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  1. 1. Estate Planning Chapter 17
  2. 2. Introduction <ul><li>Only about 30% of Americans have wills </li></ul><ul><li>Every adult needs a will along with </li></ul><ul><ul><li>A durable power of attorney </li></ul></ul><ul><ul><ul><li>Gives someone the legal right to handle your finances should you become incapacitated </li></ul></ul></ul><ul><ul><li>Advanced directives, such as a living will, health care proxy </li></ul></ul><ul><li>Estate planning isn't just for the wealthy </li></ul>
  3. 3. Everybody Needs 3 Things <ul><li>A Will </li></ul><ul><li>A Living Will </li></ul><ul><ul><li>Whether you want life support </li></ul></ul><ul><ul><ul><li>You decide whether or not you wish extraordinary means to maintain life </li></ul></ul></ul><ul><ul><li>Health-Care Proxy </li></ul></ul><ul><ul><ul><li>You allow someone else to make decisions for you </li></ul></ul></ul><ul><li>A Durable Power of Attorney </li></ul>
  4. 4. Understanding Estate Planning <ul><li>Estate – your net worth at the time of your death </li></ul><ul><li>Estate taxes – federal and state taxes assessed on the value of your estate </li></ul><ul><li>Will – legal document outlining how you want your property divided after your death </li></ul><ul><li>Executor/executrix – person who makes certain the provisions of will are carried out </li></ul>
  5. 5. Understanding Estate Planning <ul><li>Bequests – specific items of property you leave to others via your will </li></ul><ul><li>Residual estate – amount remaining after expenses, taxes, and bequests </li></ul><ul><li>Beneficiaries – persons receiving proper identified in a will </li></ul><ul><li>Heirs – persons who are entitled to received your property </li></ul><ul><li>Trust – legal format for holding property for the benefit of beneficiaries </li></ul>
  6. 6. The Contents And Value Of An Estate <ul><li>First step of estate planning is determining the value of your assets and liabilities </li></ul><ul><ul><li>Assets include items such as real estate, securities, tangible personal property, life-insurance policies, retirement accounts </li></ul></ul><ul><ul><ul><li>May be difficult to establish a fair market value of some items </li></ul></ul></ul><ul><ul><li>Liabilities may include mortgage, personal and consumer loans, unpaid taxes, funeral expenses </li></ul></ul>
  7. 7. The Contents And Value Of An Estate <ul><li>Most married couples own most of their property jointly (with Right of Survivorship) </li></ul><ul><ul><li>All owners must agree before the property can be sold or given away </li></ul></ul><ul><ul><li>If one owner dies, the spouse must agree before the property can be given to another person </li></ul></ul><ul><li>Power of attorney gives the other person the right to make decisions about your property if you are unable to do so </li></ul>
  8. 8. The Goals of Estate Planning <ul><li>All estate plans should have following goals </li></ul><ul><ul><li>Minimize the amount of federal and state taxes paid by estate </li></ul></ul><ul><ul><li>Specify how you want your estate divided after your death </li></ul></ul><ul><ul><li>Specify who will care for minor children until they reach the age of majority </li></ul></ul>
  9. 9. Federal Taxes <ul><li>If an estate is worth less than $1,500,000 ($3.5M by 2009), no federal estate taxes are due </li></ul><ul><li>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 </li></ul><ul><li>The larger the estate, the larger the federal tax rate (45% in 2007) </li></ul><ul><li>Federal taxes on estates are paid by the estate, not by the beneficiaries </li></ul>
  10. 10. 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.
