This document discusses retirement and estate planning. It covers topics like planning for retirement needs, saving for retirement through personal accounts, employer-sponsored plans, and government programs. Specific retirement tools covered include IRAs, 401(k)s, pensions, Social Security, estate planning documents like wills and trusts, and taxes on estates. The overall document provides an overview of key considerations and options for retirement and estate planning.

1. © 2010 South-Western, Cengage Learning
Chapter
© 2016 South-Western, Cengage Learning
20.1 Planning for Retirement
20.2 Saving for Retirement
Retirement and
Estate Planning
20
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2. © 2010 South-Western, Cengage Learning SLIDE 2
Chapter 20
Lesson 20.1
Planning for Retirement
Learning Objectives
LO 1-1 Describe retirement needs for most
individuals and families.
LO 1-2 Discuss estate planning documents
and methods to minimize taxes on
estates.
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3. © 2010 South-Western, Cengage Learning SLIDE 3
Chapter 20
Retirement Needs
How much income do you need?
Keep the house or move?
What type of investment strategy?
How much insurance?
How do you beat inflation?
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4. © 2010 South-Western, Cengage Learning SLIDE 4
Chapter 20
Reverse Mortgage
A reverse mortgage is a loan against
the equity in the borrower’s home.
The lender makes tax-free monthly
payments to the borrower age 62 or over.
It works the opposite of a mortgage.
Instead of making payments to the
lender, the lender pays you.
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5. © 2010 South-Western, Cengage Learning SLIDE 5
Chapter 20
Heir
An heir is a person who will inherit
property from someone who dies.
Typically, heirs are spouses and children.
If the property has to be sold in order to
pay off the mortgage, the property will
not pass to heirs.
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6. © 2010 South-Western, Cengage Learning SLIDE 6
Chapter 20
Estate Planning
 An estate is all that a person owns, less debts
owed, at the time of the person’s death.
 Estate planning involves preparing a plan for
transferring property during one’s lifetime and
at one’s death.
 Goals in estate planning:
 Minimize taxes on the estate
 Make known how you want your possessions
distributed
 Provide for a smooth transfer of your possessions
upon your death
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7. © 2010 South-Western, Cengage Learning SLIDE 7
Chapter 20
Estate Planning Tools
Wills
Trusts
Joint ownership
Power of attorney
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8. © 2010 South-Western, Cengage Learning SLIDE 8
Chapter 20
Wills
 A will, or testament, is a legal document that
explains how an estate is to be distributed
when a person dies.
 In your will, you name an executor (also called
a personal representative) to carry out your
wishes when you die.
 Any person who is 18 or older and of sound
mind can make a legally valid will.
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9. © 2010 South-Western, Cengage Learning SLIDE 9
Chapter 20
Simple Will
 A simple will is a short document that lists the
people whom you want to be your heirs and
what you want each to receive.
 Simple wills take a short time to prepare, and
they are fairly standard documents.
 If your estate is relatively uncomplicated, you
can prepare a will yourself, using an
inexpensive kit or software purchased online or
at an office supplies store.
 Whether or not you use a lawyer, you will need
two witnesses to your signature.
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10. © 2010 South-Western, Cengage Learning SLIDE 10
Chapter 20
Holographic Will
A holographic will is written in a person’s
own handwriting.
In some states, a handwritten will is
legally valid if it is entirely written in your
own hand, dated and signed, and clearly
expresses intent.
Handwritten wills are more likely to be
contested (or challenged in court).
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11. © 2010 South-Western, Cengage Learning SLIDE 11
Chapter 20
Codicil
 A person can make a will and make small
changes at a later time.
 A codicil is a legal document that modifies
parts of a will and reaffirms the rest.
 A will cannot be legally amended by crossing
out or adding words, by removing or adding
pages, or by making erasures.
 A codicil is drawn by an attorney and is
executed and witnessed the same as a will.
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12. © 2010 South-Western, Cengage Learning SLIDE 12
Chapter 20
Intestate
 When people die without a will, they are said to
be intestate.
 In that event, the person’s property is
distributed according to the laws of the state
where the decedent died.
 By having a valid will, you can control what
your heirs get, rather than allowing the state to
make those decisions.
 Property reverts to the state when a person
dies without heirs.
