Chapter 15
Estate Planning
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Chapter Goals
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Determine what estate planning is and how to
employ its key topics.
Conclude that estate planning isn’t only for the rich.
Recognize the merits of having a will.
Establish the steps in an overall estate plan.
Develop several tax reduction strategies.
Assess the advantages and disadvantages of many
estate planning tools.
Overview
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The principal purpose of estate planning is to protect
and benefit others we care about after we die. Steps:
Understanding What Estate Planning Is
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Estate planning is analyzing and deciding on how
your assets are to be managed and apportioned to
others in the event of your death or disability.
The goal is to establish an estate structure that will
maximize assets left to your beneficiaries and
achieve your other wishes in an efficient way.
The process, while varying in the amount of
supervision needed, can be the same whether it is
for a large or small estate.
Estate planning is not reserved just for the wealthy; it
concerns virtually everyone.
Identify Objectives
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Questions to ask when establishing objectives:
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What am I trying to accomplish?
Am I trying to set aside monies for the people with the
greatest need?
Do I want to provide for people I care most about?
Do I want to gift at least in part now or wait until my death?
When we speak of maximization of assets as an
objective we have to decide on the priority that we
give to others as compared with ourselves.
Identify Assets
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All household assets currently available should be
identified and their owner specified.
Information should include whether assets are joint
or separately owned, the original cost, and current
fair market value.
The total amount, cost, and way that assets are titled
are relevant to the outcome strategies that you will
select.
Establish a Will
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A will is a legal instrument that specifies who is to
receive a person’s assets upon death and that
expresses other wishes.
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The will generally includes clauses such as:
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If you don’t execute a will, the state in effect provides one
for you - but its standards and wishes, not yours.
Who gets what assets.
The powers of the executor who is in charge of
administering the estate, complying with legal requirements,
and liquidating its assets.
A guardian, where appropriate, who is in charge of people
unable to care for themselves.
General Evaluation of a Will
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A will should be evaluated for factors such as:
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Does the will reflect your wishes?
Are your wishes unambiguously stated in the will?
Once written, is the will completely up to date?
Are there overlooked assets?
Can the will cause conflict?
Is the will stored in a safe place?
Does the will comply with state law?
If there are assets in other states, does the will comply
with their laws as well?
Intestate
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Many people do not have a will, for reasons such
as:
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Not recognizing its importance.
Believing you don’t have assets worth giving away.
Feeling when young that you have time to set one up.
Having difficulty determining whom to name as heirs or as
executors or guardians.
Finding the subject too uncomfortable to think about.
Intestate means dying without a will. The division of
assets can then depend on the state you live in, the
size of your assets, and how they are titled.
Selected Reasons for Having a Will
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Reasons for having a will include:
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You may want your spouse to receive all your assets.
States may mandate that assets be given to elderly parents
who may not need the money.
To assign a preferred guardian.
To ensure that wishes as to who gets items of sentimental
worth would are accommodated.
To avoid conflict over distribution of assets.
Assets would otherwise pass to the children at age 18 or 21
when they might not be mature enough.
To include important friends.
Items vary by state.
The will can provide for tax advantaged trusts.
Consider Other Estate Planning Tools
to Meet Objectives
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There are a variety of other instruments that can
help in overall estate planning. They include:
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Trusts.
Gifts.
Titling.
Insurance.
Powers of attorney.
Letters of instruction.
Trusts
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Trusts are separate legal entities in which a third
party manages property for the benefit of another
person.
The person who manages the trust assets is called
the trustee.
The person to whom the property is given or for
whom the property is being managed is called the
beneficiary.
The person setting up the trust to comply with their
own specifications is called the grantor or trustor.
Trusts, cont.
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Advantages of a trust:
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To obtain professional management.
For tax purposes.
For control purposes.
To bypass probate.
For strengthening protection from creditors and
dissatisfied relatives.
To consolidate management.
Can provide for different people over time.
Trusts, cont.
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Disadvantages of a trust:
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Cost.
