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    Powerpoint Slides Powerpoint Slides Presentation Transcript

    • 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