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13. © 2010 South-Western, Cengage Learning SLIDE 13
Chapter 20
Trusts
 A trust is a legal document in which an
individual (the trustor) gives someone else (the
trustee) control of property, for ultimate
distribution to another person (the beneficiary).
 The trustee may be a financial institution or a
person, while the beneficiary can be one or
multiple parties.
 Types of trusts:
 Inter vivos, or a “living” trust
 Testamentary trust or trust will
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14. © 2010 South-Western, Cengage Learning SLIDE 14
Chapter 20
Trusts
 The purpose of a trust is twofold:
Trustees are held accountable for how
money is spent and how the trust is
administered.
A trust can minimize inheritance or estate
taxes and avoid the lengthy process of
probate.
Probate is the legal process of proving that a
deceased person’s will is valid and then
administering and distributing that person’s
estate upon death.
(continued)
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15. © 2010 South-Western, Cengage Learning SLIDE 15
Chapter 20
Joint Ownership
 Joint tenants with right of survivorship (JTWROS)
 The ownership is split 50-50 for estate tax purposes
 No legal action is necessary to transfer title if one party dies
 Commonly used for land, automobiles, residences, bank
accounts, and securities
 Tenancy in common
 Two or more people can own property without survivorship.
 When one person dies, his or her interest in the property
passes to his or her heirs, not to the remaining owner(s).
 Joint ownership is an effective way to avoid probate
and inheritance taxes in some states.
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16. © 2010 South-Western, Cengage Learning SLIDE 16
Chapter 20
Power of Attorney
 A power of attorney is a legal document
authorizing someone to act on your behalf.
 The power of attorney may be limited or
general in time or in scope.
 A limited power of attorney is good for a specified
period of time.
 A general power of attorney gives complete power
to act.
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17. © 2010 South-Western, Cengage Learning SLIDE 17
Chapter 20
Taxation of Estates
Federal and state governments levy
various types of taxes that must be
considered in planning your estate:
Federal estate taxes
State death taxes
Federal gift taxes
Federal/state income taxes
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18. © 2010 South-Western, Cengage Learning SLIDE 18
Chapter 20
Federal Estate Taxes
 The federal government levies an estate tax,
which is a tax on property transferred from an
estate to its heirs.
 An estate must be worth more than a certain
amount ($5.34 million in 2014) to be subject to
this tax.
 The estate tax is paid from the assets of the
estate, before anything can be distributed to
heirs.
 An estate may have to sell property or
investments in order to pay this tax.
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19. © 2010 South-Western, Cengage Learning SLIDE 19
Chapter 20
State Death Taxes
 The state inheritance tax is imposed on an
heir who inherits property from an estate.
 The difference between the federal estate tax
and a state inheritance tax lies in who pays the
tax.
 The estate tax is deducted from the value of the
estate before distribution to heirs.
 Heirs pay inheritance taxes on property received.
 In states where inheritance taxes are imposed,
laws vary widely as to the rate of taxation and
the treatment of property to be taxed.
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20. © 2010 South-Western, Cengage Learning SLIDE 20
Chapter 20
Federal Gift Taxes
A gift tax is a tax applied to a gift of
money or property.
It is paid by the giver, not the receiver, of
the gift.
In 2014, you could have given up to
$14,000 per person per year without
having to pay a gift tax.
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21. © 2010 South-Western, Cengage Learning SLIDE 21
Chapter 20
Federal Gift Taxes
 A husband and wife may use gift splitting,
which allows a married couple to combine their
annual exclusion amounts and give up to
$28,000 to one person tax free.
 Gifts beyond the limit are taxed on the excess
or take advantage of the unified gift tax credit,
which is based on lifetime gifts ($5.34 M in
2014).
(continued)
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22. © 2010 South-Western, Cengage Learning SLIDE 22
Chapter 20
Federal/State Income Taxes
When someone dies, income taxes must
be paid on the income the decedent
earned that year and on any income
earned by the estate while its assets
remain undistributed (such as interest or
dividends).
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23. © 2010 South-Western, Cengage Learning SLIDE 23
Chapter 20
Lesson 20.2
Saving for Retirement
Learning Objectives
LO 2-1 Discuss features and types of
personal retirement plans.
