1. © 2013 Pearson Education, Inc. All rights reserved.17-1 Chapter 17 Estate Planning: Saving Your Heirs Money and Headaches

2. © 2013 Pearson Education, Inc. All rights reserved.17-2 Learning Objectives 1.Understand the importance and the process of estate planning. 2.Draft a will and understand its purpose in estate planning. 3.Avoid probate.

3. © 2013 Pearson Education, Inc. All rights reserved.17-3 Introduction Estate planning is planning for what happens to your wealth and your dependents after you die. You want to pass on as much as much of your estate as possible to taxes and transfer costs. Determine who has decision-making authority if you are incapacitated.

4. © 2013 Pearson Education, Inc. All rights reserved.17-4 The Estate Planning Process Step 1: Determine the Value of Your Estate Estate’s net worth = value of your estate – level of estate’s liabilities. Level of your wealth determines tax planning needs.

5. © 2013 Pearson Education, Inc. All rights reserved.17-5 The Estate Planning Process Step 2: Choose Your Heirs and Decide What They Receive Once you know what you have, you can decide who’s going to get it. In addition to a spouse, consider the special needs of your dependents.

6. © 2013 Pearson Education, Inc. All rights reserved.17-6 The Estate Planning Process Step 3: Determine the Cash Needs of the Estate Before distributing property to heirs, must pay medical costs, funeral expenses, legal fees, outstanding debt, and estate and inheritance taxes. Use liquid funds to cover estate tax needs.

7. © 2013 Pearson Education, Inc. All rights reserved.17-7 The Estate Planning Process Step 4: Select and Implement Your Estate Planning Techniques Decide which estate planning tools are most appropriate to achieve your goals. Most common are a will, a durable power of attorney, joint ownership, trusts, life insurance, and gifts.

8. © 2013 Pearson Education, Inc. All rights reserved.17-8 Understanding and Avoiding Estate Taxes The IRS charges estate taxes, then issues an estate tax credit. Unified tax credit—estate and gift tax credit that in 2015 allows $5.43 million of an estate to be passed on tax free. Above credit, 40% estate tax rate. Calculate what your estate taxes will be.

9. © 2013 Pearson Education, Inc. All rights reserved.17-9 Gift Taxes Gifts transfer wealth prior to death, reducing the taxable value of the estate. Give $14,000 per year tax free in 2015. The gift tax and the estate tax work together with a total lifetime tax-exempt limit ($5.43 million in 2015) on gifts over $14,000 per recipient.

10. © 2013 Pearson Education, Inc. All rights reserved.17-10 Unlimited Marital Deductions Unlike the $5.43 million threshold to other beneficiaries, there is no limit to the size of estate transfers between spouses on a tax- free basis. Spouse must be U.S. citizen.

11. © 2013 Pearson Education, Inc. All rights reserved.17-11 The Generation-Skipping Transfer Tax A tax on wealth and property transfers to a person 2 or more generations younger than the donor. Assets are taxed as if they moved from the grandparents to their own children, then from children to the grandchildren.

12. © 2013 Pearson Education, Inc. All rights reserved.17-12 Calculating Estate Taxes Calculate the value of your gross estate. Calculate your taxable estate by subtracting funeral and estate expenses, debts, taxes, and allowable deductions from the gross estate. Calculate the gift-adjusted taxable estate. Estimate estate taxes using federal rate.

13. © 2013 Pearson Education, Inc. All rights reserved.17-13 Wills A legal document that describes how you want your property to be to others. Beneficiary—an individual who is willed property. Executor—personal representative who will carry out the will’s provisions. Guardian—who will care for children under the age of 18.

14. © 2013 Pearson Education, Inc. All rights reserved.17-14 Wills and Probate Probate is the legal procedure that validates a will and then distributes the estate’s assets. Probate allows for challenges to be settled. Probate allows for orderly distribution of assets of someone who dies intestate— without a valid will.

15. © 2013 Pearson Education, Inc. All rights reserved.17-15 Wills and Estate Planning If no will, a guardian for your children will be chosen by the court. Will appropriate way to provide for the special needs of children. Property is transferred according to your wishes. Make special gifts or bequests through will. Without a will, court administrator distributes assets—costly, may conflict with your desires

16. © 2013 Pearson Education, Inc. All rights reserved.17-16 Writing a Will –Introductory statement. –Payment of debt and taxes clause. –Disposition of property clause. –Appointment clause. –Common disaster clause. –Attestation and witness clause.

