AFC - Accredited Financial Counselor Retirement and Estate Planning 2 — Questions and Answers
Question 1: A client dies without a will. What legal process determines how their assets are distributed?
- Probate court applies intestacy laws (Correct answer)
- The surviving spouse automatically receives everything
- The employer determines distribution
- Assets are forfeited to the state
Correct answer: Probate court applies intestacy laws
When someone dies intestate, the probate court applies state intestacy laws dictating distribution based on a statutory hierarchy of heirs.
Intestacy laws generally follow a hierarchy: surviving spouse receives a portion (varying by state), children receive the remainder equally, then parents, siblings, and more distant relatives. Only if no heirs exist does the estate escheat to the state. Important implications: intestacy may not reflect wishes, unmarried partners receive nothing, and blended families face complications.
Question 2: What is the primary advantage of a revocable living trust over a will?
- Trusts provide better tax benefits
- Trust assets avoid probate, enabling faster and more private transfer to beneficiaries (Correct answer)
- Trusts are less expensive to create
- Trusts cannot be contested
Correct answer: Trust assets avoid probate, enabling faster and more private transfer to beneficiaries
A revocable living trust allows assets to pass directly to beneficiaries without going through probate court.
Trust advantages include: probate avoidance (saving 6-18 months and 3-7% of estate value), privacy (wills become public record), incapacity planning, and no geographic limitations for multi-state property. However, trusts cost more to establish ($1,500-$5,000 vs. $300-$1,000 for a will), require retitling assets, and do not provide additional tax benefits for most estates.
Question 3: A client named their estate as beneficiary of their 401(k). Why is this problematic?
- The estate cannot legally be a beneficiary
- Assets passing through the estate are subject to probate, lose stretch distribution options, and are exposed to creditors (Correct answer)
- The plan administrator will reject it
- There is no issue
Correct answer: Assets passing through the estate are subject to probate, lose stretch distribution options, and are exposed to creditors
Naming the estate forces retirement assets through probate, eliminates stretch distribution options, and exposes assets to estate creditors.
Problems include: probate required, loss of stretch (estate beneficiaries must distribute within 5 years versus 10 for individuals), creditor exposure, no spousal rollover option, and state intestacy may direct assets contrary to wishes. Counselors should review all beneficiary designations on retirement accounts, life insurance, and TOD accounts.
Question 4: What is the current federal estate tax exemption and what percentage of estates does it typically affect?
- $1 million; about 40% of estates
- $5 million; about 10%
- Approximately $13.6 million per person; less than 0.1% (Correct answer)
- $25 million per couple; about 5%
Correct answer: Approximately $13.6 million per person; less than 0.1%
The exemption is approximately $13.6 million per individual, meaning fewer than 0.1% of estates owe federal estate tax.
Married couples can use portability for approximately $27.2 million combined. The doubled exemption is scheduled to sunset after 2025. Several states impose their own estate or inheritance taxes with much lower thresholds ($1-5 million). Even clients below the exemption benefit from estate planning for probate avoidance, beneficiary management, and incapacity planning.
Question 5: What is the difference between an estate tax and an inheritance tax?
- They are the same tax
- An estate tax is levied on the total estate before distribution; an inheritance tax is levied on each beneficiary based on what they receive (Correct answer)
- Estate tax applies to real property; inheritance tax to financial assets
- Estate tax is federal; inheritance tax is always state-level
Correct answer: An estate tax is levied on the total estate before distribution; an inheritance tax is levied on each beneficiary based on what they receive
An estate tax is on the total estate value; an inheritance tax is on individual beneficiaries based on amount received and relationship to the deceased.
The federal government imposes only an estate tax. Six states impose inheritance taxes (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania). Inheritance tax rates often vary by relationship - spouses and children may receive exemptions or lower rates, while unrelated beneficiaries pay more.
Question 6: A client wants to ensure their adult child with special needs receives an inheritance without losing government benefits. What should the counselor recommend?
- Leave the inheritance directly in the will
- Establish a special needs trust (supplemental needs trust) (Correct answer)
- Disinherit the child to preserve benefits
- Give the inheritance to another family member informally
Correct answer: Establish a special needs trust (supplemental needs trust)
A special needs trust holds assets for the beneficiary without counting as personal assets, preserving eligibility for means-tested benefits.
SSI and Medicaid have strict asset limits (typically $2,000). A direct inheritance would disqualify the beneficiary. The SNT trustee uses funds for supplemental needs not covered by benefits: specialized care, education, recreation, and quality-of-life enhancements. Two types: third-party SNT (funded by parents, no Medicaid payback) and first-party SNT (funded by beneficiary's assets, requires payback).
AFC - Accredited Financial Counselor Retirement and Estate Planning 2
A client dies without a will.
What legal process determines how their assets are distributed?