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Estate Planning Chapter 17

Introduction
Only about 30% of Americans have wills
Every adult needs a will along with
A durable power of attorney
Gives someone the legal right to handle your finances should you become incapacitated
Advanced directives, such as a living will, health care proxy
Estate planning isn't just for the wealthy

Everybody Needs 3 Things
A Will
A Living Will
Whether you want life support
You decide whether or not you wish extraordinary means to maintain life
Health-Care Proxy
You allow someone else to make decisions for you
A Durable Power of Attorney

Understanding Estate Planning
Estate – your net worth at the time of your death
Estate taxes – federal and state taxes assessed on the value of your estate
Will – legal document outlining how you want your property divided after your death
Executor/executrix – person who makes certain the provisions of will are carried out

Understanding Estate Planning
Bequests – specific items of property you leave to others via your will
Residual estate – amount remaining after expenses, taxes, and bequests
Beneficiaries – persons receiving proper identified in a will
Heirs – persons who are entitled to received your property
Trust – legal format for holding property for the benefit of beneficiaries

The Contents And Value Of An Estate
First step of estate planning is determining the value of your assets and liabilities
Assets include items such as real estate, securities, tangible personal property, life-insurance policies, retirement accounts
May be difficult to establish a fair market value of some items
Liabilities may include mortgage, personal and consumer loans, unpaid taxes, funeral expenses

The Contents And Value Of An Estate
Most married couples own most of their property jointly (with Right of Survivorship)
All owners must agree before the property can be sold or given away
If one owner dies, the spouse must agree before the property can be given to another person
Power of attorney gives the other person the right to make decisions about your property if you are unable to do so

The Goals of Estate Planning
All estate plans should have following goals
Minimize the amount of federal and state taxes paid by estate
Specify how you want your estate divided after your death
Specify who will care for minor children until they reach the age of majority

Federal Taxes
If an estate is worth less than $1,500,000 ($3.5M by 2009), no federal estate taxes are due
A person can pass an unlimited amount of property to spouse free of estate taxes, but when that spouse dies, their estate may have to pay estate taxes
The larger the estate, the larger the federal tax rate (45% in 2007)
Federal taxes on estates are paid by the estate, not by the beneficiaries

2006 Federal Estate Tax Rates Note: The federal estate tax exemption is scheduled to remain at $2 million through 2008; to rise to $3.5 million in 2009. The federal estate tax is repealed in 2010 and reinstated in 2011.

Federal Taxes
Estate taxes are generally due within nine months of the person's death
If taxes are not paid by estate, then beneficiaries may be liable for tax bill
Executor is responsible for filing all necessary federal tax forms
2001 Economic Growth And Tax Relief Act made major changes to federal estate tax
Raised tax exemption to $1 million in 2002, increasing to $3.5 million in 2009
Top estate tax rate was reduced to 50% starting in 2002, and declines in steps to 45% in 2007
Totally repeals the federal estate tax in 2010 unless Congress elects to not do so

State Taxes
All states except Nevada levy some type of death or estate tax
Even if you live in another state when you die, if you own property in a state at the time of death, taxes may be levied
About half of states have an inheritance tax
Based on the share that each beneficiary will receive
Different tax rates apply to different classes of beneficiaries—blood relatives vs. distant relatives, for instance
Beneficiaries are responsible to paying state inheritance taxes

Wills
Should be updated periodically to reflect changes in your life situation
Creating a will is simple and inexpensive
Dying without a will is known as intestate

Types of Wills
General Classification: (Limited, General)
By Preparer: Formal or Holographic
Simple Wills (Uncomplicated)
Testamentary Will (set up in last will & Testament)
Pourover Will (a term used to describe a will where part of the inheritance is allocated to a trust document)

Types of Wills
Holographic Will (Self-prepared; often unwitnessed)
Oral Will (A will that is spoken/not written)
Joint Wills (One document covers any two people)
Living Will (Not really a will since it has force only while you are alive—tells doctors or hospitals how you wish to be treated at the end of your life)

The Probate System
Once you die, your will passes through a legal process known as probate
Process of submitting the will to court, where it is examined and declared valid
Assets are listed and current market value established
Executor may appoint an attorney to handle and administer the probate process
Wills may be challenged, in which case the probate court rules on the validity of challenges before estate can be settled
Legal fees range from 5 to 10% of estate's total value

