Chapter 1
Introduction to Estate Planning
TOPICS COVERED IN THIS CHAPTER:
Estate Planning Process
ā¢ Seven steps in the estate planning process
Fiduciaries
ā¢ Types of fiduciaries
Ā¤ Executor/Personal representative
Ā¤ Trustee
ā¢ Duties of fiduciaries
ā¢ Breach of fiduciary duties
Learning Objectives
ā¢ Explain the importance of estate planning and what it can accomplish.
ā¢ Describe the unauthorized practice of law.
ā¢ Identify the financial planning practitionerās role and responsibilities in the estate planning process.
ā¢ 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 clientās personal and financial circumstances
Step 2: Identifying and selecting goals
Step 3: Analyzing the clientās 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 Plannerās Role
Financial Planner Responsibilities
Fiduciaries
Executor Responsibilities
Trustee Responsibilities
Chapter Highlights
Key Terms
Review Questions
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 personās goals. The purpose of an estate plan is to provide personal protection and financial security to an individual and his family. 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 clientās overall financial plan and personal goals.
The clientās 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 may 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 clientās estate plan that can be addressed in collaboration with the clientās 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 clientās personal and financial situation and 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 clientās needs and accomplishes his estate planning objectives.
WHO NEEDS AN ESTATE PLAN?
An estate is defined as the rights, titles, or interests that a person, living or deceased, has in property. The manner in which assets are owned determines how they will pass at death, and to whom they will pass. Without proper planning, property could pass to the wrong person in the wrong manner. And if there is no will, individually owned property will pass to others according to state distribution rules, known as state laws of intestacy. Therefore, every adult older than age 18 should have an estate plan.
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 clientās assets for the benefit of others. Estate planning is especially needed for:
ā¢ spouses, partners, children, or other dependents who cannot handle or do not wish to handle money, securities, or a business;
ā¢ children, spouses, or other dependents who are emotionally or mentally challenged, emotionally disturbed, or physically handicapped;
ā¢ spouses, children, or other dependents who are expected to have their own significant wealth;
ā¢ elderly parents who are financiallyāand perhaps emotionallyādependent on their children to provide them with support and care; and
ā¢ pets that need to be cared for after an ownerās 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.
SITUATIONS THAT REQUIRE ADVANCED ESTATE PLANNING
A simple will may be appropriate to meet many clientsā 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:
ā¢ Estates that exceed $11,180,000 in 2018. Estate planning can minimize estate taxes and consequently transfer more family wealth to beneficiaries.
ā¢ 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.
ā¢ Closely held business interests. Estate planning can provide for the orderly transfer of a business to a key employee or a competent family member.
ā¢ Charitable objectives.
ā¢ Property owned in more than one state.
ā¢ Special property such as fine art or a coin, gun, or stamp collection.
ā¢ Asset protection concerns for heirs.
ā¢ Estates that need sufficient liquidity to pay debts, expenses, and taxes owed at death.
THE ESTATE PLANNING P...