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  • 1. Estate Planning Chapter 17
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. 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
  • 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. 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
  • 12. 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
  • 13. 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
  • 14. 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)
  • 15. 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)
  • 16. 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
  • 17. 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 21. 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
  • 22. 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
  • 23. 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
  • 24. 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
  • 25. 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
  • 26. 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
  • 27. 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
  • 28. 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
  • 29. 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