Chapter 19

Learning Objectives (1 of 3) Explain why it is important to have a will Distinguish between a will and a letter of last instructions Describe the key features of a will Explain the advantages of a codicil Describe the probate process

Learning Objectives (2 of 3) Show how to avoid probate Discuss how to select an executor List the duties of an executor Describe what a living will accomplishes Explain the concept of guardianship

Learning Objectives (3 of 3) Define a trust Describe various trusts, including a revocable living trust, a Bypass or AB Trust, and a life insurance trust Outline the basic rules of estate and gift taxation Compute the net taxable estate

Importance of a will Can save on federal estate and state inheritance taxes Reduces likelihood of relatives fighting over the assets Can make special gifts of any assets If die intestate, state’s rules for allocation of asset may not be the best

Letter of Last Instructions To be read as soon as a person dies, whereas a will is usually read after the funeral services May contain burial preferences Indicates where assets are located Identifies key contact people (e.g., lawyer, banker, broker)

Key features of a will Testamentary capacity is established It should be the last (most recent) will Properly witnessed Appoints an executor (or executrix) Names beneficiaries, legatees, devisees, and guardians May give power of appointment

Codicils Allow for short amendments to a will Should represent minor changes or clarifications, not fundamental changes (e.g., not used to disinherit a child) Must be signed and witnessed Too many codicils imply a will needs to be rewritten

Probate A will is presented to the Probate Court and validated Once probated, it becomes a public document Legal authority is given to the executor This authority established via either Letters testamentary Letters of administsration

Avoiding probate (1 of 2) Some people seek to avoid because It can be time consuming Attorney’s fees may take 5% or more Privacy lost in probate

Avoiding probate (2 of 2) Techniques to avoid probate: Reduce estate below that required to file Use asset titles that place assets outside of probated estate (e.g., POD, JTWROS, TIC) Place assets in accounts not included in probate (e.g., IRAs, Keoghs) Remember, the costs of avoiding probate may exceed the benefits

Choosing an Executor Make sure person willing to do so Executors can renounce appointments Select executors with the knowledge, time, interest, and resources for the job Consider co-executors Consider an institution (e.g., bank trust dept.) as a co-executor

Duties of an Executor Probate will if necessary Reconcile all monies owed to and by the deceased Inventory the assets (obtain appraisals) Liquidate assets not bequeathed Pay debts and taxes due Distribute estate

Living Wills Medical form, has nothing to do with an estate Gives someone else the right to make medical decisions if a person is unable to do so (e.g., “pull the plug” for a person in a coma) Different levels of permission Everyone over 18 should have one

Guardianship May be appointed anytime, not just in a will Starts with filing a petition to determine capacity If court convinced of a need, a guardian can be appointed for anyone Guardians must file statements with the court

Trusts (1 of 2) A fiduciary arrangement whereby the legal title of property is held and the property is managed by someone for the benefit of another Key parties: Grantor Trustee Beneficiary

Trusts (2 of 2) Beneficiaries may include: Income beneficiary Remainderman Trust assets known as principal or corpus Trust may be: inter vivos (Grantor alive when created) Testamentary (created in a will

Types of Trusts (1 of 4) Revocable living trust A trust that can be revoked, amended, or terminated by the grantor and the property recovered Commonly used to reduce estate passed in the will

Types of Trusts (2 of 4) ByPass or AB Trust When a parent dies, income from assets in part A go to surviving spouse, and assets to children on death of second spouse Irrevocable living trust Removes taxation of income from assets from the grantor

Types of Trusts (3 of 4) Charitable Remainder Trust Income from trust goes to income beneficiary such as children, and remainderman is a charity Provides some tax benefits Residence Trust Removes market value of residence from an estate

Types of Trusts (4 of 4) Life insurance trust Usually set up to pay federal estate taxes Keeps death benefit out of grantor’s estate Trust must be created first, and then given enough money to pay the first year’s premium

Basic rules of Estate and Gift Taxation (1 of 2) Gifts and bequests exempt from taxation Anything to a spouse Anything to charities Annual gift tax exemption For 2002 ($11,000 per year per person per spouse

Basic rules of Estate and Gift Taxation (1 of 2) Unified tax credit for 2002 (& 2003) is $229,800 This provides exemption for the first $700,000 of an estate & gifts in excess of the annual gift exemption The cost basis of all assets owned by a deceased have the cost bases stepped up to current market value at time of death

Net Taxable Estate (1 of 2) Gross Estate – Allowable Deductions = Net Taxable Estate Gross Estate inlcudes Financial Assets (based on market value on date of death) Personal Property (e.g., home, furnishings, cars, jewerly)

Net Taxable Estate (2 of 2) Allowable Deductions include: All debts and taxes owed at time of death Marital deduction (up to entire estate) Charitable deductions (must be qualified charities) Final expenses (funeral costs) Administrative expenses (including executor’s fee if there is one)

State estate taxes Frequently called inheritance or death taxes Tremendous variations among states, some essentially have no estate taxes and others may be extensive

Future of Federal Estate Taxes In 2010, scheduled to be abolished However, step-up in cost bases would be eliminated also This creates capital gains taxes for assets sold at a gain Many people will pay more in income taxes than would have under old system Many won’t know the cost bases