Chapter 15 preserving your estate
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CHAPTER 15: PRESERVING YOUR ESTATE. Estate Planning. Developing plans and taking actions during your lifetime to accumulate, preserve, and distribute your wealth upon your death according to your wishes, while minimizing taxes and transfer costs. You need estate planning if you :.

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Chapter 15 preserving your estate


Estate planning

Estate Planning

Developing plans and taking actions during your lifetime to accumulate, preserve, and distribute your wealth upon your death according to your wishes, while minimizing taxes and transfer costs.

You need estate planning if you

You need estate planning if you:

  • Have dependents.

  • Have a spouse who cannot or does not want to handle finances.

  • Have loved ones of any age with special needs.

  • Have property you would like to keep in the family.

  • Have debts or own your own business.

  • Have assets worth more than exclusion amount.

Why does an estate break up

Why Does An Estate Break Up?

  • Death-related costs – medical bills, funeral expenses, administrative costs, federal & state taxes, current unpaid bills, etc.

  • Inflation

  • Lack of liquidity – insufficient cash to cover death costs or other obligations

  • Improper use of vehicles of transfer – assets are put into the hands of beneficiaries who are unwilling or unable to handle them.

  • Disabilities – prolonged and expensive disability of the family wage earner

The estate planning process

The Estate Planning Process

1. Assess family situation and set estate planning goals.

2. Gather comprehensive and accurate data.

3. List assets and determine value of estate.

4. Designate beneficiaries of estate’s assets.

5. Estimate estate transfer costs.

6. Formulate and implement your plan.

7. Review periodically and revise as necessary; at least every 3-5 years.

Chapter 15 preserving your estate

Your estate consists of your:

  • Gross estate—all your property subject to federal estate taxes at your death, both probate and nonprobate.

  • Probate estate—all your property that can be transferred by your will (or intestate laws if you have no valid will).

  • Nonprobate estate—your property which passes by means other than your will at your death.

Data needed for estate planning

Data Needed for Estate Planning



A will is a written, legal declaration of a person's wishes concerning the disposition of his/her property upon death.

Jane Doe,

being of sound

mind . . .

If you die without a valid will

If you die without a valid will. . .

  • Your state’s laws of intestate successionwill determine how your property passes.

  • The state appoints an administrator for your estate.

  • The state determines the guardian of your dependents.

  • The state determines how the tax burden will be paid from your estate.

  • If no family can be found, your property escheatsto the state.

A properly prepared will

A properly prepared will. . .

1. Provides a plan for distributing assets in accordance with testator’s wishes, needs of the beneficiaries, and federal and state dispositive and tax laws.

2. Considers changes in family circumstances that might occur after its execution.

3. Is unambiguous and complete in describing testator’s desires.



Common features of a will

Common Features of a Will

  • Introductory clause

  • Direction of payments

  • Disposition of property

  • Appointment clause

  • Tax clause

  • Simultaneous death clause

  • Execution and attestation clause

  • Witness clause

Introductory clause

Introductory Clause

  • States the testator’s name and residence which determines the county that will have legal jurisdiction

  • Revocation statement nullifies old and forgotten wills and codicils

Direction of payments

Direction of Payments

  • Directs the estate to make certain payments of expenses

  • Rights of creditors are protected by law so this clause may be useless

Disposition of property

Disposition of Property

  • Personal Effects – detailed list of personal property, carefully identifying each item; identify to whom each item is to be given

  • Giving money to specifically named party

  • Distribution of residual assets after specific gifts have been made

Appointment clause

Appointment Clause

  • Names the executors (persons to administer the estate)

  • Names the guardians for minor children

  • Names trustees and their successors

Tax clause

Tax Clause

  • Statutes charge each beneficiary based on his or her share of the taxable estate.

  • Spouse’s share and portion going to a charity are deducted from the gross estate before arriving at the taxable estate; neither is charged with taxes.

Simultaneous death clause

Simultaneous Death Clause

  • Describes what happens in the event of simultaneous death

Execution and attestation clause

Execution and Attestation Clause

  • Every will should be in writing and signed by the testator at its end

  • Many attorneys suggest that testator also initial each page after last line or sign in a corner of each page

Witness clause

Witness Clause

  • Affirms that will is really that of deceased

  • All states require two witnesses to the testator's signature, with the exception of Vermont, which requires three

What makes a valid will

What makes a valid will?

  • Mental Capacity—person must be of sound mind.

  • Freedom of Choice—there must have been no undue influence over the testator.

  • Proper Execution—will must meet requirements of the state, and the execution must be free from fraud.

