#15
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Describe the role of estate planning in personal financial planning, and identify the seven steps involved in the process.
Recognize the importance of preparing a will and other documents to protect you and your estate.
Explain how trusts are used in estate planning.
Determine whether a gift will be taxable and use planned gifts to reduce estate taxes.
Calculate federal taxes due on an estate.
Use effective estate planning techniques to minimize estate taxes.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Developing a plan to administer and distribute assets after death in accordance with deceased’s wishes and needs of survivors while minimizing taxes
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

People planning
Asset planning
• anticipate psychological and financial needs of family
• provide enough income or capital or both to ensure a continuation of their way of life
• to make sure your assets will go to the desired beneficiaries
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Death-related costs
Inflation
Lack of liquidity
Improper use of vehicles of transfer
Disabilities
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• 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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

1. Assess family situation and set goals
2. Gather comprehensive, accurate data
3. List assets, determine value of estate
4. Designate beneficiaries
5. Estimate estate transfer costs
6. Formulate and implement plan
7. Review and revise as necessary
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A will is a written, legal declaration of a person's wishes concerning the disposition of his/her property upon death
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Properly prepared will should meet three important requirements:
Plan for distributing assets in accordance with testator’s wishes, needs of beneficiaries, and federal and state and tax laws
Consider changes in family circumstances that might occur after execution
Be concise and complete in describing testator’s desires
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introductory clause
Direction of payments
Disposition of property
Appointment clause
Tax clause
Simultaneous death clause
Execution and attestation clause
Witness clause
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Mental Capacity must be of sound mind
Freedom of Choice
Proper Execution no undue influence over the testator must meet state requirements and be free from fraud
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Codicil - modify a will without revoking it.
Reasons for changing a will:
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Will may be revoked by testator, or law, when
Later will expressly revokes prior wills
Codicil expressly revokes wills earlier than one being modified
Later will is inconsistent with a former will
Physically mutilating, burning, tearing, or defacing the will with the intention of revoking it
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Informal memorandum - not a legal document
Details items not included in a will including:
Location of will and other documents
Funeral and burial instructions
Suggestions/recommendations as to continuation, sale, or liquidation of a business.
Explanation of will provisions
Legal and accounting services
Disposition of smaller items
Personal matters
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Court oversees probate process
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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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
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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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A trust is a legal relationship that facilitates the transfer of property and the income from that property to another party.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Income and estate tax savings
Managing and conserving property
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

• 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
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Irrevocable Living Trust 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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift tax = lifetime gifts
Estate tax = death-time gifts
Tax rate the same for gifts and estates Unified rate schedule
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Unified Credits and Applicable Exclusion
Amounts for Estates and Gifts
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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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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)
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Gift tax annual exclusion
Gift tax exclusion escapes estate tax
Appreciation in value
Credit limit
Impact of marital deduction
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• 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
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1. Determine the gross estate - all property in which decedent had an interest
2. Subtract from the gross estate any allowance funeral and administrative expenses, debts, and other allowable expenses to get adjusted gross estate
3. Subtract any marital or charitable deductions from the adjusted gross estate to get taxable estate
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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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Dividing
Giving income-producing property to children either outright or in trust
Establishing a corporation
Properly qualifying for the federal estate tax marital deduction
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Deferring
Nonqualified deferred compensation plans
Making installment sales
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
Likely decrease in the estate tax
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.