Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Definition of Estate Planning
“Estate planning is a goal-oriented activity that uses tax
minimization tools and techniques to provide the
greatest possible financial security for an individual and
his beneficiaries.” – Tools & Techniques of Financial
Planning
Estate planning is also used so that an individual can
control where his or her assets go after he or she dies,
and sometimes even to control the behavior of heirs,
regardless of whether or not it maximizes financial
security or minimizes taxes.
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Estate Planning
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Tools & Techniques of
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Control
• If a person does not plan the disposition of his or her
estate, the state will do it for him.
• State intestacy laws are not designed to preserve the
estate by reducing taxation, so much of what the
person has built up in a lifetime goes where the state
wants it to go.
• Almost every estate can benefit from professional
attention.
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Estate Planning
Chapter 14
Tools & Techniques of
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People Planning
• Estate planning should give people peace
of mind.
• People want to know that their loved ones
will be taken care of.
• It isn’t just about money, it is a hope
for being remembered and for
making a difference in the lives of
their heirs.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Estate Planning is Not Just for the Rich
• Mistakes in estate planning for a middle class client
represent a bigger percentage of the estate than they
do in large estates.
• Although the techniques for maximizing the estate for
the family may not be as fancy, they can make a
greater difference in the lives of the heirs.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Six Major Estate Planning Problems
• Lack of Liquidity
• Improper distribution of assets
• Inadequate income or capital
• Asset values destabilized and not maximized
• Excessive taxes and transfer costs
• Special needs
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
The Estate Planning Process
Note that the process is analogous to the financial planning
process.
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Gather data on assets, liabilities, goals and desires.
Categorize the data into general categories.
Estimate estate transfer costs and liquidity needs.
Set priorities and prepare solutions for each problem.
Formulate the plan.
Test and implement the plan.
Review the plan as needed.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Estate Planning Legal Documents
• Documents should be prepared by an attorney who
has expertise in estate planning in that jurisdiction.
• Just as do-it-yourself financial planning is beyond the
ability of most people, mail-order estate planning kits
rarely result in the most effective estate disposition.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Legal documents that may be needed include:
• An asset and personal records inventory.
• A letter briefing the executors.
• A will – Seven out of 10 American adults do not have
a valid will.
• Trusts.
• Power of attorney.
• Living will.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
What is a will?
• “A will is a legal expression or testament of a
“testator’s” wishes that (1) provides for disposition of
the probate estate; and (2) leaves instructions for the
care of dependents and the settlement of the estate
after the testator’s death.” – Tools and Techniques of
Financial Planning
• The will is the cornerstone of estate planning.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
What a Will Does
• Determines the beneficiaries of the probate assets; state law
will determine the beneficiaries otherwise.
• Gives specific assets to selected heirs.
• Names an executor.
• Makes gifts from the estate in trust.
• Names the guardians of any minor beneficiaries.
• Gives directions as to the payment of debts.
• Makes charitable bequests.
• Takes advantage of optimum marital-deduction tax planning.
The will cannot dispose of assets that pass outside of probate, such as IRAs and
Qualified Plans, proceeds of life insurance policies, joint property, assets in a trust,
or nonqualified deferred compensation benefits.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Requirements for a Valid Will
Anyone can draw up a will, but it should be done by a
qualified attorney to make sure it is valid. To be valid:
– A will must be written (handwritten or typed).
– A will should unambiguously state that it is intended to be a will.
– The will must be signed and dated at its logical end by the
person for whom it is written (the testator).
– A number of witnesses (generally two or three depending on
state law) must sign the will after the testator’s signature
attesting to the validity of the signature. Many states require
that the witnesses not be beneficiaries under the will.
– The testator must have attained a threshold age (generally 18).
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Components of a Valid Will
• Introduction (a clear statement of the intent to make a
will).
• Direction to pay debts and expenses.
• Tax apportionment and expense apportionment clauses.
• Specific bequests or devises of real and personal
property.
• Disposition of residuary estate.
• Nomination of the executor and all trustees of trusts
created by the testator in the will.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Components of a Valid Will (cont’d)
• Powers clause enumerating the powers granted to the
executor.
• Provisions for the disposition of property to minor
beneficiaries and appointment of fiduciary.
• Common disaster or simultaneous death clause (to specify
which actions to take in the event of the simultaneous or
near simultaneous deaths of both husband and wife).
• Execution clause.
• Signature, witness, and attestation clause.
• Self-proving notarization.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Grounds for Contesting a Will
A will can be contested successfully (its validity
challenged and found invalid) UNLESS
– The Testator has legal capacity (is competent to understand
what he or she is doing).