  11. 11. Federal Taxes <ul><li>Estate taxes are generally due within nine months of the person's death </li></ul><ul><li>If taxes are not paid by estate, then beneficiaries may be liable for tax bill </li></ul><ul><li>Executor is responsible for filing all necessary federal tax forms </li></ul><ul><li>2001 Economic Growth And Tax Relief Act made major changes to federal estate tax </li></ul><ul><ul><li>Raised tax exemption to $1 million in 2002, increasing to $3.5 million in 2009 </li></ul></ul><ul><ul><li>Top estate tax rate was reduced to 50% starting in 2002, and declines in steps to 45% in 2007 </li></ul></ul><ul><ul><li>Totally repeals the federal estate tax in 2010 unless Congress elects to not do so </li></ul></ul>
  12. 12. State Taxes <ul><li>All states except Nevada levy some type of death or estate tax </li></ul><ul><li>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 </li></ul><ul><li>About half of states have an inheritance tax </li></ul><ul><ul><li>Based on the share that each beneficiary will receive </li></ul></ul><ul><ul><li>Different tax rates apply to different classes of beneficiaries—blood relatives vs. distant relatives, for instance </li></ul></ul><ul><li>Beneficiaries are responsible to paying state inheritance taxes </li></ul>
  13. 13. Wills <ul><li>Should be updated periodically to reflect changes in your life situation </li></ul><ul><li>Creating a will is simple and inexpensive </li></ul><ul><li>Dying without a will is known as intestate </li></ul>
  14. 14. Types of Wills <ul><li>General Classification: (Limited, General) </li></ul><ul><li>By Preparer: Formal or Holographic </li></ul><ul><li>Simple Wills (Uncomplicated) </li></ul><ul><li>Testamentary Will (set up in last will & Testament) </li></ul><ul><li>Pourover Will (a term used to describe a will where part of the inheritance is allocated to a trust document) </li></ul>
  15. 15. Types of Wills <ul><li>Holographic Will (Self-prepared; often unwitnessed) </li></ul><ul><li>Oral Will (A will that is spoken/not written) </li></ul><ul><li>Joint Wills (One document covers any two people) </li></ul><ul><li>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) </li></ul>
  16. 16. The Probate System <ul><li>Once you die, your will passes through a legal process known as probate </li></ul><ul><ul><li>Process of submitting the will to court, where it is examined and declared valid </li></ul></ul><ul><ul><li>Assets are listed and current market value established </li></ul></ul><ul><ul><li>Executor may appoint an attorney to handle and administer the probate process </li></ul></ul><ul><li>Wills may be challenged, in which case the probate court rules on the validity of challenges before estate can be settled </li></ul><ul><li>Legal fees range from 5 to 10% of estate's total value </li></ul>
  17. 17. The Contents of A Will <ul><li>Individual will – involves estate of one individual </li></ul><ul><li>Joint will – leaves the bulk of the estate to the surviving spouse </li></ul><ul><li>Formally drawn will – prepared by an attorney </li></ul><ul><li>Holographic will – written by individual without the advice of an attorney </li></ul><ul><li>Must be signed, dated, and witnessed </li></ul><ul><li>Minor changes may be made via a written amendment called a codicil </li></ul>
  18. 18. The Contents of A Will <ul><li>All wills should contain the following </li></ul><ul><ul><li>Identification – person’s name, address, intention to write a last will & testament, etc. </li></ul></ul><ul><ul><li>Debt payment – instructions to paying any outstanding debts, taxes, funeral expense, estate costs, inheritance taxes </li></ul></ul><ul><ul><li>Property distribution – specific bequests in terms of personal property or general bequests (does not indicate a particular fund from which the money will come) </li></ul></ul><ul><ul><li>Trusts – list any trusts from spouse or children as well as trustee </li></ul></ul><ul><ul><li>Executor – include name of executor and an alternate </li></ul></ul><ul><ul><li>Guardian – persons with minor children should appoint someone to look after children should both parents die </li></ul></ul><ul><ul><li>Funeral arrangements – list the kind and cost of funeral </li></ul></ul>
  19. 19. Selecting a Guardian <ul><li>If a guardian is not selected, the court will select one for you </li></ul><ul><ul><li>May be a stranger </li></ul></ul><ul><li>The probate court may overrule your decision and appoint someone else as guardian </li></ul><ul><ul><li>Very rare </li></ul></ul><ul><li>A relative might contest your will, asking the court to appoint someone else as guardian </li></ul><ul><ul><li>More common when parents are divorced </li></ul></ul>
  20. 20. Selecting a Guardian <ul><li>Most people select a close relative as their child’s guardian </li></ul><ul><li>Make certain the person(s) has agreed and understands their role </li></ul><ul><li>If you plan to leave money to minor children, you should also name a conservator </li></ul><ul><ul><li>Person who has legal right to make financial decisions on behalf of child until they reach legal age </li></ul></ul><ul><ul><li>If a trust is established, a conservator is not needed </li></ul></ul>
