#15
Preserving Your
Estate
© 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.
Learning Goals
Describe the role of estate planning and identify steps
involved
Recognize importance of preparing a will and other
documents
Explain how trusts are used in estate planning
Determine if a gift is taxable and use gifts to reduce estate
taxes
Calculate federal taxes due on an estate
Use effective estate planning 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.
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
© 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.
Estate Planning
© 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.
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
© 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.
Why Does An Estate Break Up?
Death-related costs
Inflation
Lack of liquidity
Improper use of vehicles of
transfer
Disabilities
© 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.
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
© 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.
The Estate Planning Process
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.
Wills
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.
Preparing the Will
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.
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
© 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.
Requirements of a Valid Will
Mental Capacity
must be of sound mind
Freedom of Choice
no undue influence
over the testator
Proper Execution
must meet state
requirements and be
free from fraud
© 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.
Changing or Revoking a Will:
Codicils
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.
Changing or Revoking a Will:
Codicils
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.
Checklist for Executers (top only)
© 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.
Letter of Last Instruction
Informal memorandum - not a legal document
Details items not included in a will including:
Location of will and other documents
Funeral and burial instructions
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.
Administration of an Estate
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.
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
© 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.
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
© 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.
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
© 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.
Trusts
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.
Why Use a Trust?
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.
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
© 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.
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
© 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.
Types of Trusts
ManagementLiving
continuity
and income flow
Irrevocable
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.
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
© 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.
Federal Unified Transfer Taxes
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.
Federal Unified Transfer Tax
Rates
© 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
© 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.
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
© 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 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)
© 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.
Reasons for Making Lifetime
Gifts
Gift tax annual exclusion
Gift tax exclusion escapes estate tax
Appreciation in value
Credit limit
Impact of 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.
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
© 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.
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
© 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.
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
© 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.
Computing Federal 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.
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
© 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.
Estate Planning Techniques
Deferring
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
© 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.
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
© 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.