– The Testator has freedom of choice (no coercion or undue
influence).
– The will is properly executed.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Codicils
• Small changes in a will can be made through a
codicil, which is a short document that affirms all the
other items in a will and changes one or two things.
• If the changes are major, a new will should be
executed.
• When a new will is made, all copies of the previous
will should be destroyed.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Revocation and Modification
• A testator can revoke a will by
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Making a later will which revokes a prior will.
Making a codicil expressly revoking a will.
Making a later will inconsistent with a former will, or
Physically mutilating, burning, tearing, or defacing the will with
the intention of revoking it.
• State law can revoke or modify a will because of
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Divorce of the testator.
Marriage of the testator.
Birth or adoption of a child of the testator.
Murder of the testator.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Right of Election
• Generally only given to the spouse.
• The spouse can elect to get what the intestacy laws
would have given him or her. (Obviously this will only
be used if the will gave more of the estate to other
parties leaving the spouse with less.)
• The right of election is usually forfeited if the spouse
deserted or killed the testator.
Please note that estate law is state law, and can vary greatly from
state to state. Always use an attorney familiar with the laws of the
state in which the client lives.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Safeguarding the Will
• Safety deposit box if the spouse can get to the box
quickly after death.
• Leaving it with the attorney can cause problems for
the executor if he or she does not want to use that
attorney for the estate.
• It is possible in some states to file the will with the
Surrogates Court (sometimes called Orphan’s Court).
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Intestacy
State intestacy laws provide a will for the person who
did not draw his own. State law, therefore, determines
– Who is entitled to receive an intestate decedent’s probate
property.
– How such individuals will receive their shares.
– When those shares will be paid out.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Letter of Instructions
An informal way to tell the executor personal thoughts and
directions that should not be included in a will. It might
include:
– Location of the will and other key documents.
– Funeral and burial instructions (remember that a will is often not
opened until long after the funeral).
– Suggestions or recommendations as to the continuation, sale, or
liquidation of a business.
– Personal matters the client might prefer not to be made public.
– Legal and accounting services.
– An explanation of why certain actions were taken in the will.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Picking the Executor
The person chosen to be executor should have:
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Competence.
The understanding and personal skills to deal with other heirs.
Knowledge of the special needs of the testator’s heirs.
Knowledge of the testator’s property.
The willingness to do a time-consuming and often thankless task.
Honesty.
Geographic proximity to the probate court, assets, and other heirs, to
the greatest extent possible.
– The lack of any insurmountable conflicts of interest with the estate and
other beneficiaries.
The best executor may not be the most successful financially, nor the most knowledgeable, although
those are good traits. Honesty and diligence and a sense of responsibility are better qualifications.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Power of Attorney
• “A power of attorney is a legal instrument that gives
another person or entity the right to legally perform
specified acts for a person. The power of attorney
can be limited or extensive. The person granting the
powers decides what powers and rights the person is
going to delegate to the other person.” – Tools and
Techniques of Financial Planning.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Types of Power of Attorney
• Immediate or springing powers.
• Durable power of attorney.
• Scope
– Broad
– Limited
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Medical & Health-related Documents
• The Supreme Court decision in Cruzan vs. Director, Missouri
Department of Health, held that the U.S. Constitution does not
prohibit states from requiring that evidence of an incompetent
patient’s wishes to have life-sustaining treatment withdrawn must
be established by clear and convincing evidence. In Justice Scalia’s
concurring opinion, he stated that there is no federal constitutional
basis whatsoever for preventing states from prohibiting patients (or
their families) to refuse unwanted life-sustaining treatment.
• For a frank and learned discussion of the issues involved in Health
Care Proxies, see
“Questions with... Joseph Fins, M.D., on contract versus covenant: Lessons on
advance directives from the Terri Schiavo case.” (2005). Journal of Financial
Planning, 18(7), 10-14 at http://www.fpanet.org/journal/
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
How to Indicate Desires as to Health Care and
Resuscitation
Although the Cruzan decision and the Schiavo case
illustrate that despite all efforts, your wishes may not be
respected if you become incapacitated in a permanent
vegetative state, nevertheless, every person who cares
should have:
– Living Will (Advance Directive for Medical Care).
– Durable Power of Attorney (Health Care Proxy).