  21. 21. Last Letter of Instruction & Living Wills <ul><li>Last letter of instruction </li></ul><ul><ul><li>Provides an inventory of your assets and liabilities </li></ul></ul><ul><ul><li>Describes how you want your property divided and transferred to beneficiaries </li></ul></ul><ul><ul><li>Contains funeral and burial instructions </li></ul></ul><ul><li>Living wills (plus Medical Proxy) </li></ul><ul><ul><li>Lists your desires should you become incapacitated and unable to represent yourself </li></ul></ul><ul><ul><li>May state that you do not wish treatment that prolongs your life by artificial means </li></ul></ul><ul><ul><li>Hospitals and doctors may ignore living wills </li></ul></ul>
  22. 22. Trusts (3 Types Exist) <ul><li>Legal status enabling a trustee to hold and distribute funds on behalf of a person’s beneficiaries </li></ul><ul><li>May go into effect after death or during a person’s lifetime </li></ul><ul><li>Donor must </li></ul><ul><ul><li>Establish the trust </li></ul></ul><ul><ul><li>Name the trust beneficiaries and trustee(s) </li></ul></ul><ul><ul><li>Transfer property to the trust </li></ul></ul><ul><li>Trust earns income, pays taxes, and distributes benefits </li></ul><ul><li>Trustee(s) is responsible for managing the trust and overseeing payments </li></ul>
  23. 23. Trusts <ul><li>Have one or more purposes </li></ul><ul><ul><li>Manage the money of a minor, inexperienced, or otherwise limited person for a specified period of time </li></ul></ul><ul><ul><li>Limit the way in which the beneficiary can use money left to him or her by the estate </li></ul></ul><ul><ul><li>Provide tax advantages </li></ul></ul><ul><ul><li>Avoid probate and public scrutiny of a person’s estate </li></ul></ul><ul><li>Costs involve </li></ul><ul><ul><li>Paying an attorney to set up the trust </li></ul></ul><ul><ul><li>Paying the trustee an annual fee to manage the trust (often set as a percentage of the trust’s assets) </li></ul></ul><ul><li>Given the high costs of a trust, it may not be worthwhile unless a substantial sum in involved </li></ul>
  24. 24. 1. Testamentary Trusts <ul><li>Written into the will </li></ul><ul><li>Becomes funded and operational at death </li></ul><ul><li>Often designed to provide for the care of minor children </li></ul><ul><ul><li>Usually dissolved when the children reach a specified age and the children receive control of the property </li></ul></ul><ul><li>Can also be used to double the $1.5 million federal estate tax exemption for married couples </li></ul>
  25. 25. 2. Living Trusts <ul><li>Empowers a trustee to handle and distribute assets while the person is still living </li></ul><ul><li>People establish living trusts for a variety of reasons </li></ul><ul><ul><li>Fear of becoming disabled or incompetent and unable to handle their own money management </li></ul></ul><ul><ul><li>Desire to avoid probate </li></ul></ul><ul><ul><li>Keep their financial affairs private </li></ul></ul>
  26. 26. Living Trusts <ul><li>Can be revocable or irrevocable </li></ul><ul><ul><li>Revocable – can be changed at any point during the person’s life without the consent of beneficiaries </li></ul></ul><ul><ul><ul><li>Cannot be used to avoid taxes </li></ul></ul></ul><ul><ul><li>Irrevocable – cannot be changed once it is established, even if donor changes his mind </li></ul></ul><ul><ul><ul><li>Can reduce your taxes because the trust pays taxes on the income by the assets held in trust </li></ul></ul></ul><ul><li>Life estates – variation of a living trust allowing you to protect your home so that you may pass it on to heirs </li></ul>
  27. 27. 3. Insurance Trusts <ul><li>Set up to administer proceeds of one’s life insurance </li></ul><ul><li>Set up while you are alive and funded upon your death </li></ul><ul><ul><li>Either with life insurance policy proceeds or pension death benefits </li></ul></ul><ul><li>May or may not have tax advantages </li></ul>
  28. 28. Gifts and Taxes <ul><li>You are allowed to make gifts of up to $11,000 per year, per recipient without paying federal gift taxes </li></ul><ul><ul><li>If you and your spouse give jointly, the amount doubles to $22,000 </li></ul></ul><ul><li>2001 tax law created a $1 million lifetime gift tax exclusion </li></ul><ul><li>2001 tax law also changes some strategies </li></ul><ul><ul><li>People traditionally transferred assets likely to appreciate, such as real estate and stocks </li></ul></ul><ul><ul><ul><li>However, the new exclusion creates less incentive for this assuming the estate tax repeal becomes permanent </li></ul></ul></ul>
  29. 29. Other Types of Gifts <ul><li>Tax-exempt gifts to charities are not subject to the $11,000 annual cap </li></ul><ul><ul><li>However, they are limited to a percentage of your adjusted gross income </li></ul></ul>

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