The Contents of A Will
Individual will – involves estate of one individual
Joint will – leaves the bulk of the estate to the surviving spouse
Formally drawn will – prepared by an attorney
Holographic will – written by individual without the advice of an attorney
Must be signed, dated, and witnessed
Minor changes may be made via a written amendment called a codicil

The Contents of A Will
All wills should contain the following
Identification – person’s name, address, intention to write a last will & testament, etc.
Debt payment – instructions to paying any outstanding debts, taxes, funeral expense, estate costs, inheritance taxes
Property distribution – specific bequests in terms of personal property or general bequests (does not indicate a particular fund from which the money will come)
Trusts – list any trusts from spouse or children as well as trustee
Executor – include name of executor and an alternate
Guardian – persons with minor children should appoint someone to look after children should both parents die
Funeral arrangements – list the kind and cost of funeral

Selecting a Guardian
If a guardian is not selected, the court will select one for you
May be a stranger
The probate court may overrule your decision and appoint someone else as guardian
Very rare
A relative might contest your will, asking the court to appoint someone else as guardian
More common when parents are divorced

Selecting a Guardian
Most people select a close relative as their child’s guardian
Make certain the person(s) has agreed and understands their role
If you plan to leave money to minor children, you should also name a conservator
Person who has legal right to make financial decisions on behalf of child until they reach legal age
If a trust is established, a conservator is not needed

Last Letter of Instruction & Living Wills
Last letter of instruction
Provides an inventory of your assets and liabilities
Describes how you want your property divided and transferred to beneficiaries
Contains funeral and burial instructions
Living wills (plus Medical Proxy)
Lists your desires should you become incapacitated and unable to represent yourself
May state that you do not wish treatment that prolongs your life by artificial means
Hospitals and doctors may ignore living wills

Trusts (3 Types Exist)
Legal status enabling a trustee to hold and distribute funds on behalf of a person’s beneficiaries
May go into effect after death or during a person’s lifetime
Donor must
Establish the trust
Name the trust beneficiaries and trustee(s)
Transfer property to the trust
Trust earns income, pays taxes, and distributes benefits
Trustee(s) is responsible for managing the trust and overseeing payments

Trusts
Have one or more purposes
Manage the money of a minor, inexperienced, or otherwise limited person for a specified period of time
Limit the way in which the beneficiary can use money left to him or her by the estate
Provide tax advantages
Avoid probate and public scrutiny of a person’s estate
Costs involve
Paying an attorney to set up the trust
Paying the trustee an annual fee to manage the trust (often set as a percentage of the trust’s assets)
Given the high costs of a trust, it may not be worthwhile unless a substantial sum in involved

1. Testamentary Trusts
Written into the will
Becomes funded and operational at death
Often designed to provide for the care of minor children
Usually dissolved when the children reach a specified age and the children receive control of the property
Can also be used to double the $1.5 million federal estate tax exemption for married couples

2. Living Trusts
Empowers a trustee to handle and distribute assets while the person is still living
People establish living trusts for a variety of reasons
Fear of becoming disabled or incompetent and unable to handle their own money management
Desire to avoid probate
Keep their financial affairs private

Living Trusts
Can be revocable or irrevocable
Revocable – can be changed at any point during the person’s life without the consent of beneficiaries
Cannot be used to avoid taxes
Irrevocable – cannot be changed once it is established, even if donor changes his mind
Can reduce your taxes because the trust pays taxes on the income by the assets held in trust
Life estates – variation of a living trust allowing you to protect your home so that you may pass it on to heirs

3. Insurance Trusts
Set up to administer proceeds of one’s life insurance
Set up while you are alive and funded upon your death
Either with life insurance policy proceeds or pension death benefits
May or may not have tax advantages

Gifts and Taxes
You are allowed to make gifts of up to $11,000 per year, per recipient without paying federal gift taxes
If you and your spouse give jointly, the amount doubles to $22,000
2001 tax law created a $1 million lifetime gift tax exclusion
2001 tax law also changes some strategies
People traditionally transferred assets likely to appreciate, such as real estate and stocks
However, the new exclusion creates less incentive for this assuming the estate tax repeal becomes permanent

Other Types of Gifts
Tax-exempt gifts to charities are not subject to the $11,000 annual cap
However, they are limited to a percentage of your adjusted gross income

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