LO 2-2 Discuss features and types of
employer-sponsored retirement plans.
LO 2-3 Explain basic benefits available
through government-sponsored plans.
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24. © 2010 South-Western, Cengage Learning SLIDE 24
Chapter 20
Personal Retirement Accounts
Individual retirement accounts (IRAs)
Keogh plans
Simplified employee pension (SEP)
plans
Annuities
Pre-taxed savings
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25. © 2010 South-Western, Cengage Learning SLIDE 25
Chapter 20
Individual Retirement Accounts
(IRAs)
 An individual retirement account (IRA) is a
retirement savings plan that offers tax
advantages and allows individuals to set aside
a specified amount each year.
 With a traditional IRA, you can deduct your
contribution each year from your taxable
income.
 With a Roth IRA, contributions are taxed, but
earnings are not.
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26. © 2010 South-Western, Cengage Learning SLIDE 26
Chapter 20
Keogh Plans
A Keogh plan is a tax-deferred
retirement savings plan available to self-
employed individuals and their
employees.
The amounts an employer contributes
are fully tax deductible.
Earnings on Keogh plans are also tax-
deferred.
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27. © 2010 South-Western, Cengage Learning SLIDE 27
Chapter 20
Simplified Employee Pension
(SEP)
 A Simplified Employee Pension (SEP) plan is
a tax-deferred retirement plan available to
small businesses.
 Each employee sets up an IRA at a financial
institution.
 The employer makes an annual tax-deductible
contribution of up to 25 percent of the employee’s
salary or $52,000 (in 2014), whichever is less.
 With a SEP plan, all contributions come from the
employer; employees cannot contribute.
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28. © 2010 South-Western, Cengage Learning SLIDE 28
Chapter 20
Annuities
An annuity is a contract between you
and an insurance company in which you
make a lump-sum payment or series of
payments that earn interest in return for
regular disbursements, often at
retirement.
Tax-sheltered annuities (TSAs) can be
used to save for retirement.
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29. © 2010 South-Western, Cengage Learning SLIDE 29
Chapter 20
Pretaxed Savings
Not all of your retirement savings should
be in tax-deferred plans.
Some should be savings and
investments made with pretaxed income.
You will be able to withdraw these funds
at any time, without tax consequences.
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30. © 2010 South-Western, Cengage Learning SLIDE 30
Chapter 20
Employer-Sponsored
Retirement Plans
 Another source of retirement income may be
the retirement plan offered by your employer.
 With employer-sponsored plans, you and often
your employer contribute to your tax-sheltered
retirement savings.
 Contributions and earnings on employer-
sponsored plans accumulate tax-free until you
receive them.
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31. © 2010 South-Western, Cengage Learning SLIDE 31
Chapter 20
Defined-Benefit Plans
 A defined-benefit plan is a company-
sponsored retirement plan in which retired
employees receive a set monthly amount
based on wages earned and number of years
of service.
 The employer may make the entire contribution
to the plan.
 To become vested, or entitled to the full
amount in the plan, you may have to work for
the company for a specified number of years.
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32. © 2010 South-Western, Cengage Learning SLIDE 32
Chapter 20
Defined-Contribution Plans
 A defined-contribution plan is a company-
sponsored retirement plan in which employees
receive a periodic or lump-sum payment based
on their account balance and the performance
of the investments in their account.
 These contributions are often tax-deferred (not
taxed until withdrawn at retirement).
 The employer may or may not contribute to the
employee’s account as well.
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33. © 2010 South-Western, Cengage Learning SLIDE 33
Chapter 20
401(k) Plans
A 401(k) plan is a defined-contribution
plan for employees of companies that
operate for a profit.
Characteristics
Employees contribute a percentage of
wages or salary
Payroll deduction
Investment choices
Matching contribution
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34. © 2010 South-Western, Cengage Learning SLIDE 34
Chapter 20
403(b) Plans
A 403(b) plan is a defined-contribution
plan for employees of schools, nonprofit
organizations, and government units.
While the rules may vary slightly, the
403(b) plan operates like a 401(k).
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35. © 2010 South-Western, Cengage Learning SLIDE 35
Chapter 20
Government-Sponsored
Pension Plans
Social Security
Military benefits
© 2016 South-Western, Cengage Learning