Dr. Steven Hays

Personal Finance

BKHS

Explain the use of a will Describe estate taxes Explain the use of trusts, gifts,

and contributions Introduce other aspects of estate planning

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Estate: the assets of a deceased person after all debts are paid

Estate planning: the act of planning for how your wealth will be allocated on or before your death

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Will: a legal request for how your estate should be distributed upon your death. If can also identify a preferred guardian for any surviving children

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Reasons for having a will◦ Ensures that your estate is distributed

as you desire◦ Beneficiaries (heirs): the persons specified

in a will to receive a part of an estate◦ Intestate: the condition of dying without a will

Court appoints an administrator who may not make the decisions you preferred

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Creating a valid will◦ Minimum age — 18 or 21◦ Mentally competent◦ Not under undue influence of others◦ Must be signed and dated◦ 2 or 3 witnesses who are not beneficiaries◦ Attorney recommended

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Common types of wills◦ Simple will: a will suitable for smaller estates that

specifies that the entire estate be distributed to the person’s spouse

◦ Traditional marital share will: a will suitable for larger estates, valued at $675,000 or more) that distributes half of the estate to the spouse and all the other half to any children or to a trust

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Key components of a will◦ Distribution of the estate

Details the the distribution to the heirs, usually by percentage

◦ Executor (personal representative): the designated in a will to execute your instructions regarding the distribution of your assets Collects debts owed to the estate, pays debts owed by

estate, and distributes proceeds of the estate

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◦ Guardian Parents should name a person to be responsible

for caring for any dependent children◦ Signature

Validates will◦ Letter of last instruction

Describes your wishes regarding funeral arrangements and tells the location of any key financial documents

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Go to: http://moneycentral.msn.com/articles/retire/will/tlwillq.asp

This Web site provides a quiz that indicates your ability to create your own will.

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Exhibit 20.1: A Sample Will

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Exhibit 20.1: A Sample Will

Focus on Ethics: Undue influence on wills◦ Wills can be created under duress or from undue

influence◦ Consider creating a will without consulting

potential beneficiaries◦ A financial planner can assist you

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Changing your will◦ May be necessary if you move to a state

with different laws or if you marry or divorce◦ Major changes may require a new will◦ Codicil: a document that specifies changes

in an existing will Appropriate for minor revisions

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Executing the will during probate

◦ Probate: a legal process that declares a will valid and ensures the orderly distribution of assets

◦ Executor files forms in probate court, provides a copy of the will, a list of assets and liabilities of deceased, pays debts and sells necessary assets Typically opens a bank account for this purpose

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Without a surviving spouse, a large estate is subject to estate taxes

Determining estate taxes◦ Value of estate is the value of all assets minus

any liabilities minus funeral and administrative expenses

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◦ In 2001, estates with values over $675,000 are subject to federal taxes of 37% to 50%

Tax Relief Act of 2001 gradually increases tax free limit while reducing maximum tax rate

◦ Proper planning can reduce these taxes

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Other related taxes◦ Some states also impose taxes on estates

Valuing your estate to assess potential estate taxes◦ It is important to calculate the value of your

estate periodically so that you can plan appropriately if your net worth exceeds the tax-free limit

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These may help avoid estate taxes

Trust: a legal document in which one person transfers assets to another who manages them for designated beneficiaries

◦ Grantor: the person who creates a trust

◦ Trustee: the person or institution named in a trust to manage the trust assets for the beneficiaries

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◦ Living trust: a trust in which you assign the management of your assets to a trustee while you are living Revocable living trust: a living trust that can

be dissolved Irrevocable living trust: a living trust that cannot

be changes, although it can provide income to the grantor

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◦ Standard family trust (credit-shelter trust): a trust established for children in a family Testamentary trust: a trust created by a will

Gifts: a tax-free distribution of up to $10,000 per year from one person to another

◦ Not subject to tax for the giver or the recipient

Contributions to charitable organizations

◦ Not subject to estate taxes

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Go to: http://moneycentral.msn.com/retire/home/asp

Click on: Estate Planning Click on: Plan Your Estate This Web site provides step-by-step

instructions for estate planning.

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Living will: a legal document in which individuals specify their preferences if they become mentally or physically disabled

Power of attorney: a legal document granting a person the power to make specific decisions for you in the event that you are incapable

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◦ Durable power of attorney for health care: a legal document granting a person the power to make specific health care decisions for you

Maintaining estate plan documents

◦ Need to be kept in a safe, convenient place

◦ Key individuals need to know where they are kept

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Go to: http://www.nolo.com Click on: Estate Planning This Web site provides a background on

estate planning decisions and the terminology used in estate planning.

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Key decisions about estate planning for your financial plan are:

◦ Should you create a will?

◦ How can you limit your estate taxes?

◦ Should you create a living will or designate an individual to have power of attorney?

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