PFIN 4 Preserving Your Estate 15 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be...

PFIN 4

Preserving Your Estate

15

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

GITMAN/ JOEHNK/ BILLINGSLEY

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1 Describe the role of estate planning in personal financial planning, and identify the seven steps involved in the process

2 Recognize the importance of preparing a will and other documents to protect you and your estate

3 Explain how trusts are used in estate planning

LEARNING OUTCOMES

PFIN4 | CH15

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4 Determine whether a gift will be taxable and use planned gifts to reduce estate taxes

5 Calculate federal taxes due on an estate

6 Use effective estate planning techniques to minimize estate taxes

LEARNING OUTCOMES (continued)

PFIN4 | CH15

Estate Planning

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• Developing a plan to administer and distribute assets after death according to:• Deceased’s wishes• Needs of survivors

PFIN4 | CH15

Exhibit 15.1

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Potential Estate Planning Problems and Major Causes or Indicators

Who Needs Estate Planning ?

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• People planning• Anticipate psychological and financial needs

of loved ones• Provide adequate resources to maintain life of

loved ones• Asset planning

• Ensuring that assets are received by desired beneficiaries upon a person’s death or incapacity

PFIN4 | CH15

Reasons for an Estate Break Up

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• Death-related costs• Inflation• Lack of liquidity• Improper use of vehicles of transfer• Disabilities

PFIN4 | CH15

Types of Estate

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Exhibit 15.2

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Steps in the Estate Planning Process

Will

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• Expresses how a person’s property should be distributed upon his or her death• Written and legally enforceable document

• Intestacy: Situation that exists when a person dies without a valid will

• Testator: Person who makes a will that provides for disposition of property at his or her death

PFIN4 | CH15

Requirements of Preparing the Will

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• Provide a plan for distributing the testator’s assets according to:• Testator’s wishes and beneficiaries’ needs• Federal and state dispositive and tax laws

• Consider the changes in family conditions occurring after execution of the will

• Be concise and complete in describing the testator’s desires

PFIN4 | CH15

Features of a Will

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Will

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• Requirements for being valid• Mental capacity• Freedom of choice• Proper execution

• Changing• Codicil: Document that legally modifies a will

without revoking it• Ways of revoking

• Making a later will that revokes prior wills

Will

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• Making a codicil that expressly revokes all wills the one being modified

• Making a later will that is inconsistent with a former will

• Physically mutilating, burning, tearing, or defacing the will with the intention to revoke it

• Safe guarding• Original will needs to be kept in a safe-

deposit box• Lodging of the will - Filling and safekeeping

the will in the office of the probate court

Will

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• Letter of last instructions• Informal memorandum that is separate from

a will• Contains suggestions for carrying out a

decedent’s wishes

Administration of an Estate

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• Probate process: Court supervised disposition of a decedent’s estate

• A local court supervises probate process through the executor and administrator• Executor: Personal representative of an estate

designated decedent's will• Administrator: Personal representative of the

estate appointed by the court if the decedent died intestate

Other Estate Planning Documents

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Forms of Joint Ownership

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• Joint tenancy• Ownership by two or more parties with the

survivor holding all property upon death of one or more of the owners

• Tenancy by entirety• Ownership by husband and wife in which

property passes to the surviving spouse

Characteristics of Joint Ownership

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• Right of survivorship: Surviving joint owners of property receive title to the deceased joint owner’s interest in the property

• Joint tenancy may consist of any number of persons without any relation

• Tenancy by entirety can exist only between husband and wife

Joint Ownership

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• Each joint tenant can unilaterally sever the tenancy in a joint tenancy• Tenancy by entirety can be severed only by

mutual agreement, divorce, or conveyance by both spouses to a third party

• Co-owners must have equal interests

Other Forms of Ownership

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• Tenancy in common• Co-ownership where there is no right of

survivorship• Allows each co-owner to leave their share to

whomever they desire• Community property

• Marital property co-owned equally by both spouses while living in a community property state

Trusts

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• Created when one party transfers property to a second party for the benefit of third parties

• Grantor: Person who creates a trust and whose property transferred into it

• Trustee: Organization or individual• Selected by a grantor to manage and conserve

property in a trust• Beneficiaries: People who receive benefits

from a trust

Trusts

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• Purposes• Attain income and estate tax savings• Manage and conserve property

Qualities of a Trustee

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• Posses sound business knowledge and judgment

• Have an intimate knowledge of the beneficiary’s needs and financial situation

• Being skilled in investment and trust management

• Being available to beneficiaries• Ability to make impartial decisions

Types and Characteristics of Trusts

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• Living: Created and funded during grantor’s lifetime• Pour-over wills: Provides for passing of the

estate to an existing living trust• Revocable living: Grantor reserves the

right revoke the trust and regain property• Irrevocable living: Grantor gives up the

right revoke or terminate the trust

Types and Characteristics of Trusts

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• Testamentary: Created by decedent’s will and funded through probate process

• Irrevocable life insurance: Major asset is life insurance on the grantor’s life

Federal Unified Transfer Taxes

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• Tax on right to transfer property from one individual to another which affects:• Gift tax: Tax levied on the value of gifts made

during the giver’s life time • Estate tax: Tax levied on the value of property

transferred at the owner’s death• Applicable exclusion amount (AEA): Credit

applicable to the amount of federal estate tax owed by the person at death

• Unified rate schedule: Applied to all taxable transfers

Means for Reducing Amount for Tax Purposes

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• Annual exclusions: Amount given each year without being subject to gift tax

• Gift splitting: Method of reducing gift taxes• Charitable deductions• Marital deductions• Qualified Terminable Interest Trust (QTIP)

Steps in Computation of Federal Estate Tax

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• Determine the gross estate• Find the adjusted gross estate• Calculate the taxable estate• Compute the estate tax base• Determine the total death taxes• Determine federal estate tax due

Estate Planning Techniques

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• Gift giving program• Use of the unified transfer tax credit• Charitable contributions• Life insurance trust• Trusts• Valuation issues

• Minority interest• Marketability discount• Blockage discount

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• Estate planning• Probate estate• Gross estate• Will• Intestacy• Testator• Codicil• Letter of last

instructions• Probate process• Executor

KEY TERMS

• Administrator• Durable power of

attorney for financial matters

• Living will• Durable power of

attorney for health care

• Ethical will• Right of survivorship• Joint tenancy• Tenancy by the

entirety PFIN4 | CH15

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• Tenancy in common• Community property• Trust• Grantor• Trustee• Beneficiaries• Living (inter vivos)

trust• Revocable living trust• Irrevocable living trust• Pour-over will• Testamentary trust

KEY TERMS

• Irrevocable life insurance trust

• Gift tax• Estate tax• Applicable exclusion

amount (AEA)• Unified rate schedule• Annual exclusions • Gift splitting• Unified tax credit

PFIN4 | CH15

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SUMMARY

• Estate planning involves developing a plan to administer and distribute assets after death according to deceased’s wishes, and needs of survivors

• A will is an important document as it expresses how a person’s property should be distributed upon his or her death

• Trusts facilitate the transfer of property and the income earned from it to another party

PFIN4 | CH15

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SUMMARY

• Federal unified transfer tax affects gift tax and estate tax

• Federal estate taxes are levied on the transfer of property at death

• Estate planning techniques• Gift giving program• Using unified transfer tax (UTT) credit• Investing in life insurance• Establishing trusts

PFIN4 | CH15