Estate Planning and Wealth Transfer
This domain tests wills, intestacy, probate, trusts, beneficiary designations, titling, gifts, powers of attorney, health-care directives, estate and gift taxes, and incapacity planning. Questions often ask how an asset passes, what a will cannot control, and how to reduce probate or estate tax.
Core rules and concepts
- A will directs probate assets, names an executor, and can appoint a guardian for minors. Intestacy statutes control if there is no valid will.
- Probate assets pass under the will; non-probate assets pass by contract, such as beneficiary designations, joint tenancy, and trusts. Beneficiary designations generally control over the will.
- A revocable living trust can avoid probate and manage incapacity, but it does not remove assets from the taxable estate. An irrevocable trust can remove assets but sacrifices control.
- Gift and estate taxes use exemptions, annual exclusions, and deductions, including the marital deduction. Gifted assets may carry over basis, while inherited assets often receive a step-up in basis.
- Incapacity documents include durable powers of attorney for finances and health-care directives. Without them, a guardianship proceeding may be needed.
- Review beneficiary designations, titling, and fiduciaries after divorce, death, birth, or a major liquidity event.
Worked example
A client's will leaves everything to the spouse, but the 401(k) beneficiary designation still names the client's parent. Reasoning: the 401(k) is a non-probate asset and generally passes to the named beneficiary, not under the will. The will does not fix the designation. The planner should confirm the plan's spousal rights, obtain the client's instructions, and update the beneficiary form. The same review should cover life insurance and IRAs. If minor children are involved, a guardian and a trust for management may be appropriate.
Traps that cost marks
- Assuming the will controls retirement accounts and insurance.
- Creating a trust but failing to fund it.
- Leaving outdated beneficiaries after divorce or remarriage.
- Ignoring state estate or inheritance taxes.
- Believing gifts are always tax-free without reporting.
- Omitting incapacity documents.