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CHAPTER 15: PRESERVING YOUR ESTATE. Developing plans and taking actions during your lifetime to accumulate, preserve, and distribute your wealth upon your death according to your wishes, while minimizing taxes and transfer costs. Estate Planning. Accumulating enough capital to
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Developing plans and taking actions during your lifetime to accumulate, preserve, and distribute your wealth upon your death according to your wishes, while minimizing taxes and transfer costs. Estate Planning
Accumulating enough capital to Meet education and special family needs. Provide for family members in event of death of head of household. Provide for yourself and your family in the event of long-term disability. Having plans in place to manage your affairs If you become disabled. If you are unable to make medical decisions for yourself. Estate Planning Includes. . .
You need estate planning if you: • Have dependents. • Have a spouse who cannot or does not want to handle finances. • Have loved ones of any age with special needs. • Have property you would like to keep in the family. • Have debts or own your own business. • Have assets worth more than exclusion amount.
Death-related costs Inflation Lack of liquidity Improper use of vehicles of transfer Disabilities Why Does An Estate Break Up?
1. Assess family situation and set estate planning goals. 2. Gather comprehensive and accurate data. 3. List assets and determine value of estate. 4. Designate beneficiaries of estate’s assets. 5. Estimate estate transfer costs. 6. Formulate and implement your plan. 7. Review periodically and revise as necessary. The Estate Planning Process
Your estate consists of your: • Gross estate—all your property subject to federal estate taxes at your death, both probate and nonprobate. • Probate estate—all your property that can be transferred by your will (or intestate laws if you have no valid will). • Nonprobate estate—your property which passes by means other than your will at your death.
A will is a written, legal declaration of a person's wishes concerning the disposition of his/her property upon death. Wills Jane Doe, being of sound mind . . .
Your state’s laws of intestate successionwill determine how your property passes. The state appoints an administrator for your estate. The state determines the guardian of your dependents. The state determines how the tax burden will be paid from your estate. If no family can be found, your property escheatsto the state. If you die without a valid will. . .
1. Provides a plan for distributing assets in accordance with testator’s wishes, needs of the beneficiaries, and federal and state dispositive and tax laws. 2. Considers changes in family circumstances that might occur after its execution. 3. Is unambiguous and complete in describing testator’s desires. A properly prepared will. . .
Introductory clause Direction of payments Disposition of property Appointment clause Tax clause Simultaneous death clause Execution and attestation clause Witness clause The parts of a will include:
What makes a valid will? • Mental Capacity—person must be of sound mind. • Freedom of Choice—there must have been no undue influence over the testator. • Proper Execution—will must meet requirements of the state, and the execution must be free from fraud.
How can the will be changed? • A codicil can modify certain parts of the will without revoking it. • A will may be revoked by the testator or automatically by the law. • The right of election gives the surviving spouse the right to “take against the will” a specified portion of the probate estate regardless of what the will provides (varies by state).
Letter of Last Instruction: • Informal memorandum; not a legal document. • Details items that cannot properly be included in a will. For example: • Location of the will and other documents • Funeral and burial instructions • Explanation of will provisions • Disposition of smaller items
Court oversees probate process— the liquidation of deceased’s estate. The executor you named in your will (or court-appointed administrator if you died intestate) acts as your personal representative. Executor inventories your assets, pays your debts and taxes (both income and estate), and distributes remaining assets according to your will. Administration of an Estate
Other estate planning documents: • Power of Attorney—names an agent to handle your financial affairs (several types). • Living Will—states your wishes concerning medical treatment. • Durable Power of Attorney for Healthcare—names an agent to make medical decisions on your behalf. • Ethical Will—informal document to share morals, ethics, experiences, etc., with loved ones.
Types of Ownership: • Joint tenancy with right of survivorship—ownership passes to other tenant(s) at death; any tenant can sever the tenancy. • Tenancy by the entirety—only between husband and wife; ownership passes to spouse at death and can be dissolved only by mutual agreement. • With both types, co-owners have equal interests, and property passes automatically by operation of law.
Other Types of Ownership: • Tenancy in common—no right of survivorship; each tenant can leave his/her share to anyone and can have unequal interests. • Community property—marital ownership in some states where both spouses equally own all the assets acquired during marriage; each spouse can leave his/her half to anyone. • With both types, the willcontrols the disposition of your portion of the property.
