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Estate Planning

Estate Planning. Chapter 17. Introduction. Only about 30% of Americans have wills Every adult needs a will along with A durable power of attorney Gives someone the legal right to handle your finances should you become incapacitated

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Estate Planning

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  1. Estate Planning Chapter 17

  2. Introduction • Only about 30% of Americans have wills • Every adult needs a will along with • A durable power of attorney • Gives someone the legal right to handle your finances should you become incapacitated • Advanced directives, such as a living will, health care proxy • Estate planning isn't just for the wealthy

  3. Everybody Needs 3 Things • A Will • A Living Will • Whether you want life support • You decide whether or not you wish extraordinary means to maintain life • Health-Care Proxy • You allow someone else to make decisions for you • A Durable Power of Attorney

  4. Understanding Estate Planning • Estate – your net worth at the time of your death • Estate taxes – federal and state taxes assessed on the value of your estate • Will – legal document outlining how you want your property divided after your death • Executor/executrix – person who makes certain the provisions of will are carried out

  5. Understanding Estate Planning • Bequests – specific items of property you leave to others via your will • Residual estate – amount remaining after expenses, taxes, and bequests • Beneficiaries – persons receiving proper identified in a will • Heirs – persons who are entitled to received your property • Trust – legal format for holding property for the benefit of beneficiaries

  6. The Contents And Value Of An Estate • First step of estate planning is determining the value of your assets and liabilities • Assets include items such as real estate, securities, tangible personal property, life-insurance policies, retirement accounts • May be difficult to establish a fair market value of some items • Liabilities may include mortgage, personal and consumer loans, unpaid taxes, funeral expenses

  7. The Contents And Value Of An Estate • Most married couples own most of their property jointly (with Right of Survivorship) • All owners must agree before the property can be sold or given away • If one owner dies, the spouse must agree before the property can be given to another person • Power of attorney gives the other person the right to make decisions about your property if you are unable to do so

  8. The Goals of Estate Planning • All estate plans should have following goals • Minimize the amount of federal and state taxes paid by estate • Specify how you want your estate divided after your death • Specify who will care for minor children until they reach the age of majority

  9. Federal Taxes • If an estate is worth less than $1,500,000 ($3.5M by 2009), no federal estate taxes are due • A person can pass an unlimited amount of property to spouse free of estate taxes, but when that spouse dies, their estate may have to pay estate taxes • The larger the estate, the larger the federal tax rate (45% in 2007) • Federal taxes on estates are paid by the estate, not by the beneficiaries

  10. Note: The federal estate tax exemption is scheduled to remain at $2 million through 2008; to rise to $3.5 million in 2009. The federal estate tax is repealed in 2010 and reinstated in 2011. 2006 Federal Estate Tax Rates

  11. Federal Taxes • Estate taxes are generally due within nine months of the person's death • If taxes are not paid by estate, then beneficiaries may be liable for tax bill • Executor is responsible for filing all necessary federal tax forms • 2001 Economic Growth And Tax Relief Act made major changes to federal estate tax • Raised tax exemption to $1 million in 2002, increasing to $3.5 million in 2009 • Top estate tax rate was reduced to 50% starting in 2002, and declines in steps to 45% in 2007 • Totally repeals the federal estate tax in 2010 unless Congress elects to not do so

  12. State Taxes • All states except Nevada levy some type of death or estate tax • Even if you live in another state when you die, if you own property in a state at the time of death, taxes may be levied • About half of states have an inheritance tax • Based on the share that each beneficiary will receive • Different tax rates apply to different classes of beneficiaries—blood relatives vs. distant relatives, for instance • Beneficiaries are responsible to paying state inheritance taxes

  13. Wills • Should be updated periodically to reflect changes in your life situation • Creating a will is simple and inexpensive • Dying without a will is known as intestate

  14. Types of Wills • General Classification: (Limited, General) • By Preparer: Formal or Holographic • Simple Wills (Uncomplicated) • Testamentary Will (set up in last will & Testament) • Pourover Will (a term used to describe a will where part of the inheritance is allocated to a trust document)

  15. Types of Wills • Holographic Will (Self-prepared; often unwitnessed) • Oral Will (A will that is spoken/not written) • Joint Wills (One document covers any two people) • Living Will (Not really a will since it has force only while you are alive—tells doctors or hospitals how you wish to be treated at the end of your life)

  16. The Probate System • Once you die, your will passes through a legal process known as probate • Process of submitting the will to court, where it is examined and declared valid • Assets are listed and current market value established • Executor may appoint an attorney to handle and administer the probate process • Wills may be challenged, in which case the probate court rules on the validity of challenges before estate can be settled • Legal fees range from 5 to 10% of estate's total value

