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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

Estate Planning

Chapter 17

  • 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
everybody needs 3 things
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
understanding estate planning
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
understanding estate planning1
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
the contents and value of an estate
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
the contents and value of an estate1
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
the goals of estate planning
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
federal taxes
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
2006 federal estate tax rates

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
federal taxes1
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
state taxes
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
  • 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
types of wills
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)
types of wills1
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)
the probate system
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
the contents of a will
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
the contents of a will1
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
selecting a guardian
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
selecting a guardian1
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
last letter of instruction living wills
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
trusts 3 types exist
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
  • 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
1 testamentary trusts
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
2 living trusts
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
living trusts
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
3 insurance trusts
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
gifts and taxes
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
other types of gifts
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