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Chapter 17
Estate Planning: Saving Your
Heirs Money and Headaches
1

Objectives of Estate Planning
 Distribute property
 Provide for dependents
 Select guardians for minors
 Minimize estate and inheritance taxes
 Minimize settlement costs, including legal and accounting fees
 Appoint power of attorney in case of physical or mental impairment
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The Estate Planning Process
 Step 1: Determine what your estate is worth.
– Estate net worth = value of estate’s assets – value of estate liabilities
 Step 2: Choose your heirs and decide what they receive.
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The Estate Planning Process
(cont’d)
 Step 3: Determine the cash needs of the estate.
– Liquid assets are needed to pay estate taxes
 Step 4: Select and implement your estate planning techniques.
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Understanding and Avoiding
Estate Taxes
 Estate taxes
 Gift taxes
 Unlimited marital deduction
 The generationskipping tax
 Calculating estate taxes
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Estate Taxes
 $675,000 tax-free transfer threshold for
2000/2001 increasing to $1 million in 2006.
 Tax rates of 37% to 55%, determined by exact value, will be assessed on estates valued over the tax-free transfer threshold.
 Special treatment for small business and family farm owners.
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Gift Taxes
 An individual can give $10,000
($20,000 per couple) per year tax-free to an unlimited number of people.
 The $10,000 amount will be indexed to inflation, but only in $1,000 increments.
 Gifts in excess of the limit are nontaxexempt.
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Unlimited Marital Deduction
 There is no limit on the value of an estate that can be passed tax-free to a spouse who is a U.S. citizen.
 Unlimited marital deduction does not apply to non-U.S. citizen spouses.
 Tax-free gift per year to non-citizen spouses is $100,000, beyond the taxfree transfer threshold.
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The Generation-Skipping Tax
 Flat 55% tax, in addition to the regular estate tax, imposed on any wealth or property transfers to a person 2 or more generations younger than the donor.
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The Generation-Skipping Tax
 Exemptions apply:
– $10,000 gift tax exclusion as well as education and medical expense gift tax exclusions apply
– Exemption of $1 million per individual ($2 million per couple) may be passed on to grandchildren
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Calculating Your Estate Taxes
 Step 1: Calculate the value of the gross estate
 Step 2: Calculate your taxable estate
 Step 3: Calculate your gift-adjusted taxable estate
 Step 4: Calculate your estate taxes
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Step 1: Calculate the Value of the Gross Estate

This is the value of all of the deceased’s assets.
 This includes life insurance, pensions, investments, and any real or personal property.
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Step 2: Calculate Your
Taxable Estate
 This is equal to the gross value of the deceased’s estate minus funeral and administrative expenses, debts, liabilities, taxes and any marital or charitable deductions.
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Step 3: Calculate Your Gift-
Adjusted Taxable Estate
 This is equal to the deceased’s taxable estate plus any taxable lifetime gifts
(cumulative).
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Step 4: Calculate Your Estate
Taxes
 Estate taxes are equal to the giftadjusted taxable estate multiplied by the appropriate tax rate.
 To determine the net tax owed calculate the total tax owed and subtract the unified gift and estate tax credit.
In 2000/2001, the $675,000 estate tax transfer threshold equaled a credit of $220,500.
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Wills and What They Do
 Will -- a legal document that transfers an estate after death
 Beneficiaries -- the people who receive your property
 Executor or personal representative -- the person who is responsible for carrying out the provisions of the will
 Guardian -- cares for minor children and manages their property
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Wills and the Probate Process
 Probate -- the process of distributing an estate's assets
 Purposes of the probate process
– appoint an executor, if one is not named
– validate the will
– allow for challenges to the will
– oversee the distribution of assets
– file a report with the court and close the estate
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Wills and the Probate Process
(cont’d)
 Disadvantages of the probate process
– Numerous costs and fees – legal fees, executor fees, court fees – that can run to
1% to 8% of the estate value
– Process can be slow, especially if there are challenges to the will or tax problems
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Why Do You Need a Will?
 So state law will not dictate the
– distribution of your assets
– custody of children or care for those with special needs
 To avoid a court-appointed administrator and associated costs
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The Basics of Writing a Will
 Wills can be handwritten, computer generated, or oral
 The safest way is to have a will drawn up by a lawyer
 Wills must be signed, witnessed by 2 or more people, and notarized
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The Basics of Writing a Will
(cont’d)
 Wills should be stored in a safe place; however, a safety deposit box is not always a good place because it may be sealed upon your death.
 Note: Always tell someone you trust where your will is so it can be found upon your death.
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The Basic Organization of a
Will
 Introductory statement
 Payment of debt and taxes clause
 Disposition of property clause
 Appointment clause
 Common disaster clause
 Attestation and witness clause
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Introductory Statement
 Identifies the owner of the will and revokes all previous copies of the will
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Payment of Debt and Taxes
Clause
 Directs the payment of debts, death and funeral expenses, and taxes.
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Disposition of Property Clause
 Allows for the distribution of money and property.
 Names the beneficiaries.
 Contains a remainder clause stipulating the disposition of any assets not directly given.
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Appointment Clause
 Names the executor of the will
 Appoints guardians for all children under
18 years of age
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Common Disaster Clause
 Identifies which spouse is assumed to have died first in the event of simultaneous death
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Attestation and Witness
Clause
 Dates and validates the will with a signature before 2 or more witnesses, who also must sign the document.
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Requirements of a Valid Will
 Mental competence
 Under no undue influence from another person
 Will must conform to the state laws
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Updating or Changing Your
Will -- The Codicil
 Institutes minor changes in the original will
 Must be signed, witnessed, and attached to the original will
 Note: If the changes are major then a new will should be drafted.
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Letter of Last Instruction
 Not a legally binding agreement
 Provides information and direction,
Including the location of your will
 Lists the people to be notified of your death
 Lists the location of all pertinent legal documents
 Contains funeral and burial instructions
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The Duties of an Executor
 Ensures that the deceased's wishes are carried out
 Sends copies of the will to all beneficiaries
 Publishes the death notice
 Pays debts and liabilities on behalf of the estate
 Manages the deceased's property until the will is executed and the estate closed
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Other Estate -- Planning
Documents
 Durable power of attorney
 Living will
 Health care proxy
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Durable Power of Attorney
 Provides for someone to act on your behalf in the event you should become mentally or physically incapacitated.
 This document is separate from the will and goes into effect before death.
 This document should be very specific as to which legal powers it transfers.
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Living Will and Health Care
Proxy
 A living will states your wishes regarding medical treatment in the event of a terminal illness or injury.
 A health care proxy designates someone to make health care decisions should you be unable to do so for yourself.
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Ways to Avoid Probate
 Joint ownership
– tenancy by the entirety
– joint tenancy with the right of survivorship
– tenancy in common -- will controls distribution of deceased’s share
– community property -- state law and will control distribution of the property
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Ways to Avoid Probate
(cont’d)
 Gifts
– Exception for life insurance policies
– Unlimited gift tax exclusion on payments made for medical and educational expenses
– Charities
 Naming beneficiaries in contracts
 Trusts
– Living -- take effect before death
– Testamentary -- take effect upon death
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The Benefits of Using Trusts for Estate Transfer
 Avoid probate
 Are much more difficult to challenge in court than are wills
 Reduce estate taxes
 Allow for professional management
 Provide for confidentiality
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The Benefits of Using Trusts for Estate Transfer (cont’d)
 Can be used to provide for children with special needs
 Can be used to hold money until a child reaches maturity
 Can assure that children from a previous marriage will receive some inheritance
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Living Trusts
 Revocable trust
 Irrevocable living trusts
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Revocable Trusts

