Principles of Estate Planning

DLSU RVR COB Financial Management Department

What is Estate Planning ? The process of developing a plan to

administer and distribute one’s assets after death in a manner consistent with one’s wishes and the needs of its heirs while at the same time minimizing taxes

During one’s lifetime – one (1)accumulates, (2)preserves, (3)distributes wealth upon death

Estate Planning requires knowledge of wills trusts taxes & various administrative costs

Estate planning goes beyond financial issues & includes plans to manage affairs in case one becomes disabled, thus will include a statement of your personal wishes for medical care should you become unable to make them clear yourself

Major objective is to minimize tax exposure to increase the amount ultimately passed on to the heirs

Insurance & retirement planning Objectives

- to provide for family during death - achieve a comfortable standard of living during

retirement

Potential Problems of Estate Planning Taxes & estate administrative expenses

higher than necessary Insufficient cash; not enough assets that are

quickly & inexpensively convertible to cash to meet tax demands & other costs

Beneficiaries receive the wrong assets or the proper assets in the wrong manner at the wrong time

Capital is insufficient or not readily convertible to income producing status

High medical costs; capital insufficient or not readily convertible to income producing status; difficulty in reducing living standards

Excessive taxes, inflation, improper investment planning

Special problems : a family member with serious illness; children of prior marriage; beneficiaries who have extraordinary medical or financial needs; beneficiaries who cannot agree on how to handle various estate matters, business problems, opportunities

Who needs Estate Planning ? Two Main Areas of Estate Planning

People Planning anticipating psychological & financial needs of

loved ones providing enough income or capital to ensure

continuation of their way of life Keeping mother’s cameo brooch in the family Preserving the business that Lolo started Planning for minors, intellectually gifted children,

the emotionally, mentally, physically handicapped Spouses who cannot or don’t want to handle

money, securities or the business

Asset Planning To stabilize & maximize its assets and income

producing values To avoid problems – lawyers’ fees, taxes

Why does an Estate Break Up? Death related costs – medical bills, funeral

expenses, lawyer fees, appraisers, accountants, administrative costs, federal estate taxes, state death taxes, unpaid bills – mortgages, business loans, installment contracts, unpaid income taxes, property taxes

Inflation – failure to rearrange, reappraise an estate plan to counter the effects of inflation can impair the ability of assets to provide

Lack of liquidity – insufficient cash to cover death costs & other estate obligations

Improper use of vehicles for transfer – spendthrift spouses or minors may be left large sums of money outright in the form of life insurance, through joint ownership of a savings account or as beneficiaries of an employee fringe benefit

Disabilities – Prolonged & expensive disability of a family wage earner is called Living Death.

What is your Estate? Probate estate consists of real & personal

property owned that can be transferred at death

Gross estate is a larger amount of property & includes all property – probate & non probate, that might be subject to federal estate tax at death

Non-probate : life insurance, jointly held property, property passing under certain employee benefit plan

Estate Planning Process1. Assess your family situation & set estate

planning goals2. Gather comprehensive & accurate data3. List all assets and determine the value of

your estate4. Designate beneficiaries of your estate’s

assets5. Estimate estate transfer costs6. Formulate & implement plan7. Review the plan periodically & revise as

necessary

Data Personal data Property classification, title, indebtedness,

marketable securities Life insurance, agent’s names & addresses Medical insurance company, policy numbers

benefits Business interest – names, address,

ownership, names of account Employee benefits – Group insurance plans Family income – Income of client, spouse

Other data : retirement plan, retirement age, potential sources of retirement income, required amount, expected sources of income

Listing of liabilities, creditors, amounts Authorization : Life insurance, executor

Will – a written and legally enforceable document expressing how a person’s property should be distributed on his death

Intestacy – the situation that exists when a person dies without a valid will

Distribution of Intestate Who are the survivors?

