Chapter 1 -
Understanding Estate Planning
Learning Objectives
After reading this chapter, you will be able to
• Explain why clients may resist the estate planning process.
• Evaluate the role of the financial planner in the estate planning process.
• Discuss the difference between estate planning advice and the unauthorized practice of
law.
• Distinguish between the gross estate and the probate estate.
• Evaluate documents needed to begin the estate planning process.
• Recognize typical estate planning objectives.
• Determine how client constraints affect estate planning alternatives.
• Discuss why the estate plan should be monitored and may need to be changed.
Introduction
It is important that CPAs and financial planners recognize that there is more to estate planning
than minimizing estate tax. An effective estate plan considers the accumulation, preservation, and
distribution of a client’s property in light of that individual’s objectives and ever-changing tax
rules. Arguably, one’s estate plan is linked to one’s retirement plan and one’s investment plan. If
the retirement plan and investments in general are successful, the client leaves property behind at
death. Insurance planning is likely to influence the estate plan significantly. Life insurance not
only provides for survivors, but also is in itself property with potential estate tax implications.
The presence of disability, property and liability insurance coverage for asset protection in the
financial plan may greatly affect the amount of a client’s property in life and at death.
The client may have the objective to pass investments or other property to spouses, children, or
grandchildren but worries that such recipients (donees) have little, if any, ability to manage
money, investments, or property. An effective estate plan can provide investment or property
management as needed. Many of the rules affecting an individual’s estate are state statutes. Where
a client holds property in more than one state, a proper plan prevents survivors from feeling
trapped in a maze of conflicting states’ laws.
Under tax statues operating in 2008, a married couple can transfer property well exceeding $4
million with no shrinkage from estate tax. Under the law that took effect in 2002, that number
rises to $7 million in 2009. Under current law, in 2010, federal estate tax will be eliminated
altogether (although this elimination of the tax is subject to the “sunset” provision of the 2001
Tax Act, which would reinstate the tax under prior rules in 2011). In the estate planning arena,
planners must consider both the big picture and the small picture; clients may fret more over
Grandma’s cameo brooch than they do about the IRS.
Obstacles to Estate Planning
Many clients resist estate planning because contemplating one’s own death and the death of one’s
spouse creates a knot in the stomach. Other clients may avoid estate planning due to family feuds
and tensions. Some clients may have good intentions about preparing estate documents, but
perceive themselves as too young or too busy to address estate planning now.
The CPA’s Role
The accountant is likely to find himself or herself in the role of motivator when it comes to the
client’s estate plan. The more knowledgeable the planner is about the benefits of an effective
estate plan, the better able that planner is to convince clients to implement the process.
Tax-saving opportunities are significant for clients with individual net worth exceeding $2
million. The amount of property that can be transferred after death without transfer tax rises
dramatically through tax year 2010, when the amount becomes unlimited. Additionally, married
couples have planning opportunities not available to single persons. However, without
knowledge about marital transfers, careless estate planning can significantly shrink the amount of
family wealth that is ultimately passed to heirs.
Often, families have planning needs that relate little to taxes. Estate planning is crucial for
families with minor children in order to determine who will care for them and their property if
both parents die. Dependents who are physically or mentally challenged may require special
consideration in an estate plan.
Limits on the CPA’s Role
While the accountant or financial planner can lead the client in the estate planning endeavor, the
planner should take care not to engage in activities that might be perceived as the unauthorized
practice of law. Unless the CPA is a licensed attorney, he or she should not prepare contracts or
other papers such as wills and trusts that document a client’s legal rights. Nor should the CPA
render legal opinions, unless he or she is a licensed attorney.
However, the accountant will often be asked to make referrals to attorneys in the area who can
provide legal services to help the client implement and monitor the estate plan. The CPA is wise
to establish referral relationships with the best professionals in the area. Both written and oral
recommendations should express that while the CPA/planner diligently reviews the competence
of recommended professionals, that CPA/planner is not responsible for recommendations or
actions of others.
The Estate
An individual’s estate contains all property to which the individual holds title, as well as any
interests or rights in certain property.
Gross Estate
According to federal tax law, the gross estate is the total value of all property interests owned by
an individual at the time of his or her death.
Probate Estate
The probate estate includes all property interests that pass under a will. Probate property also
includes property subject to state court administration, presuming an individual dies without a
will. This is an intestate distribution.
Certain items of property may be in the gross estate but are not in the probate estate. Examples of
such property include retirement plan assets, life insurance death benefits, and jointly owned
property.
In many states, tangible items of personal property (for example, the decedent’s clothing), are not
considered part of the probate estate or subject to the probate process.
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