Changing or revoking a will codicils

Changing or Revoking a Will: Codicils

  • A codicil can modify certain parts of the will without revoking it.

  • Reasons for changing a will:

    • His or her (or the beneficiaries’) health or financial circumstances change significantly

    • Births, deaths, marriages, or divorces alter the operative circumstances

    • The testator moves to a state other than where the will was executed

    • An executor, trustee, or guardian can no longer serve

    • Substantial changes occur in the tax law

Changing or revoking a will codicils1

Changing or Revoking a Will: Codicils

  • A will may be revoked by the testator, or automatically by the law, in one of four ways:

    1. Making a later will that expressly revokes prior wills

    2. Making a codicil that expressly revokes all wills earlier than the one being modified

    3. Making a later will that is inconsistent with a former will

    4. Physically mutilating, burning, tearing, or defacing the will with the intention of revoking it

How can the will be changed

How can the Will be changed?

The right of election gives the surviving spouse the right to “take against the will” a specified portion of the probate estate regardless of what the will provides (varies by state).

Safeguarding the will

Safeguarding the Will

  • Keep your original will in a safe place but one that will be accessible upon your passing

  • Keep copies in a safe and accessible place at home and also with the attorney who drafted it

Letter of last instruction

Letter of Last Instruction:

  • Informal memorandum; not a legal document.

  • Details items that cannot properly be included in a will.

    For example:

    • Location of the will and other documents

    • Funeral and burial instructions

    • Explanation of will provisions

    • Legal & accounting services

    • Disposition of smaller items

    • Personal matters

Administration of an estate

Administration of an Estate

  • Court oversees probate process— the liquidation of deceased’s estate.

  • The executor you named in your will (or court-appointed administrator if you die intestate) acts as your personal representative.

  • Executor inventories your assets, pays your debts and taxes (both income and estate), and distributes remaining assets according to your will.

Other estate planning documents

Other estate planning documents:

  • Power of Attorney—names an agent to handle your financial affairs (several types).

  • Living Will—states your wishes concerning medical treatment.

  • Durable Power of Attorney for Healthcare—names an agent to make medical decisions on your behalf.

  • Ethical Will—informal document to share morals, ethics, experiences, etc., with loved ones.

Types of ownership

Types of Ownership:

  • Joint tenancy with right of survivorship—ownership passes to other tenant(s) at death; any tenant can sever the tenancy.

  • Tenancy by the entirety—only between husband and wife; ownership passes to spouse at death and can be dissolved only by mutual agreement.

  • With both types, co-owners have equal interests, and property passes automatically by operation of law.

Other types of ownership

Other Types of Ownership:

  • Tenancy in common—no right of survivorship; each tenant can leave his/her share to anyone and can have unequal interests.

  • Community property—marital ownership in some states where both spouses equally own all the assets acquired during marriage; each spouse can leave his/her half to anyone.

  • With both types, the willcontrols the disposition of your portion of the property.



A trust is a legal relationship that facilitates the transfer of property and the income from that property to another party.

Chapter 15 preserving your estate

The GRANTOR transfers property to


Chapter 15 preserving your estate

The GRANTOR transfers property to

the TRUSTEEwho holds and administers the property for the benefit of


Chapter 15 preserving your estate

The GRANTOR transfers property to

the BENEFICIARIES (which may include the grantor).

the TRUSTEEwho holds and administers the property for the benefit of


Purposes of trusts

Purposes of Trusts:

  • Possible income tax savings for those in higher tax brackets.

  • Possible estate tax savings; if trust is irrevocable, value of trust property is removed from grantor’s estate.

  • Manage and conserve property on behalf of beneficiaries over a long period of time.

Selecting a trustee

Selecting a Trustee

  • Trustee must:

    1. Possess sound business knowledge and judgment

    2. Have an intimate knowledge of the beneficiary’s needs and financial situation

    3. Be skilled in investment and trust management

    4. Be available to beneficiaries (specifically, this means that the trustee should be young enough to survive the trust term)

    5. Be able to make decisions impartially

Types of trusts

Types of Trusts:

  • Living (inter vivos) Trust—created during grantor's lifetime; can last for a limited period or continue after grantor's death.

    • Revocable Living Trust: grantor may revoke trust and regain property; grantor pays income taxes.

    • Irrevocable Living Trust: grantor forfeits all rights to trust property; trust pays income taxes.

Benefits of an irrevocable living trust

Benefits of an Irrevocable Living Trust

1. Management continuity and income flow are ensured; no probate is necessary.

2. The trustee assumes burdens of investment decisions and management responsibility.

3. The terms and the amount of assets placed into the trust do not become public knowledge.

Chapter 15 preserving your estate

  • Testamentary Trust—created after death according to will provisions; no tax savings, as grantor owns property until death.

