FIN 200: Personal Finance

1. FIN 200: Personal Finance Topic 23–Estate Planning Lawrence Schrenk, Instructor

2. Learning Objectives • Explain the reasons for and elements of a will. ▪ • Discuss the tax implications of estate planning. • Describe trusts, gifts, and contributions . ▪

3. Wills: Terminology • Estate: Assets of a deceased person after all debts are paid • Estate Planning: Planning how your wealth will be allocated on or before your death • Will: A legal request for how your estate should be distributed upon your death. It can also identify a preferred guardian for any surviving children

4. Reasons for a Will • Ensures that your estate is distributed as you desire • Beneficiaries (Heirs): Persons specified in a will to receive a part of an estate • Intestate: Condition of dying without a will • Court appoints an administrator who may not make the decisions you preferred

5. Validity of a 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

6. 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 that distributes half of the estate to the spouse and all the other half to any children or to a trust

7. Key Components of a Will • Distribution of estate usually by percentage • Executor (Personal Representative) • Collects debts owed, pays debts owed, distributes proceeds of the estate • Guardian for dependent children • Signature Validates Will • Letter of Last Instruction • Wishes regarding funeral arrangements , etc.

8. A Sample Will

9. A Sample Will (cont’d)

10. Changing your Will • 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

11. 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, • Makes a list of assets and liabilities of deceased, pays debts, • Sells necessary assets, etc.

12. Estate Taxes • 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

13. Estate Taxes (cont’d) • During 2004 and 2005, the first $1 million of an estate can be distributed to children or others tax-free • Beyond this limit, the federal estate tax rates on the taxable part of the estate range from 45 and 48 percent. • Tax Relief Act of 2001 gradually increases tax free limit while reducing maximum tax rate

14. Estate Taxes (cont’d) • 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

15. Trusts, Gifts, and Contributions • 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

16. Trusts, Gifts, and Contributions (cont'd) • 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 changed, but can provide grantor income • Standard Family Trust (Credit-Shelter Trust): A trust established for children in a family • Testamentary Trust: A trust created by a will

17. Trusts, Gifts, and Contributions (cont'd) • Gifts • Tax-free distribution of up to $11,000 per year from one persona to another • Not subject to tax for the giver or the recipient • Contributions to Charitable Organizations • Not subject to estate taxes

18. Other Documents • 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 in the event that you are incapable • Durable Power of Attorney for Health Care: A legal document granting a person the power to make specific health care decisions for you

19. Estate Planning Online • Estate Planning • Money Central Estate Planning • Provides step-by-step instructions for estate planning • Legal Advice • Nolo.com • Click on: Wills and Estate Planning • Provides a background on estate planning decisions and the terminology used in estate planning

20. Three Questions • 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?

21. Project Note

22. Ethical Dilemma