Trusts A trust is a legal relationship that facilitates the transfer of property and the income from that property to another party.
the TRUSTEEwho holds and administers the property for the benefit of The GRANTOR transfers property to $
the TRUSTEEwho holds and administers the property for the benefit of the BENEFICIARIES (which may include the grantor). The GRANTOR transfers property to $
Purposes of Trusts: • Possible income tax savings for those in higher tax brackets. • Possible estate tax savings; if trust is irrevocable, value of trust property is removed from grantor’s estate. • Manage and conserve property on behalf of beneficiaries over a long period of time.
Types of Trusts: • Living (inter vivos) Trust—created during grantor's lifetime; can last for a limited period or continue after grantor's death. • Revocable Living Trust: grantor may revoke trust and regain property; grantor pays income taxes. • Irrevocable Living Trust: grantor forfeits all rights to trust property; trust pays income taxes.
Testamentary Trust—created after death according to will provisions; no tax savings, as grantor owns property until death. • Irrevocable Life Insurance Trust— created while living and funded with life insurance policy; removes proceeds of policy from grantor's estate; usually used to pay estate taxes or care for family.
Living Trusts and Pour-Over Wills: • A pour-over will passes the remainder of estate property to a previously established living trust. • Assures that all estate assets will be managed by the trust, even those which have been left out or acquired after trust was established.
Gift Taxes A gift is made when property is transferred without full consideration in money or money’s worth to another, and the donor relinquishes control over the property.
Not everything that is transferred by an individual is subject to gift tax. • The following are means of reducing the total amount of the gift for tax purposes.
Gifts Made During Life: • Gifts valued at or under the following amounts are removed from the donor's estate. • Gift taxes will be due only on amounts in excess of the exclusion amounts. Annual Exclusion—Gifts valued up to $11,000 (now indexed) can be given yearly to any number of individuals tax free. Gift Splitting—Married taxpayers together may give up to $22,000 (now indexed) yearly to any number of individuals tax free.
Gifts Made During Life or at Death: • Charitable and marital gifts • Are free from both gift and estate taxes. • Reduce the value of donor’s estate for estate tax purposes. • Do not reduce the exemption amount that can be transferred to others tax free. Charitable Deduction—Unlimited amount can be given to a qualified charity. Marital Deduction—Unlimited amount can be given to your spouse (provided spouse is a U.S. citizen).
Estate Taxes and Planning • Estate taxes are assessed on the value of property transferred to others at death. • Estate taxes are also assessed on certain transfers made during a person’s lifetime. • Estates are taxed at both the federal and state levels. • Estate tax rates are higher than income tax rates.
Exemption Amount and Top Estate Tax Rates: • Only the value of one's estate in excess of the exemption amount is subject to estate taxes. • The top estate tax rates are being reduced through the year 2010.
Unified Rate Schedule: • Same tax table is used for both taxable lifetime gifts and one's estate property. • Gifts in excess of exclusion amounts made during life are added back to one's estate at death. • Tax is figured on total amount, and then credit is given for gift taxes previously paid. • This allows the tax to be calculated in the highest possible tax bracket.
Computing Estate Taxes: 1. Determine the gross estate, the value of all property in which the decedent had an interest. 2. Subtract funeral and administrative expenses, debts, and other allowable expenses to get adjusted gross estate. 3. Subtract any marital or charitable deductions to get taxable estate.
4. Add back any taxable gifts made during deceased's lifetime after 1976 to get estate tax base. Use the unified rate schedule to compute tentative tax on this amount. 5. Apply any credits, such as gift taxes previously paid and the unified tax credit to determine total death taxes. 6. Subtract state death tax creditto determine federal estate taxdue.
Estate Planning Techniques • Dividing—Ex: gifting property to children during life or using the marital deduction at death divides property into smaller entities; typically saves on taxes due to lower brackets.
Deferring—Ex: spreading income and assets over several years helps minimize tax burden in any single year. • Discounting—Ex: life insurance purchased by a trust or someone other than insured can be used to pay estate taxes. Cost to purchase insurance while alive is much less than amount paid out in estate taxes at death. This makes it possible to pay estate taxes at a discount.