Potential trustee deviation from wishes.
Effort required to set up.
Possible resentment by beneficiaries.
Types of Trusts
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A living trust is one set up during a grantor’s life.
A testamentary trust comes about after death.
A revocable trust is one that can be revoked or
changed by the grantor whenever desired.
An irrevocable trust is one that cannot be altered.
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Its main advantage over other trusts is the ability to qualify
for favorable estate tax treatment.
Gifts
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Gifts are irrevocable transfers of property to others.
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In order for an item to be considered a gift it must:
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They are called intervivos transfers because they happen
while the giftor is alive.
Gifts can provide funds when needed, thereby raising the
satisfaction of the recipient and donor.
Be given without any characteristics of control left with the
giftor.
Cannot be exchanged for an agreement to provide a
contra gift or service.
Gifts, cont.
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Gifts are combined with estate assets to establish
the exemption from estate taxes.
The first $1 million of lifetime gifts depending on
year will not be subject to federal taxes.
In smaller estates no federal estate or gift tax will
be due at all.
By a gift of property, the recipient there takes the
cost basis of the person providing the gift. When
the property is sold, the recipient will pay an
income tax at capital gains rates on the difference
between the proceeds received and the cost basis.
Gifts, cont.
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Gifts that don’t count as a deduction from the
lifetime exemption, an additional benefit include:
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Gifts between married people.
Gifts of under $11,000 per year.
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Each person is allowed to make a gift of $11,000 per year per
person without it affecting the estate tax exemption.
Spouses can combine their deduction to gift $22,000 per
year to each person.
If they wished to, for their child’s family of four they could gift
$88,000 per year by gifting $22,000 to each member.
Charitable gifts.
 An unlimited amount of money may be donated to
charitable institutions for estate tax purposes.
 A charitable contribution is income-tax deductible
based on its fair market value at the time of the gift.
Gifts, cont.
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Two principal types of charitable trusts for gifting
purposes are:
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Charitable remainder trust: The donor receives a stream of
annual income for a fixed period or for life, and the
remainder is given to the charity. The NPV of the
remainder portion is deductible for income tax purposes.
Charitable lead trust: The charity receives the stream of
income for a designated term, and the balance thereafter
goes to an heir. The income tax deduction in this case
comes from the NPV of the charity’s income received.
The government will not allow tax benefits for any
charitable transaction that lacks charitable intent.
Titling and Transferring of Assets
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It is very important to determine the way an asset is
titled for both inheritance and tax purposes.
Property owned jointly with someone else can be
titled in one of three ways:
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Joint Tenancy with Right of Survivorship: Allows a person
to automatically inherit the property upon the death of the
other owner. The surviving co-owner’s right to the
property takes precedence over the provisions stated in a
will and, as mentioned, bypasses probate.
Tenancy by the Entirety: In the event of death the surviving
co-owner receives full ownership. However, it is only
available to married persons and can only be undone by
consent of both parties. Only some states allow.
Tenancy in Common: Each co-owner owns a specified
percentage of a property.
Titling and Transferring of Assets,
cont.
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Property owned by a trust is treated the same way
as property owned by any other entity.
Marital property refers to rights in property gained
through marriage. Separate property is an asset
owned entirely by a person.
Generally, assets owned before marriage and gifts
and inheritances made specifically to a person are
considered separate property if they are kept in
separate accounts.
Whether the property is marital or separate
property can determine who is entitled to receive
the assets at death or divorce.
Life Insurance
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Potential roles of life insurance in estate planning:
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Liquidity: Life insurance can provide a ready source of
cash flow, which can fund estate taxes and enable
postponement of the sale of property and other business
decisions to an optimal time.
Relative assurance of payment: The insurance policy can
provide the structure that enables a stated sum to be left
to beneficiaries at death.
Escapes probate and spousal election: Escapes probate
because it is not payable to the deceased or the estate.
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Life Insurance, cont.
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Tax savings: The proceeds from insurance arising from the
death of a person are not subject to income taxation but
are subject to estate taxation.