  17. The Contents of A Will • Individual will – involves estate of one individual • Joint will – leaves the bulk of the estate to the surviving spouse • Formally drawn will – prepared by an attorney • Holographic will – written by individual without the advice of an attorney • Must be signed, dated, and witnessed • Minor changes may be made via a written amendment called a codicil

  18. The Contents of A Will • All wills should contain the following • Identification – person’s name, address, intention to write a last will & testament, etc. • Debt payment – instructions to paying any outstanding debts, taxes, funeral expense, estate costs, inheritance taxes • Property distribution – specific bequests in terms of personal property or general bequests (does not indicate a particular fund from which the money will come) • Trusts – list any trusts from spouse or children as well as trustee • Executor – include name of executor and an alternate • Guardian – persons with minor children should appoint someone to look after children should both parents die • Funeral arrangements – list the kind and cost of funeral

  19. Selecting a Guardian • If a guardian is not selected, the court will select one for you • May be a stranger • The probate court may overrule your decision and appoint someone else as guardian • Very rare • A relative might contest your will, asking the court to appoint someone else as guardian • More common when parents are divorced

  20. Selecting a Guardian • Most people select a close relative as their child’s guardian • Make certain the person(s) has agreed and understands their role • If you plan to leave money to minor children, you should also name a conservator • Person who has legal right to make financial decisions on behalf of child until they reach legal age • If a trust is established, a conservator is not needed

  21. Last Letter of Instruction & Living Wills • Last letter of instruction • Provides an inventory of your assets and liabilities • Describes how you want your property divided and transferred to beneficiaries • Contains funeral and burial instructions • Living wills (plus Medical Proxy) • Lists your desires should you become incapacitated and unable to represent yourself • May state that you do not wish treatment that prolongs your life by artificial means • Hospitals and doctors may ignore living wills

  22. Trusts (3 Types Exist) • Legal status enabling a trustee to hold and distribute funds on behalf of a person’s beneficiaries • May go into effect after death or during a person’s lifetime • Donor must • Establish the trust • Name the trust beneficiaries and trustee(s) • Transfer property to the trust • Trust earns income, pays taxes, and distributes benefits • Trustee(s) is responsible for managing the trust and overseeing payments

  23. Trusts • Have one or more purposes • Manage the money of a minor, inexperienced, or otherwise limited person for a specified period of time • Limit the way in which the beneficiary can use money left to him or her by the estate • Provide tax advantages • Avoid probate and public scrutiny of a person’s estate • Costs involve • Paying an attorney to set up the trust • Paying the trustee an annual fee to manage the trust (often set as a percentage of the trust’s assets) • Given the high costs of a trust, it may not be worthwhile unless a substantial sum in involved

  24. 1. Testamentary Trusts • Written into the will • Becomes funded and operational at death • Often designed to provide for the care of minor children • Usually dissolved when the children reach a specified age and the children receive control of the property • Can also be used to double the $1.5 million federal estate tax exemption for married couples

  25. 2. Living Trusts • Empowers a trustee to handle and distribute assets while the person is still living • People establish living trusts for a variety of reasons • Fear of becoming disabled or incompetent and unable to handle their own money management • Desire to avoid probate • Keep their financial affairs private

  26. Living Trusts • Can be revocable or irrevocable • Revocable – can be changed at any point during the person’s life without the consent of beneficiaries • Cannot be used to avoid taxes • Irrevocable – cannot be changed once it is established, even if donor changes his mind • Can reduce your taxes because the trust pays taxes on the income by the assets held in trust • Life estates – variation of a living trust allowing you to protect your home so that you may pass it on to heirs

  27. 3. Insurance Trusts • Set up to administer proceeds of one’s life insurance • Set up while you are alive and funded upon your death • Either with life insurance policy proceeds or pension death benefits • May or may not have tax advantages

  28. Gifts and Taxes • You are allowed to make gifts of up to $11,000 per year, per recipient without paying federal gift taxes • If you and your spouse give jointly, the amount doubles to $22,000 • 2001 tax law created a $1 million lifetime gift tax exclusion • 2001 tax law also changes some strategies • People traditionally transferred assets likely to appreciate, such as real estate and stocks • However, the new exclusion creates less incentive for this assuming the estate tax repeal becomes permanent

  29. Other Types of Gifts • Tax-exempt gifts to charities are not subject to the $11,000 annual cap • However, they are limited to a percentage of your adjusted gross income

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