1. 1 (of 23) FIN 200: Personal Finance Topic 23–Estate Planning Lawrence Schrenk, Instructor

2. 2 (of 23`) Learning Objectives 1. Explain the reasons for and elements of a will. ▪ 2. Discuss the tax implications of estate planning. 3. Describe trusts, gifts, and contributions. ▪

3. Wills: Terminology Estate: Assets of a deceased person after all debts are paid Estate Planning: Planning how your wealth will be allocated on or before your death Will: A legal request for how your estate should be distributed upon your death. It can also identify a preferred guardian for any surviving children 3 (of 23`)

4. Reasons for a Will Ensures that your estate is distributed as you desire Beneficiaries (Heirs): Persons specified in a will to receive a part of an estate Intestate: Condition of dying without a will  Court appoints an administrator who may not make the decisions you preferred 4 (of 23`)

5. Validity of a Will Minimum Age: 18 or 21 Mentally Competent Not under Undue Influence of Others Must be Signed and Dated 2 or 3 Witnesses who are not Beneficiaries Attorney Recommended 5 (of 23`)

6. Common Types of Wills Simple Will: A will suitable for smaller estates that specifies that the entire estate be distributed to the person’s spouse Traditional Marital Share Will: A will suitable for larger estates that distributes half of the estate to the spouse and all the other half to any children or to a trust 6 (of 23`)

7. Key Components of a Will Distribution of estate usually by percentage Executor (Personal Representative)  Collects debts owed, pays debts owed, distributes proceeds of the estate Guardian for dependent children Signature Validates Will Letter of Last Instruction  Wishes regarding funeral arrangements, etc. 7 (of 23`)

8. A Sample Will 8 (of 23`)

9. A Sample Will (cont’d) 9 (of 23`)

10. Changing your Will Move to a state with different laws or if you marry or divorce Major changes may require a new will Codicil: A document that specifies changes in an existing will  Appropriate for minor revisions 10 (of 23`)

11. Probate Probate: A legal process that declares a will valid and ensures the orderly distribution of assets Executor  Files forms in probate court,  Provides a copy of the will,  Makes a list of assets and liabilities of deceased, pays debts,  Sells necessary assets, etc. 11 (of 23`)

12. Estate Taxes Without a surviving spouse, a large estate is subject to estate taxes Determining estate taxes  Value of estate is the value of all assets minus any liabilities minus funeral and administrative expenses 12 (of 23`)

13. Estate Taxes (cont’d) During 2004 and 2005, the first $1 million of an estate can be distributed to children or others tax-free Beyond this limit, the federal estate tax rates on the taxable part of the estate range from 45 and 48 percent. Tax Relief Act of 2001 gradually increases tax free limit while reducing maximum tax rate 13 (of 23`)

14. Estate Taxes (cont’d) Other related taxes  Some states also impose taxes on estates Valuing your estate to assess potential estate taxes  It is important to calculate the value of your estate periodically so that you can plan appropriately if your net worth exceeds the tax- free limit 14 (of 23`)

15. Trusts, Gifts, and Contributions These may help avoid estate taxes Trust: A legal document in which one person transfers assets to another who manages them for designated beneficiaries  Grantor: The person who creates a trust  Trustee: The person or institution named in a trust to manage the trust assets for the beneficiaries 15 (of 23`)

16. Trusts, Gifts, and Contributions (cont'd) Living Trust: A trust in which you assign the management of your assets to a trustee while you are living  Revocable Living Trust: A living trust that can be dissolved  Irrevocable Living Trust: A living trust that cannot be changed, but can provide grantor income  Standard Family Trust (Credit-Shelter Trust): A trust established for children in a family  Testamentary Trust: A trust created by a will 16 (of 23`)

17. Trusts, Gifts, and Contributions (cont'd) Gifts  Tax-free distribution of up to $11,000 per year from one persona to another  Not subject to tax for the giver or the recipient Contributions to Charitable Organizations  Not subject to estate taxes 17 (of 23`)

18. Other Documents Living Will: A legal document in which individuals specify their preferences if they become mentally or physically disabled Power of Attorney: A legal document granting a person the power to make specific decisions in the event that you are incapable Durable Power of Attorney for Health Care: A legal document granting a person the power to make specific health care decisions for you 18 (of 23`)

19. Estate Planning Online Estate Planning  Money Central Estate Planning Money Central Estate Planning  Provides step-by-step instructions for estate planning Legal Advice  Nolo.com Nolo.com Click on: Wills and Estate Planning  Provides a background on estate planning decisions and the terminology used in estate planning 19 (of 23`)

20. Three Questions Should you create a will? How can you limit your estate taxes? Should you create a living will or designate an individual to have power of attorney? 20 (of 23`)

21. Project Note 21 (of 23)

22. 22 (of 23`) Ethical Dilemma