Estate Planning
Estate Planning
This domain tests lifetime and testamentary wealth transfer: documents, titling, beneficiary designations, trusts, gift and estate tax, basis, and probate.
Core rules and concepts
- Core documents: will, revocable living trust, durable power of attorney, health-care proxy, and HIPAA authorization.
- Probate is the court process for validating a will and distributing probate assets; trusts and beneficiary designations can avoid it.
- Intestacy applies when there is no valid will; state law determines heirs.
- Federal estate and gift tax uses a unified basic exclusion amount, indexed annually; portability lets a surviving spouse use the deceased spouse's unused exclusion if elected.
- Annual gift tax exclusion is indexed; gifts above it use exemption or require a return.
- Inherited assets generally receive a step-up in basis at death; gifted assets carry over basis.
- Trusts: revocable vs irrevocable, marital, bypass, GST, and spendthrift; understand trustee powers and beneficiary rights.
Worked example
A married couple has $15 million in the first spouse's estate and elects portability. If the federal exclusion is $13.99 million per person, the survivor can use the deceased spouse's unused $13.99 million plus the survivor's own $13.99 million, for $27.98 million total. Assets passing to the surviving spouse qualify for the marital deduction, so no estate tax is due at the first death. Without a portability election, the first spouse's unused exclusion is lost.
Traps
- Assuming a will controls all assets; beneficiary designations and joint titling override it.
- Failing to elect portability.
- Ignoring state estate or inheritance tax.
- Confusing step-up in basis with carryover basis.