1. CHAPTER 15 Basic Structure of Estate Planning Chapter 15: Estate Planning1

2. INTRODUCTION  Objectives of estate planning  Protect the family  Provide for efficient utilization of assets during lifetime  Insure that estate property is adequate for family needs  Arrange an orderly distribution of assets to beneficiaries  Take steps to insure that surviving family members receive guidance from trusted professionals  Estate is like a funnel (Figure 15-1)  UNAUTHORIZED PRACTICE OF LAW PROHIBITED Chapter 15: Estate Planning2

3. ESTATE DISTRIBUTION Figure 15-1 Estate Distribution Chapter 15: Estate Planning3

4. PSYCHOLOGICAL IMPLICATIONS OF DEALING WITH DEATH:  Planner’s role is to raise issues associated with death to help client come to personal realizations and conclusions  Most people do not want to talk about these things. (Byerly)  A plan that structures the future and provides support for survivors can be psychologically satisfying to the client Chapter 15: Estate Planning4

5. ESTATE PLANNING: OBJECTIVES AND TOOLS  Common Misconceptions:  Estate planning makes sense only for wealthy people  Estate planning can be dispensed with if husband and wife own everything jointly  Purchasing life insurance constitutes a complete estate plan  Making a will completes estate planning process  Objectives of Estate Planning  Maximize value to the heirs and beneficiaries of the estate. Chapter 15: Estate Planning5

6. Tools of Estate Planning  Tools of Estate Planning  Will  Joint Ownership  Trusts  Lifetime Gifts  Estate refers to everything owned solely and jointly owned  Property  Assets that pass through probate  Assets that do not pass through probate  Both types may still be included in the gross estate Chapter 15: Estate Planning 6

7. GROSS ESTATE Figure 15-2 Gross Estate Chapter 15: Estate Planning7

8. WILL  Importance of Will  Who gets it  When do they get it  How much should they get  Who should help them  Who will care for the children  Absence of Will  Everyone has a will  Written and developed with thought  Or die with no written record of desires and the state uses it’s estate “template”  Die intestate  The state determines how and who gets what Chapter 15: Estate Planning8

9. What if you do not have a will? 1. I give my wife only one-third of my possessions, and I give my children the remaining two-thirds. 2. I appoint my spouse as guardian of my children, but as a safeguard I require that he/she report to the probate court each year and render an accounting of how, why and where the money was spent that was necessary for the proper care of my children. 3. As a further safeguard, I direct my spouse to produce to the probate court a performance bond to guarantee that she exercises proper judgment in the handling, investing and spending of the children’s money. 4. As a final safeguard, my children shall have the right to demand and receive complete accounting my spouse of all the financial actions with their money as soon as they reach legal age. 5. Should my spouse remarry prior to passing away, her second husband shall be entitled to at least one-third of everything my spouse possesses. Should my children need some of this share for their support, the second husband shall not be bound to spend any part of his share on my children’s behalf. These actions may or may not be applicable in every state. However, if even one is possible, the need for a will for everyone, especially someone with children is evident. Chapter 15: Estate Planning 9

10. What if you do not have a will? 1. The second husband shall have sole right to decide who is to get his share, even to the exclusion of my children. 2. Should my wife die while any of my children are minors, I do not wish to exercise my right to nominate the guardian of my children. 3. Rather than nominating a guardian of my preference, I direct the probate court to get together and select a guardian. If the court wishes, it may appoint a stranger acceptable to it. 4. Under the existing tax law, there are certain legitimate avenues open to me to lower death taxes. Since I prefer to have my money used for governmental purposes rather than for the benefit of my wife and children, I direct that no effort be made to lower taxes. These actions may or may not be applicable in every state. However, if even one is possible, the need for a will for everyone, especially someone with children is evident. Chapter 15: Estate Planning 10

11. Typical Scheme of Distribution for Intestate Succession Figure 15-3 Typical Scheme of Distribution for Intestate Succession Chapter 15: Estate Planning11

12. Will  Drafting a Will  Simple Will  Reciprocal Will  Husband and wife together  One document  Leave all assets to each other  Mutual Will  Single instrument  Not necessarily between spouses  Holographic Will  Handwritten  Not legal in all states Chapter 15: Estate Planning 12

13. Will  Basic Structure of Will  Exordium Clause  Identification  Invalidates all previuos wills  Payment of Debt and Taxes Clause  Disposition of Personal and Real Property Clause  Appointment of Fiduciary Clause  Powers Clause  Appointment of Guardian Clause  Common Disaster Clause  In case of same time deaths, identifies which one would be declared as passing first  Testimonium and Attestation Clause Chapter 15: Estate Planning 13