State law will determine which is more effective in your
state.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Living will
• A living will is a document indicating a person’s
intentions in the event the person becomes disabled
and lacks the legal capacity to make medical
decisions. A living will deals with the health-care
measures desired in the event of disability and
incapacity. The living will should carefully spell out
whether or not heroic measures should be taken in
the event of a terminal accident or illness or a
permanent coma.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Durable Power of Attorney for Health Care
• A durable power of attorney gives a selected agent the
power to make health-care decisions for a person if the
person becomes legally incompetent. The durable
power for health care is more widely recognized and
more flexible than a living will, since the designated
agent may be able to act before a person’s permanent
incapacity. Of course, while a person is still competent,
the person is still free to continue to make the person’s
own decisions and can revoke the power at any time
the person still has the legal capacity to do so.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Three Stages to Administer an Estate
• Safeguarding and collecting the decedent’s assets.
• Paying of debts and taxes.
• Distribution of any remainder to the heirs specified in
the will or under state intestacy law.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
The Personal Representative
• The executor (or executrix if female) of the estate is
the personal representative of the deceased and is
supposed to handle the estate as the deceased would
have wanted it.
• The Executor or Executrix is named by the will and
confirmed by the court.
• If the person dies intestate, the court appoints an
Administrator whose job is the same as that of an
executor.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Why is It Important to Properly Administer and
Settle the Estate?
• To collect bank accounts and other assets and to
enforce contracts.
• To provide a chain of title on real property so it can be
marketable.
• Assure the person and heirs that the wishes of the
decedent will be carried out and the heirs receive
what they are supposed to receive.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Gift Giving
• Sometimes it is good financial planning to divest a
person’s assets by giving gifts
– Remove income producing assets from the person’s taxable
estate.
– Lifetime gifts ensure that the property goes to the person
that the giver intends.
– Pleasure of seeing the gift received and a chance to see
how the person receiving the gift handles it.
– Privacy. Lifetime gifts are not anyone’s business but the two
parties involved.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Reducing or Eliminating the Gift Tax
• The giver is required to pay a tax on gifts.
• This gift tax can be reduced by:
– The annual gift tax exclusion.
– Split gifts.
– Gift tax marital deduction.
– Unified credit.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
What Property Should Be Given?
Helping the Client Select
• Income producing property if the donor is in a high
tax bracket and the donee is not.
• Give assets likely to appreciate in value. (Removes
the property from the taxable estate).
• Give away property owned in a state other than the
one in which the client lives. (Avoids probate in the
non-resident state).
• Do not give away highly appreciated property if death
is likely to occur in only a few years, because
inherited property gets a step-up in basis.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
The Federal Estate Tax
• Designed to redistribute wealth – keep rich families
from getting richer over generations.
• Can be almost confiscatory.
• Current law exempts an increasing amount from
estate taxes ($1.5 million in 2005), rising to total
exemption in 2010. In 2011, a sunset provision in the
law reverts to $1 million being exempt from tax.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Gift and Estate Tax Schedules
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
The Gift and Estate Tax
Law will briefly call for
no taxes in 2010, then
revert to the old
schedule in 2011.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Unified Credit and Resulting Exclusion
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Generation-Skipping Transfers
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•
Yet another Federal Transfer tax
Taxed at top Federal rate – 47% in 2005
“Planners should recognize that it is possible that the cost of making a
generation-skipping transfer can be greater than the value of the entire
gift. For example, assume a client who is already in the 48% gift tax
bracket writes a check to his granddaughter for $2,000,000 in 2004. The
generation-skipping transfer tax will be 48% of the $2,000,000, or
$960,000. In addition, since the transfer was a gift, the client must pay a
gift tax at the rate of 48% on the gift, another $960,000. To make it even
worse, the client is deemed to be making a second gift, a gift of the
generation-skipping transfer tax ($960,000) upon which must be paid an
additional 48% gift tax (or $460,800). The total tax is therefore
$2,380,000.”
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
State Death Taxes
• In addition to the Federal Gift and Estate Tax, there
are state death taxes.
• The Federal law gives a deduction or some credit for
the state taxes. (Table on next slide.)
• Planning can lower state death taxes considerably.
• For people of modest means, state death taxes may
be worse than federal taxes.
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
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Estate Planning
Chapter 14
Tools & Techniques of
Financial Planning
Conclusion: Estate Discussions are Delicate
• No one likes to think about dying.
• Planners can “turn people off” to the entire planning
process if estate issues are not properly handled.
• The planner must:
– Show compassion and care for reasons beyond possible
compensation.
– Become competent in estate planning and/or work with other
advisers who are.
– Learn the goals, circumstances, and needs of all the people
involved.
– Bring the client and the client’s family into the planning process
as much as possible.
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