Allow for unlimited control by the trust’s owner, because the owner retains title to all the assets in the trust.
 Do not provide any tax advantages.
 Do not pass through probate.
 Provide greater ease and privacy of distribution upon death.
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Irrevocable Living Trusts
 Can not be changed by the owner once established, because the trust becomes another entity which owns all the assets contained in the trust.
 Are not subject to estate taxes.
 Do not pass through probate.
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Testamentary trusts
 Standard family trusts
 Qualified terminable interest property
(Q-TIP) trusts
 Sprinkling trusts
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Standard Family Trusts
 Holds the assets of the first spouse to die until the second spouse dies.
 Spouse has access to income from the trust, or the trust principal, if necessary.
 Reduces the estate of the second spouse so that the estate taxes can be reduced.
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Qualified Terminable Interest
Property (Q-TIP) Trusts
 Provides a means to pass income to the surviving spouse without turning over control of the assets.
 Ensures that assets will be passed to your children upon the death of the surviving spouse.
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Sprinkling Trusts
 Distributes assets on a need basis rather than according to some preset plan to a designated group of beneficiaries.
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A Last Word on Estate
Planning
 Do it now!
 Write a will.
 Depending on estate size and other needs, get professional help with estate planning.
 Tell someone the location of your estate planning documents.
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What Should You Do for
2000/2001?
 If your estate is worth less than $675,000 you have no estate tax problems.
– Write a will
– Consider a trust for managing property of children

If you’re married and your estate value is between $675,000 and $1.35M, to avoid taxes
– Take advantage of the tax-free estate transfer
– Consider a standard family trust
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What Should You Do for
2000/2001? (cont’d)

If you’re single and have an estate of over $675,000 or are married have an estate over $1.35M
– Reduce the value of the estate to avoid taxes
» Spend
» Give money away
» Give away life insurance
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Summary
 The estate planning process consists of
– determining what your estate is worth.
– choosing your heirs and deciding what they receive.
– determining the cash needs of the estate.
– selecting and implementing your estate planning techniques.
 Your will and the probate process
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Summary (cont’d)
 Other estate planning documents
– Durable power of attorney
– Living will
– Letter of last instruction
 Types of trusts
– living trusts -- take effect before death
– testamentary trusts -- take effect upon death
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Summary (cont’d)
 Benefits of using trusts
–
– avoid probate more difficult to challenge than are wills
– reduce estate taxes
– allow for professional management
– provide for confidentiality
– allow options for meeting the needs of children
 Reducing the taxable value of an estate
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