Spouse & children of legal spouse Grandchildren Children not of the spouse or illegitimate children If no spouse, no children, parents become heirs

Distribution by Law (U.S.) 50% to the legal spouse 50% remaining equally divided to the

legitimate children If no children : 100% to the surviving/legal

spouse If no spouse, no children – equally to parents If still no parents – the estate may be passed

on to the state for the benefit of the state school funds

Preparing the Will Testator – person directing the disposition of

property at his death Preparation & drafting

two pages, about USD150 complex document, costing USD1,500 state objectives consider income gifts, estate tax laws knowledge of corporate, trust, real estate,

securities laws may be ineffective, misinterpret wish of the dying

Proper preparation includes 3 items A Plan for distribution according to wishes of

the dying, needs of the beneficiaries, tax laws Consider changes in family circumstances

that might occur after its execution i.e. divorce, new children, death

Must be concise and complete in describing the testator’s desires

Common features of a Will Introductory Clause Direction of Payments Disposition of Property Appointment Clause Tax Clause Simultaneous Death Clause Execution & Attestation Clause Witness Clause

Requirements of a Will Mental capacity : Person must be of sound mind

to make a valid will Freedom of choice Proper execution

Changes In Wills Health or financial status of beneficiary changes

significantly Births, deaths, marriages, divorces Moving to a different state, changes in tax laws An executor, trustee, guardian can no longer

serve

Basic Concept of Succession (De Leon) The Civil Code defines succession as a mode

of acquisition of property, rights, obligations of a person transmitted through death to another by his will or by law

Three elements are Decedent – the person whose property is transmitted

through succession, if there is a will he is also called Testator

Successor – the person to whom the property or property rights will pass

Inheritance or estate – the subject matter of the succession

Kinds of Successor Heir – person called to the succession either

by will or by law, he succeeds from the moment of the latter’s death

Devisee – person to whom a gift of real property is given by virtue of a will

What does an inheritance include?- All property, rights, obligations of a person not

extinguished by death- Heirs are not liable for the obligations of the

decedent beyond the value inherited

Kinds of Succession Testamentary – resulting from the

designation of an heir, made in a will executed in the form by law

Intestate – that which takes place when a person dies without a will or a void will or a will that lost its validity or if no one succeeds under his will

Mixed – effected partly by will and partly by operation of law

Who else are involved?Executor is a person or trust company named in the willto carry out its provisions.

Administrator is a person or trust company appointed by theCourt to administer and distribute the estate of the decedentIf there is no will or if no executor is named in the will or If the named executor does not act.

Definitions Legitime – testator’s property that cannot be disposed

because the law has reserved it for the compulsory heirs Free portion – the part of the inheritance in excess of the

legitime which the testator may dispose of freely Compulsory heirs (forced heirs)

a. Legitimate children & descendants b. If no children, legitimate parents c. Surviving spouse d. Acknowledged natural children & natural children by

law e. Illegitimate childrenC,d,e – their shares are taken from the free portion of the

estate, if there are legitimate children, legitimate parents are excluded

Legitime Legitimate children – ½ of the estate divided

equally Surviving spouse – ½ of the estate One legitimate child situation :

½ to the child ¼ to the spouse ¼ remaining is free portion

Legitime No child situation

½ to the legitimate parents ¼ to the spouse ¼ free portion

Two or more legitimate children situation ½ to the children dividend equally Spouse gets a share equal to the share of each child or

descendant The rest is the free portion

Order of Intestate Succession Legitimate children & descendants Legitimate parents – excluded by legitimate

children Illegitimate children & descendants – always

inherit The surviving spouse – always inherit Collateral relatives within the fifth degree The State – excluded by any above

Illustration X died leaving an estate of P143,470, in his

will he provided that his properties be divided equally to

C – legitimate child W – surviving wife M – legitimate mother D – daughter in law N - nephew

Illustration If the will is valid,

Legitime of C = ½ Legitime of W = ¼ Free portion – ¼

Mother has no legitime because there is a child.The distribution will be

c = ½ = P71,735 W = ¼ = P35,867.50 Free portion = ¼ P 35,867.50 --------------------- Total 100%

Illustration Free Portion Free Portion (1/4)

Mother – 1/3 = P 11,955.83 Daughter in Law – 1/3 = P 11,955.83 Nephew – 1/3 = P 11,955.83Total = P 35,867.50

If last will is Void.M, D, N are NOT heirs. Estate will be

distributed only to Child, and Surviving Wife, equally or

P71,735 each.

Reference : Hector S. De Leon, Hector M. De Leon Jr. ,THE LAW ON TRANSFER AND BUSINESS TAXATION 2009 Rex Bookstore Inc.

End of Presentation