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The estate funnel.

The estate funnel helps to explain the types of property found in most estates, the problems often encountered in settling an estate, and the objectives of estate planning.

All property is created in one of two ways, either people at work or capital at work. Wages are the product of people at work, while interest, dividends, and capital appreciation are the products of capital at work.

The property found in most estates generally falls into one of five categories:

Personal property, such as furniture, cars, jewelry, cash, bonds, savings, and other personal effects.

Real estate, such as a home, a vacation house, land, and rental property such as apartments or office buildings. (1)

Business interests, in the form of closely held corporations, partnerships, or sole proprietorships.

Life insurance, either group insurance or individual policies.

Government benefits, such as social security, disability, retirement, and survivor income benefits.

Unfortunately, at death there is often a great deal of CONFLICT. This occurs due to the differing and conflicting ways in which many of these assets pass to the family or other heirs. For example, personal property can pass by will, by state law if there is no will, by title, or by trust. (2) Real estate and business interests may also pass by all of these means, as well as by agreement. Generally life insurance passes by beneficiary designation, and government benefits by federal statute.

These conflicts, together with the generally slow probate process, can easily result in a DELAY of 1 to 2 years or more (3)

Considerable EXPENSE may also be incurred during the estate settlement process. For example, existing debts must be paid. There are also medical expenses, funeral expenses, attorney fees, income taxes, and estate taxes. The final result is often a shrinkage of 30% or more by the time an estate is passed to the surviving family. (4)

The basic objectives of estate planning are to provide for the orderly and efficient accumulation, conservation, and distribution of an estate, while avoiding conflict, shortening delays, and reducing expenses. (5)



1. Names of client, spouse, and children.

2. Dates of birth.

3. For client and spouse--smoker/nonsmoker.

4. Type of wills (simple, exemption trust, marital share, etc.).

5. Trusts established.

Assets (determine how titled--individual, joint, etc.)

6. Personal and intangible property:

liquid--cash, checking accounts, certificates of deposit, money market funds, mutual funds, municipal bonds, corporate bonds, annuities, options, etc.

illiquid--contents of home, personal effects, jewelry, collections, cars, notes, leases, royalties, and tax sheltered investments.

employee benefits--individual retirement accounts, HR-10 plans, tax deferred annuities, 401(k) plans, and vested deferred compensation and pension plan benefits (including beneficiary designations).

7. Real estate: home, vacation home, land, lots, commercial property, and investment property.

8. Business interests: corporations, partnerships, sole proprietorships, and farming operations.

9. Insurance: group and individual life insurance, disability and health coverage (including ownership and beneficiary designations).

10. Government benefits: social security disability payments, survivor benefits, and retirement payments.


11. Short-term debt: bills payable, loans, notes, consumer debt.

12. Long-term debt: home mortgage and home equity loans.

Obligations and Objectives

13. Debt to be paid at death (including final expenses).

14. Charitable bequests.

15. Monthly income required by surviving family.

16. Monthly income required by spouse after children are grown.

17. Cost for children's education (per year).

18. Monthly income in case of long-term disability or retirement.

Special Circumstances

19. Support for ex-spouse or children from prior marriage.

20. Support for other dependents.


(1) Where more than one person owns real estate or certain types of personal property, the form of ownership determines how the property is passed upon death. The form of ownership also determines the extent to which the property is includable in the gross estate for federal estate tax purposes:

a. Where the property is owned in a tenancy in common, each tenant--or co-owner--has a fractional, divisible interest in the property. Upon the death of a co-owner, his fractional interest is probate property and passes by will or by state intestacy laws. Each surviving co-tenant retains his proportionate interest in the property. The fair market value of the decedent's fractional interest is includable in the federal gross estate.

b. Where the property is owned in joint tenancy with right of survivorship, each joint tenant has an undivided interest in the entire property. The survivorship right is the key characteristic: upon the death of a joint tenant, the decedent's interest passes by operation of law to the surviving tenant or tenants. The decedent's interest is not a probate asset and therefore cannot be disposed of by will or intestacy law. For federal estate tax purposes, joint tenancy with right of survivorship does not necessarily prevent all or any of the property from inclusion in the federal gross estate upon the death of a joint owner. However, a joint-and-survivorship property interest created between spouses after 1976 is considered to be a "qualified joint interest." As such, only one-half of the value is included in the gross estate for federal tax purposes. All other joint-and-survivorship property is fully includable in the gross estate of the first owner to die, except to the extent that the decedent's estate can demonstrate that the survivor contributed to the purchase price. However, jointly owned property obtained through gift or inheritance is included in proportion to the decedent's ownership interest.

c. Some states recognize a tenancy by the entirety. Generally, this form of ownership parallels joint-and-survivorship property except that it may be created by husband and wife only.

d. In community property states each spouse is considered to own an undivided one-half interest in such property during the marriage, and each spouse is free to dispose of his or her share of community property upon death. One-half of the fair market value of community property is includable in the decedent spouse's estate. See the expanded discussion of community property on pages 381-382.

(2) The unlimited marital deduction allows jointly owned property to pass to a surviving spouse free of the federal estate tax. However, having virtually all property in joint title with right of survivorship can defeat the potential estate tax advantages of the Exemption Trust Will (chart, page 29). When property is jointly owned, it passes by law directly to the surviving spouse and therefore cannot pass into the non-marital, or "B" trust. Such over qualification of the unlimited marital deduction means that the property may be subject to taxation upon the subsequent death of the surviving spouse. Furthermore, there may be certain income tax disadvantages to having property jointly owned if and when the surviving spouse sells the property. See page 547 for an expanded discussion of stepped-up basis.

(3) For specific examples of the time delays that can occur when the valuation of closely held stock is left to chance, refer to the materials on pages 201-207. See also page 499 for a discussion of the probate process.

(4) Typical estate debts, costs, and taxes for various size estates are set forth on page 98. See also page 364 for a discussion of asset protection techniques.

(5) During the fact finding phase of estate planning it is important to obtain for review numerous client documents (see page 94). See also, Survivor Checklist on page 105. However, a nonattorney should not provide specific advice regarding the modification or drafting of legal documents, since this activity could be construed as the unauthorized practice of law.
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Title Annotation:ESTATE PLANNING
Author:Cady, Donald F.
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
Previous Article:Estate planning matrix.
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