There are generally a maximum of three parties to an
insurance policy: the owner of the policy, the insured, and
the beneficiary.
When the owner is also the insured, the amount will be
taxable for estate purposes.
However, where the proceeds are payable to another
beneficiary and all incidents of ownership are eliminated
by the insured, no estate taxes will be assessed on the
estate of the insured.
Life Insurance Trust: The life insurance trust must be
irrevocable to qualify for estate tax savings.
Power of Attorney and Letters of
Instruction
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A power of attorney is a legal document that lets
someone act on your behalf.
The letter of instruction is a supplement to a will
that helps people understand your thinking and
provide direction for matters to be accomplished.
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It can indicate where the will and other important papers
are located as well as the telephone numbers of advisors
and perhaps an evaluation of them.
It can discuss sensitive family matters that an executor
may find helpful such as conflicts, untrustworthy
individuals, and so on.
It can include burial wishes and provide a justification for
certain life actions including those provided in the will.
Evaluate Obstacles and Ways to
Overcome Them
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Obstacles are impediments to the estate planning
process.
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Probate is sometimes viewed as a ponderous process,
because the procedures that must be followed result in
expenditures and delay in distributing estate assets.
Probate also opens up your private affairs to public
scrutiny.
Conflict may occur in relation to:
 The division of assets.
 Executors and guardians.
 The Age of inheritance.
Become Familiar with All Types of
Relevant Taxes
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Three types of assessments in connection with
planning in this area are:
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Estate tax. Taxes that are due after the death of the owner
are based on assets owned at death.
 Estate tax law provides an exemption from taxation for
initial asset accumulation. The exemption is in the
form of a credit against taxes called a unified credit.
Gift tax. Lifetime transfers are now combined with estate
assets to compile $1 to $3.5 million total exemption
Income tax. assessments based on job-related and
investment earnings.
 Income taxes on gains on sale of assets are based on
selling price minus original cost.
 Congress passed into law a bill providing that assets at
death be given a fair market value basis for income tax
purposes instead of the original cost.
Become Familiar with All Types of
Relevant Taxes, cont.
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Estate tax law as of the raising of the unified credit
in 2000 is as follows:
Determine Available Financial Planning
Strategies
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Some basic strategies include:
Consider a Bypass Trust.
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Gifting versus Bequests.
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A bypass trust is a document that is set up while the grantor is
alive or it is provided for in the will. The principal benefit of the
bypass trust is the ability to use both husband and wife’s unified
credit to advantage while providing funds for the surviving
spouse to live on.
Gifting provide resources when needed and allows you to
observe the benefits of your gift.
Bequests can be safer, allowing the grantor to maintain all assets
for household use. They can also postpone providing assets to
younger people when there is concern about negative influences
of money.
Determine Available Financial Planning
Strategies, cont.
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Investing for Estate Planning.
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Consider Placing Monies in Joint Name in Smaller
Estates.
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Where money has been set out exclusively for
beneficiaries, the investment policy can take on the risk
tolerance of the beneficiaries instead of the grantor.
Where liquidity or estate tax is an issue, life insurance can
be considered as an investment asset in the asset
allocation.
If taxes may are not an issue, placing money in joint
accounts can ensure that the intended person receives the
money quickly and free of probate expenditures.
On the other hand, be aware that you are providing
another person with ownership rights in your estate while
you’re alive.
Determine Available Financial Planning
Strategies, cont.
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Integrate Estate and Income Tax Considerations in
Planning.
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Gift Fast-Growing Assets.
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There are many occasions when possible actions involve
a choice between an income tax and an estate tax.
Your goal should be to consider both by using a time value
of money technique such as obtaining the NPV of both
alternatives and selecting the one with the greatest sum
made available net of taxes.
Assets that are expected to increase rapidly in value are
often preferred gifting vehicles. They eliminate assets that
can increase the estate’s valuation and therefore estate
taxes.
Determine Available Financial Planning
Strategies, cont.
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Pay Compensation to Executor on Large Estates.
