#15
Preserving Your
Estate
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Estate Planning
Developing a plan to administer and
distribute assets after death in
accordance with deceased’s wishes
and needs of survivors while
minimizing taxes
Estate Planning
Who Needs Estate Planning
People
planning
• anticipate psychological and
financial needs of family
• provide enough income or
capital or both to ensure a
continuation of their way of life
Asset
planning
• to make sure your assets will
go to the desired beneficiaries
Why Does An Estate Break Up?
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Death-related costs
Inflation
Lack of liquidity
Improper use of vehicles of transfer
Disabilities
What is Your Estate?
• Probate estate - all property that can be
transferred by a will
– or intestate laws if no valid will
• Gross estate - all property subject to federal
estate taxes upon death
– both probate and nonprobate
• Nonprobate estate - property which passes
by means other than by a will
The Estate Planning Process
1. Assess family situation and set 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 and revise as necessary
Wills
A will is a
written, legal
declaration of a
person's wishes
concerning the
disposition of
his/her property
upon death
Absence of a Valid Will: Intestacy
• State law of intestate succession
determines how property passes
• Decedent’s spouse
• Children and other offspring
• If none of the above then parents, siblings
will receive a share property
• Otherwise property escheats to the state
Preparing the Will
1. Plan for distributing assets in accordance with
testator’s wishes, needs of beneficiaries, and
federal and state and tax laws
2. Consider changes in family circumstances
that might occur after execution
3. Be concise and complete in describing
testator’s desires
Common Features of a Will
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Introductory clause
Direction of payments
Disposition of property
Appointment clause
Tax clause
Simultaneous death clause
Execution and attestation clause
Witness clause
Requirements of a Valid Will
Mental Capacity
Freedom of Choice
Proper Execution
must be of sound
mind
no undue influence
over the testator
must meet state
requirements and
be free from fraud
Changing or Revoking a Will:
Codicils
Codicil - modify a will without revoking it
Reasons for changing a will
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Health or financial circumstances change
Births, deaths, marriages, or divorces
Testator moves to another state
Executor, trustee, or guardian can no longer
serve
– Substantial changes occur in the tax law
Changing or Revoking a Will:
Codicils
Will may be revoked by testator, or law, when
1. Later will expressly revokes prior wills
2. Codicil expressly revokes all wills earlier
than one being modified
3. Later will is inconsistent with a former will
4. Physically mutilating, burning, tearing, or
defacing the will with the intention of
revoking it
Letter of Last Instruction
Informal memorandum - not a legal document
• Details items not included in a will
– Location of will and other documents
– Funeral and burial instructions
– Explanation of will provisions
– Legal and accounting services
– Disposition of smaller items
– Personal matters
Administration of an Estate
• Court oversees probate process
– liquidation of estate
• Executor or court-appointed administrator
acts as personal representative
• Executor inventories assets, pays debts and
taxes (both income and estate), and
distributes remaining assets according to will
Other Estate Planning
Documents
• Power of Attorney - to handle financial affairs
• Living Will - wishes of medical treatment
• Durable Power of Attorney for Healthcare agent to make medical decisions
• Ethical Will - informal document to share
morals, ethics, experiences, with loved ones
Joint Ownership
Joint tenancy with right of
survivorship –
• ownership passes to other
tenant at death
• either tenant can sever
the tenancy
Tenancy by the
entirety –
• only between
husband and
wife
With each, co-owners have equal
interests, and property passes
automatically by operation of law
Other Types of Ownership
Tenancy in common
• no right of
survivorship
• each tenant can
leave his/her share
to anyone
• can have unequal
interests
Community Property
• marital ownership in
some states where
spouses equally own
all assets acquired
during marriage
• either can leave their
half to anyone
With both, the will controls property disposition
Trusts
A trust is a legal relationship that
facilitates the transfer of property and
the income from that
property to another party
Why Use a Trust?
• Income and estate tax savings
• Managing and conserving property
Selecting a Trustee
Trustee should:
• possess sound
business knowledge
and judgment
• have intimate
knowledge of
beneficiary’s needs and
financial situation
Trustee must be:
• skilled in investment
and trust
management
• available to
beneficiaries
• able to make
impartial decisions
Types of Trusts
• Living (inter vivos) Trust - created during
grantor's lifetime; 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
Types of Trusts
Irrevocable Living Trust
 Management continuity and income flow
are ensured; no probate necessary
 Trustee assumes burdens of investment
decisions and management responsibility
 Terms and amount of assets placed into
trust do not become public knowledge
Living Trusts and Pour-Over Wills
• A pour-over will passes the remainder
of estate property to a previously
established living trust
• Assures all estate assets will be
managed by the trust, including those
left out or acquired after trust was
established
Types of Trusts
Testamentary Trust
• created after death
according to will
provisions
• no tax savings since
grantor owns
property until death
Irrevocable Life Insurance
Trust
• created while living and
funded with life insurance
• removes proceeds of policy
from grantor's estate
• usually used to pay estate
taxes or care for family
Federal Unified Transfer Taxes
• Gift tax lifetime gifts
• Estate tax death-time gifts
Tax rate the same for gifts
and estates - Unified rate
schedule
Federal Unified Transfer Tax Rates
Unified Credits and Applicable Exclusion
Amounts for Estates and Gifts
Is it Taxable?
Not everything transferred by an individual is
subject to a gift tax
Annual Exclusion - Gifts up to $13,000 (indexed)
can be given yearly to any number of individuals
tax free
Gift Splitting – Gift given by one spouse can be
treated as if each had given half of it
Gift Splitting
Charitable and marital gifts
– Free from gift and estate taxes
– Reduce value of donor’s estate for estate tax
purposes
– Do not reduce exemption amount that can be
transferred to others tax free
Charitable Deduction - Unlimited amount to qualified charity
Marital Deduction - Unlimited amount given to a spouse (if
U.S. citizen)
Reasons for Making Lifetime
Gifts
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Gift tax annual exclusion
Gift tax exclusion escapes estate tax
Appreciation in value
Credit limit
Impact of marital deduction
Calculating Estate Taxes
• Estate taxes assessed on
– value of property transferred to others at death
– certain transfers made during a person’s lifetime
• Estates are taxed at federal and state levels
• Estate tax rates are higher than income tax
rates
Computing Federal Estate Tax
1.
Determine the gross estate - all property in
which 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
Computing Federal Estate Tax
4. Add back any taxable gifts made during
deceased's lifetime after 1976 to get estate tax
base
• use unified rate schedule to compute tentative tax
5. Apply any gift taxes previously paid and unified
tax credit to determine total death taxes
6. Subtract state death tax credit to determine
federal estate tax due
Estate Planning Techniques
Dividing
• Giving income-producing property to
children
– either outright or in trust
• Establishing a corporation
• Properly qualifying for federal estate tax
marital deduction
Estate Planning Techniques
Deferring
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Nonqualified deferred-compensation plans
Private annuities
Qualified pension and profit-sharing plans
Government Series EE bonds
Stocks with no or low dividends
Life insurance policies
Depreciable real estate
Installment payment of federal estate taxes
Life Insurance as an Estate
Planning Tool
• If someone other than insured owns the
policy, proceeds can pass to decedent’s
beneficiaries free of income tax, estate tax,
inheritance tax, and probate costs
• After insured’s death, trustee uses insurance
proceeds to benefit surviving family members