  • Irrevocable Life Insurance Trust— created while living and funded with life insurance policy; removes proceeds of policy from grantor's estate; usually used to pay estate taxes or care for family.

Living trusts and pour over wills

Living Trusts and Pour-Over Wills:

  • A pour-over will passes the remainder of estate property to a previously established living trust.

  • Assures that all estate assets will be managed by the trust, even those which have been left out or acquired after trust was established.

Gift taxes

Gift Taxes

A gift is made when property is transferred without full consideration in money or money’s worth to another, and the donor relinquishes control over the property.

Chapter 15 preserving your estate

  • Not everything that is transferred by an individual is subject to gift tax.

  • The following are means of reducing the total amount of the gift for tax purposes.

Gifts made during life

Gifts Made During Life:

  • Gifts valued at or under the following amounts are removed from the donor's estate.

  • Gift taxes will be due only on amounts in excess of the exclusion amounts.

Annual Exclusion—Gifts valued up to $11,000 (now indexed) can be given yearly to any number of individuals tax free.

Gift Splitting—Married taxpayers together may give up to $22,000 (now indexed) yearly to any number of individuals tax free.

Gifts made during life or at death

Gifts Made During Life or at Death:

  • Charitable and marital gifts

    • Are free from both gift and estate taxes.

    • Reduce the value of donor’s estate for estate tax purposes.

    • Do not reduce the exemption amount that can be transferred to others tax free.

Charitable Deduction—Unlimited amount can be given to a qualified charity.

Marital Deduction—Unlimited amount can be given to your spouse (provided spouse is a U.S. citizen).

Estate taxes and planning

Estate Taxes and Planning

  • Estate taxes are assessed on the value of property transferred to others at death.

  • Estate taxes are also assessed on certain transfers made during a person’s lifetime.

  • Estates are taxed at both the federal and state levels.

  • Estate tax rates are higher than income tax rates.

Exemption amount and top estate tax rates

Exemption Amount and Top Estate Tax Rates:

  • Only the value of one's estate in excess of the exemption amount is subject to estate taxes.

  • The top estate tax rates are being reduced through the year 2010.

Unified rate schedule

Unified Rate Schedule:

  • Same tax table is used for both taxable lifetime gifts and one's estate property.

  • Gifts in excess of exclusion amounts made during life are added back to one's estate at death.

  • Tax is figured on total amount, and then credit is given for gift taxes previously paid.

  • This allows the tax to be calculated in the highest possible tax bracket.

Computing estate taxes

Computing Estate Taxes:

1. Determine the gross estate, the value of all property in which the decedent had an interest.

2. Subtract funeral and administrative expenses, debts, and other allowable expenses to get adjusted gross estate.

3. Subtract any marital or charitable deductions to get taxable estate.

Chapter 15 preserving your estate

4. Add back any taxable gifts made during deceased's lifetime after 1976 to get estate tax base. Use the unified rate schedule to compute tentative tax on this amount.

5. Apply any credits, such as gift taxes previously paid and the unified tax credit to determine total death taxes.

6. Subtract state death tax creditto determine federal estate taxdue.

Estate planning techniques

Estate Planning Techniques

  • Dividing

    • Giving income-producing property to children, either outright or in trust.

    • Establishing a corporation; permits individuals in high tax brackets to save taxes.

    • Properly qualifying for the federal estate tax marital deduction; allows for individual to pass—estate tax free—unlimited amounts to a spouse.

Estate planning techniques1

Estate Planning Techniques

  • Deferring spreading income and assets over several years helps minimize tax burden in any single year.

    • Nonqualified deferred-compensation plans

    • Making installment sales

    • Private annuities

    • Qualified pension and profit-sharing plans

    • Government Series EE bonds

    • Stocks that pay no or low dividends

    • Life insurance policies

    • Depreciable real estate

    • Installment payment of federal estate taxes

    • Possible elimination of the estate tax

Life insurance as an estate planning tool

Life Insurance as an Estate Planning Tool

  • If someone other than the insured owns the policy, the proceeds of such insurance can pass to the decedent’s beneficiaries free of income tax, estate tax, inheritance tax, and probate costs.

  • After the insured’s death, trustee uses the insurance proceeds for the benefit of the surviving family members,

    • who might use them to pay death taxes, debts, administrative expenses, or other family expenses such as college costs, mortgage balances, and other major expenditures.

Chapter 15 preserving your estate


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