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Think about Designating Younger People as Heirs.
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The elimination of income taxes on assets with a low cost
basis by retaining instead of selling should be considered
by people who are elderly or seriously ill.
Consider IRAs and Other Qualified Plans.
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Estate taxation repeats at each death of the owner.
Therefore, the NPV of estate taxes is likely to be lower for
each generation below yours that you provide for.
Give Consideration to the Step-up in Basis.
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Paying an executor who is a beneficiary for their services
can be advantageous.
Nonmarital beneficiaries of an IRA can defer taxation upon
death and take mandatory withdrawals based on their life
expectancy.
Incorporate Estate Risks
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Two principal risks include longevity and incapacity.
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Longevity:
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Ironically, dying in the period close to the retirement date can
place greater resources in the hands of beneficiaries, as the
retiree often has accumulated substantial sums for retirement.
Unusually long lives can place retirement and therefore estate
sums in jeopardy.
One approach is to plan conservatively for retirement needs,
assuming death at age 90.
Incorporate Estate Risks, cont.
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Incapacity:
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Can disrupt the normal functioning of the household. Legal
documents that can help include:
Health-Related Trusts: A revocable living trust can provide
the funding to administer a person’s care under the
supervision of a trustee when the person can no longer
handle his or her own affairs.
Durable Power of Attorney: Remains in effect over time
with the amount of power and the circumstances under
which it can be used stated in the document.
Springing Power of Attorney: Does not take effect until a
specific event stated in the document occurs.
Medical Power of Attorney: Allows someone else to make
medical decisions when you are not capable of doing so
yourself. It is used because a general durable power of
attorney is not recognized in medical matters.
Consider Separately Estate Planning
for Minors
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For children under 14:
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Under the Uniform Gifts to Minors Act a donor can
make a gift to a minor and have a guardian
supervise that gift in a way similar to that of a
guardian acting as a trustee.
A 2503C trust for minors can be set up.
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The first $800 of income on investments is not taxable.
The next $800 is taxed at the child’s low tax rate.
The rest is taxed at the parent’s marginal rate.
Provides more flexibility as many kinds of assets including
property can be placed into it.
Any outlays of income from the trust must be spent on
behalf of the child and the money distributed when the
child becomes 21.
Assess Anticipated Resources and
Finalize the Estate Plan
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Since the date of death is not known, the
anticipated resources will be an estimate.
Where amounts are specifically set aside for estate
planning and not used for retirement planning
purposes as well, the figure will be easier to
ascertain.
The total amount projected as available will help
determine the tools and strategies used.
To finalize the estate plan, we integrate the original
objectives, which are typically both financial and
personal.
The strategies and tools will attempt to maximize
assets selecting those that achieve the purpose
depend on circumstance.
Summary of estate planning tools
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Implement the Plan and Review
Periodically
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Implementation involves drawing up the legal
documents by the estate attorney and the actions
that the grantor must take.
Estate planning is one of those financial areas that
should be reviewed fairly frequently.
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Economic circumstances change and people’s opinions on
what they want to do with their monies and their other
wishes can shift over time.
Tax and other estate planning laws are altered by the
government and new tax strategies arise.
Chapter Summary
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Estate planning is analyzing and deciding how your
assets are to be managed and apportioned to
others in the event of your death or disability.
The financial planning objectives are to minimize
taxes and to provide assets to the ones we care for
with as little conflict as possible.
A will, which virtually everyone should have, is
often the most important document in estate
planning.
Trusts are separate legal entities in which a third
party usually manages property for the benefit of
another person.
Chapter Summary, cont.
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Gifts are irrevocable transfers of property to others,
and if the giftor maintains some ownership rights
they are not gifts.
Life insurance roles in estate planning include
providing liquidity, relative assurance of payment,
and tax saving.
Probate is the procedure after death during which
the court validates the will and/or administers
certain estate assets.
The principal estate risks are longevity and
incapacity.
A power of attorney is a legal document that allows
someone to act on your behalf.