Planning Your Financial Future, 4eby: Boone, Kurtz & Hearth

Estate Planning

Chapter 17

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Introduction

Only about 30% of Americans have willsEvery 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

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Everybody Needs 3 Things

A WillA 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

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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Types of Wills

General Classification: (Limited, General)

By Preparer: Formal or HolographicSimple 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)

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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)

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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

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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 attorneyHolographic will – written by individual without

the advice of an attorneyMust be signed, dated, and witnessedMinor changes may be made via a written

amendment called a codicil

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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

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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

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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

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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

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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

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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

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1. Testamentary Trusts

Written into the willBecomes funded and operational at deathOften 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

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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

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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

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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

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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 $22,0002001 tax law created a $1 million lifetime gift

tax exclusion2001 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

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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