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Estate Planning

Estate Planning. Useful Terms. Estate: the assets of a deceased person after all debts are paid Estate planning: the act of planning for how your wealth will be allocated on or before your death

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Estate Planning

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  1. Estate Planning

  2. Useful Terms • Estate: the assets of a deceased person after all debts are paid • Estate planning: the act of planning for how your wealth will be allocated on or before your death • Will: a legal request for how your estate should be distributed upon your death. It can also identify a preferred guardian for any surviving children.

  3. Purpose of a Will • Reasons for having a will • Ensures that your estate is distributed as you desire • Beneficiaries (heirs): the persons specified in a will to receive a part of an estate • Intestate: the condition of dying without a will • Court appoints an administrator who may not make the decisions you preferred

  4. Purpose of a Will • Creating a valid will • Minimum age—18 or 21 • Mentally competent • Not under undue influence of others • Must be signed and dated • 2 or 3 witnesses who are not beneficiaries • Attorney recommended

  5. Types of Wills • Common types of wills • Simple will: a will suitable for smaller estates that specifies that the entire estate be distributed to the person’s spouse • Traditional marital share will: a will suitable for larger estates that distributes half of the estate to the spouse and all the other half to any children or to a trust

  6. Components of a Will • Distribution of the estate • Details the distribution to the heirs, usually by percentage • Executor (personal representative): the person designated in a will to execute your instructions regarding the distribution of your assets • Collects debts owed to the estate, pays debts owed by estate, and distributes proceeds of the estate

  7. Components of a Will • Guardian • Parents should name a person to be responsible for caring for any dependent children • Signature • Validates will • Letter of last instruction • Describes your wishes regarding funeral arrangements and tells the location of any key financial documents

  8. A Sample Will Source: http://tagprudence.com/yahoo_site_admin/assets/images/sampleWIllTear.29761401_std.jpg

  9. Changing Your Will • Changing your will • May be necessary if you move to a state with different laws or if you marry or divorce • Major changes may require a new will • Codicil: a document that specifies changes in an existing will • Appropriate for minor revisions

  10. Executing the Will During Probate • Probate: a legal process that declares a will valid and ensures the orderly distribution of assets • An executor files forms in probate court, provides a copy of the will, a list of assets and liabilities of deceased, pays debts and sells necessary assets. • Typically opens a bank account for this purpose

  11. Estate Taxes • Without a surviving spouse, a large estate is subject to estate taxes. • Determining estate taxes • Value of estate is the value of all assets minus any liabilities minus funeral and administrative expenses.

  12. Estate Taxes • During 2004 and 2005, the first $1 million of an estate can be distributed to children or others tax-free. • Beyond this limit, the federal estate tax rates on the taxable part of the estate range from 45 and 48 percent. • Tax Relief Act of 2001 gradually increases tax free limit while reducing maximum tax rate • Proper planning can reduce these taxes

  13. Estate Taxes • Other related taxes • Some states also impose taxes on estates • Valuing your estate to assess potential estate taxes • It is important to calculate the value of your estate periodically so that you can plan appropriately if your net worth exceeds the tax-free limit.

  14. Trusts, Gifts, and Contributions • These may help avoid estate taxes • Trust: a legal document in which one person transfers assets to another who manages them for designated beneficiaries • Grantor: the person who creates a trust • Trustee: the person or institution named in a trust to manage the trust assets for the beneficiaries

  15. Trusts, Gifts, and Contributions • Living trust: a trust in which you assign the management of your assets to a trustee while you are living • Revocable living trust: a living trust that can be dissolved • Irrevocable living trust: a living trust that cannot be changed, although it can provide income to the grantor

  16. Trusts, Gifts, and Contributions • Standard family trust (credit-shelter trust): a trust established for children in a family • Testamentary trust: a trust created by a will • Gifts: a tax-free distribution of up to $11,000 per year from one person to another • Not subject to tax for the giver or the recipient • Contributions to charitable organizations • Not subject to estate taxes

  17. Other Aspects of Estate Planning • Living will: a legal document in which individuals specify their preferences if they become mentally or physically disabled • Power of attorney: a legal document granting a person the power to make specific decisions for you in the event that you are incapable

  18. Other Aspects of Estate Planning • Durable power of attorney for health care: a legal document granting a person the power to make specific health care decisions for you • Maintaining estate plan documents • Need to be kept in a safe, convenient place • Key individuals need to know where they are kept

  19. How Estate Planning Fits within Your Financial Plan • Key decisions about estate planning for your financial plan are: • Should you create a will? • How can you limit your estate taxes? • Should you create a living will or designate an individual to have power of attorney?

  20. Estate Planning Decisions

  21. Estate Planning Guidelines • Plans need flexibility; • Disclaimer trust planning allows a surviving spouse to decide if and how to fund trusts at the death of first spouse; • Powers of appointment allow surviving spouse to change disposition of trusts established at first spouse’s death. • Trust Protectors

  22. Gifting • FLPs and the accompanying discounts are alive and well; • $13,000 annual gift exemption remains; • Can accelerate gifts using lifetime gift exclusion;

  23. Other Reasons to Plan • Trust protects assets from • future “new” spouse, • creditors of surviving spouse • changes in tax laws.

  24. Trusts for Kids • Protects assets from kids’ creditors; • Protects assets from kids’ soon to be ex-spouse; • Protects assets from kids’ dependencies and addictions; • Allows for Special Needs planning for kids and grandkids

  25. Special Needs Trusts • Number of people eligible for medical assistance programs continues to climb; • If assets are held by the individual, they must be spent down before eligible for assistance; • If assets are held in a Special Needs Trust, trust assets are exempt and protected

  26. State Estate Tax • Some states have “de-coupled” from the federal estate tax; • Minnesota has a $1,000,000 exemption; • Iowa and Nebraska have an inheritance tax.

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