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CFPN: Estate Planning

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Estate Planning

Domain 7 tests how property passes at death and how to reduce transfer costs, taxes, and delays. Questions often turn on titling, beneficiary designations, and liquidity.

Core tools

  • A will directs probate assets, names an executor, and can create trusts for minors or dependants. Intestacy rules apply if there is no valid will.
  • Probate is the court process for validating a will and distributing assets; it can be slow and public.
  • Assets passing by beneficiary designation, joint tenancy, or transfer-on-death bypass the will and usually probate.
  • Trusts separate legal and beneficial ownership. A funded revocable trust avoids probate but does not remove assets from the estate for tax purposes; an irrevocable trust may.
  • Gifts during life reduce the estate but may trigger gift tax, lose control, or create capital gains issues.
  • Powers of attorney and healthcare directives handle incapacity, not death.
  • Estate liquidity: cash, insurance, or marketable assets must cover debts, taxes, and administration.

Worked example

Gross estate is 10,000,000. Debts are 1,000,000, funeral and administration 500,000, a charitable bequest is 1,000,000, and a spouse transfer is 4,000,000. The taxable estate is 10,000,000 − 1,000,000 − 500,000 − 1,000,000 − 4,000,000 = 3,500,000. With an exemption of 2,000,000 and a 20% rate, estate tax is (3,500,000 − 2,000,000) × 20% = 300,000. If liquid assets are only 200,000, the estate has a 100,000 liquidity gap before administration costs, so the planner should consider life insurance owned outside the estate or a planned sale of assets.

Traps

  • Assuming a will controls every asset; beneficiary designations and joint titles override it.
  • Failing to update beneficiaries after divorce, birth, or death.
  • Creating a trust but never funding it.
  • Ignoring probate and administration costs in the liquidity calculation.
  • Using joint tenancy for convenience and exposing the asset to the joint owner's creditors.
  • Confusing estate tax with inheritance tax or capital gains on inherited assets.