14. WILL (Contd.)  Codicil  Letter of Last Instructions (Memorandum)  Not legally binding; explains the why of the will  Personal Representative  Executor, executrix  Power of Attorney  General or specific powers  Definite or indefinite time frame  Durable Power of Attorney  Could be for healthcare instructions  Guardian for Minor Children  Alternates should be listed  Guardians should be notified ahead of time. Chapter 15: Estate Planning14

15. Probate  Probate  Means to prove or validate  Prove that this is the final will  Personal representative files with the court and the process starts  Must be done in each state where the person owns real estate  Usually long, complicated, and expensive Chapter 15: Estate Planning 15

16. Joint Ownership  Community property states  Both spouses own separate undivided interest  Property acquired during marriage owned equally  Gifts or inheritances retain ownership  Deceased spouses half included in their estate  But entire asset gets step up in value  Later when we talk about taxes Chapter 15: Estate Planning 16

17. Joint Ownership  Common Law states  Joint tenancy with right of survival  Each owner equal ownership  Each owner can sell or gift their portion with permission  At death share goes immediately to survivor  Skips probate  Included in estate  Tenancy in common  Only spouses  Neither can give or sell without permission  Bypasses probate  Tenancy in common  Could be unequal shares  At death interest in asset goes to the heirs not the co-owners Chapter 15: Estate Planning 17

18. TRUSTS  Overview  Legal Entity Created to Hold, Manage, and Distribute Assets to Beneficiaries  Trust property, principal, or corpus Chapter 15: Estate Planning18

19. DIAGRAM OF TRUST Figure 15-4 Diagram of Trust Chapter 15: Estate Planning19

20. Trusts  Trustee – manages the assets and oversees distribution of assets in accordance with the trust document  Selection of Trustee - Just as important as the purpose of the trust document  Owners or grantors  Revocable or irrevocable  Beneficiaries  Principal Forms of Trust:  Inter Vivos or Living Trust  Avoids probate  possibly  Protects the privacy of the decedent  A will is a public document  Testamentary Trust  Only come into creation at the execution of the will Chapter 15: Estate Planning 20

21. LIFETIME GIFTS  Gift giving is effective tool for reducing size of probatable assets  14K per person (28K per couple) per year to iunlimited  During one's lifetime, gifts can be given in a variety of ways  If found taxable, the donor pays the tax.  Distinction Between Gifts Made Within Three Years and After Three Years of Death Chapter 15: Estate Planning21

22. FEDERAL ESTATE TAXES  Overview: Estate built during lifetime may not entirely belong to the beneficiaries  Federal Estate Taxes  State Inheritance Tax  1976 Tax Act: Unified federal estate tax rate  Economic Growth and Tax Relief Reconciliation Act of 2001  Increased exclusion amount and reduced top tax rate Chapter 15: Estate Planning22

23. Applicable Exclusion Amounts and Highest Estate and Gift-Tax Rates Chapter 15: Estate Planning23

24. Computation of Federal Estate Tax Table 15-4 Computation of Federal Estate Tax Chapter 15: Estate Planning24

25. Includible Items in Gross Estate Table 15-5 Includible Items in Gross Estate Chapter 15: Estate Planning25

26. FEDERAL ESTATE TAXES (Contd.)  Deductions  Funeral expenses  Administration expenses  Claims Against The estate  Contractual obligation  Charitable Deductions  Unlimited amount  Marital Deduction  Unlimited amount Chapter 15: Estate Planning26

27. FEDERAL ESTATE TAXES (Contd.)  Deductions  Power of Appointment Trust  Unlimited if:  Surviving spouse entitled to income from the trust  Spouse actually receives the income annually  Surviving spouses appointment is unconditional  Qualified Terminable Interest Property (QTIP) Trust Chapter 15: Estate Planning27

28. Estimated Federal Estate Tax: Husband’s Estate Chapter 15: Estate Planning28

29. Estimated Federal Estate Tax: Wife’s Estate Chapter 15: Estate Planning29

30. Estate and Gift Tax Rates Chapter 15: Estate Planning30

31. STATE INHERITANCE TAX  Annually nearly 400,000 retirees move from home states to other states  Home states lose income and sales taxes and driver’s license fees  Many states reduced or eliminated inheritance taxes to prevent this migration Chapter 15: Estate Planning31