfers

A transfer of property is said to be complete and
irrevocable when it is no longer rescindable or
amendable, i.e., when the transferor has totally
relinquished all dominion and control over that
Ex. Buying a car
What about having a time period to back out of a
Revocable v. Irrevocable Trusts

Concurrent Ownership
Property can be owned entirely by one
person. A person can also hold a portion
of property in conjunction with others
Tenancy in Common
Joint Tenancy with Right of Survivorship
Tenancy by the Entirety

Tenancy in Common (TC)

A separate but undivided interest in property (real or
personal) shared between two or more individuals.
All cotenants do not have to have an equal share of the property

Property can be real or personal.

Interest can be sold or transferred (sale, gift or will)
without the consent or even the knowledge of the other
No right of survivorship
Included in the Probate Estate

Tax Concerns of TC

Federal Estate Tax:

Fair Market Value (FMV) of an individuals interest in property is included in their Gross Estate,
but if transferred to ones spouse then its FMV is eligible for the unlimited marital deduction

Federal Gift Tax:

If one tenant has received a greater proportionate interest than his contribution to the tenancy,
a gift has been made from the cotenant at its creation. A gift may also occur if the property is
sold and a cotenant receives a greater share of the proceeds than his contribution .

Federal Income Tax:

A cotenant is treated as a separate owner of his share in the property. Each cotenant is
entitled to his share of any income generated by the property. If a cotenant sells their
interest, they will realize a gain or loss, which is calculated using a basis in the property
depending on his proportionate interest in the property and original contribution to attain said
General Rule : Upon the death of a taxpayer, property in the estate gets a new cost basis for
income tax purposes.

TC Example
John and Allison owned a tract of land as
Tenants in Common. John contributed
$75K and Allison contributed $25K.
Assuming Allison died today, what
percentage would she include in her Gross
Estate for Federal Estate Tax purposes?
25% of the FMV of the property would be
included in Allisons Gross Estate for
Federal Estate Tax calculations.

Income Tax/Basis Example 1

Jane owns but one asset at her death: one share of stock.
She paid $1 for it. If she sold it for $10 while alive, what is
her taxable gain?
She would have a $9 taxable gain for income tax purposes.
At Janes death, the share of stock was valued at $10 for
federal estate purposes. If Janes heirs sold it after her
death for $10, what is their income tax liability?
There is no income tax liability because Janes cost basis
in the stock would be increased (stepped up) on her death
by operation of law, from $1 to $10, its date-of-death value.

Joint Tenancy with Right of

Survivorship (JT)

2 or more Joint Tenants who have an undivided equal ownership interest of

the whole.
Different than Tenancy in Common where tenants can have disproportionate
ownership interests (, , )

Property can be real or personal.

A Joint Tenancy can be severed by one interest holder without the consent of
the other cotenants.
If one owner dies, that owner's interest in the property will pass to the
surviving owner or owners by operation of law, and avoids probate
The last surviving joint tenant can do whatever they want with the whole property.
In avoiding probate, one avoids issues involving: a spouses elective share, will
contests, more fees (executors commission and attorneys fees), time and other
problems of probate.

Property held in JT is potentially seizable on the default or misdeeds of either

Property held in JT does NOT pass by will.
To A and B as joint tenants with the right of survivorship, and not as tenants
in common.
Be aware: To A, B, and C as joint tenants each owning 1/3 share is a TC!

Tax Concerns of JT

Federal Estate Tax:

Full FMV of the property will be included in the last living joint tenants Gross Estate. Additionally,
prior joint tenants who die before must include their proportionate share of ownership in their estate.
In regards to two JT who are married (also referred to as Tenancy by the Entirety), the first to die will
have to include of the value of the jointly held property in their estate and when the second spouse
dies, they will have to include the entire value of the asset in their estate. However, spouses can
leave everything they own, including property held jointly with spouses, to their spouses free of the
federal estate tax Unlimited Marital Deduction (no federal estate tax on property held jointly with a
spouse when the first spouse dies!
Federal Gift Tax:
If one joint tenant contributes (actual contribution rule) more than his share to acquire jointly held
property, that joint tenant has made a gift to the other joint tenants (ex. adding anothers name to a
title of a house) OR a gift is made to the other joint tenants where one pays more than his share of
either mortgage payments, costs of maintenance, or other expenses for the operation of the property.
Exception: Withdraw Rule, see bank account example
Federal Income Tax:
If the property is not held between spouses, the step-up in basis generally will depend upon the
amount each joint tenant contributed to obtain the property.
Property held jointly between spouses (JT/TE) does not get a 100 percent step-up in basis for income
tax purposes, rather only a 50% step-up because only 50% is included in the estate of the first
spouse to die.

Income Tax/Basis Example 2

If Jane owned the $1 stock jointly with her
spouse and died, only half the stock would get a
step-up in basis. If Janes spouse sold the stock
after her death for $10, what would his taxable
gain be?
$4.50 because his starting cost was $.50 (half
the $1 paid), his half of the gain would be $5
($10 price divided by 2). By subtracting his cost
of $.50 from the $5, we have a $4.50 gain. He
has no gain on Janes half because her half got a
step-up in basis to $5.

Income Tax/Basis Example 3

Jane owns the $1 stock in her name (not as JT).
Jane dies and leaves it to her spouse. There
would be NO federal estate tax since spouses
can leave everything tax-free to surviving
spouses. What is her spouses basis in the stock
if it has appreciated to $10?
He takes the stock with a stepped up basis of
$10. If he were to sell the stock for $10, there is
no income taxable gain.

Actual Contribution Rule

Property is included in the decedents gross estate to the extent of

the decedents original contribution percentage.

Ex. John purchased a piece of real estate and titled the property as
a JT with his son Bubba. Bubba contributed no money to the
purchase of the property. John has made a gift of 50% of the value
of the property to Bubba. When John dies, 100% of the value of the
property will be included in Johns Gross Estate because of the
Actual Contribution Rule. If Bubba died first, Bubba would include
0% in his Gross Estate.

There may be Gift Tax consequences here. This can also occur
where one Joint Tennant pays MORE than his share of either
mortgage payments or the cost of maintenance and operation of the

Joint Bank Accounts/Withdraw

Unlike in the preceding example with
Bubba, a gift will not be deemed to have
been made at the creation of a joint bank
account (JT).
A gift is made when the donee-joint tenant
makes a withdraw from the joint bank
account until that time such gift is deemed
revocable and incomplete.

Joint Bank Account Example

If Mrs. Robinson deposits money in a joint
savings account that she opens in both her and
her sons name, when has a gift been given?
She has not made a gift until her son withdraws
some of the money for his own use. The doneejoint tenant must receive some benefit from the
property before a completed gift is made.

Tenancy by the Entirety (TE)

JT and TE can be referred to as: Qualified Joint Interests

Joint ownership of property only between a husband and wife that cannot be
partitioned without the consent of the other spouse.
Property can be real or personal.
At the death of the first spouse, the property automatically transfers to the
surviving spouse outside of probate.
Property held in TE cannot be reached by any one spouses creditors, but
can be by joint creditors (credit in both spouses names)
50% of the FMV of the property is included in a decedents Gross Estate for
Estate Tax purposes and its value is eligible for the unlimited marital
deduction regardless of the Actual Contribution Rule (who actually
purchased the property).
See JT explanations for other tax concerns only difference is the
application of the unlimited Estate and Gift tax marital deductions for all
TE (as long as spouses are US citizens)
To A and B as tenants by the entirety. To A and B as married persons with
the right of survivorship.