17. © 2013 Pearson Education, Inc. All rights reserved.17-17 Updating or Changing a Will—The Codicil A codicil is an attachment to a will that alters or amends a portion of the will. A codicil should be drawn up by a lawyer, witnessed, and attached to the will.

18. © 2013 Pearson Education, Inc. All rights reserved.17-18 Letter of Last Instructions A letter of last instructions is generally written to the surviving spouse. Not a legally binding document. Tells of location of the will, legal documents, financial assets, those to notify of the death, listing of personal property, funeral and burial instructions, organ donation wishes.

19. © 2013 Pearson Education, Inc. All rights reserved.17-19 Selecting an Executor Makes sure your wishes are carried out. Manages your property until the estate is passed on to your heirs. Could be a family member, lawyer, or bank trust officer. Deals with personal matters, pays taxes and debts, distributes remaining assets after bequests have been honored, reports final accounting to the court.

20. © 2013 Pearson Education, Inc. All rights reserved.17-20 Other Estate Planning Documents Durable power of attorney—provides for someone to act in your place should you become mentally incapacitated. Living will—allows you to state your wishes regarding medical treatment in the event of illness or injury. Durable health care power of attorney— designates someone to make health care decisions for you.

21. © 2013 Pearson Education, Inc. All rights reserved.17-21 Avoiding Probate Probate is essential to validate your will and ensure your provisions are carried out. Can avoid probate through: –Joint ownership –Gifts –Trusts

22. © 2013 Pearson Education, Inc. All rights reserved.17-22 Joint Ownership Tenancy by the Entirety: Property held by a married couple may be transferred only if both agree. On death of one, property passes to other. Joint tenancy with rights of survivorship: Two or more people own an asset. If one dies, ownership passes to other owners. Tenancy in common: Two or more people own an asset. If one dies, ownership passes according to deceased will. Community property: Assets acquired during a marriage. If one dies, ⅟ 2 goes to spouse, other according to will.

23. © 2013 Pearson Education, Inc. All rights reserved.17-23 Gifts Avoid probate and reduce taxable value of estate. Are a good way to transfer property that grows in value. Unlimited gifts tax exclusion to charity or gift payments for medical or educational expenses. You may need the assets, they may be squandered.

24. © 2013 Pearson Education, Inc. All rights reserved.17-24 Trusts A legal entity that holds and manages an asset for another person. Is created when a grantor, transfers property to a trustee for the benefit of one or more beneficiaries. The trustee can be an individual, an investment firm, or a bank. Any asset can be placed in a trust.

25. © 2013 Pearson Education, Inc. All rights reserved.17-25 Trusts Avoid probate. More difficult to challenge in court. Reduce estate taxes. Allow for professional management.

26. © 2013 Pearson Education, Inc. All rights reserved.17-26 Trusts Provide for confidentiality. Provide for a child with special needs. Hold money till a child reaches maturity. Ensures children from previous marriage receive inheritance.

27. © 2013 Pearson Education, Inc. All rights reserved.17-27 Living Trusts Place assets in trust while alive, withdraw them later if you wish. Revocable Living Trusts—you control the assets in the trust and can receive income from the trust without removing assets from the estate.

28. © 2013 Pearson Education, Inc. All rights reserved.17-28 Living Trusts Irrevocable Living Trusts—a trust in which you relinquish title and control of the assets when they are placed in the trust.

29. © 2013 Pearson Education, Inc. All rights reserved.17-29 Testamentary Trusts Created by a will, active after you die. Standard Family Trusts – also known as A- B Trusts, Credit-Shelter Trusts and Unified Credit Trusts: Assets placed in trust rather than willed. Qualified Terminable Interest Property Trust(Q-TIP): You direct income from trust to spouse. Then upon spouse death assets willed. Sprinkling Trusts: Need vs formula

30. © 2013 Pearson Education, Inc. All rights reserved.17-30 A Last Word on Estate Planning Many put off estate planning because it is complex and deals with death—don’t. Approach a professional for your estate planning. Make sure your family knows where your estate planning documents are.

31. © 2013 Pearson Education, Inc. All rights reserved.17-31 Summary Estate planning is a 4-step process that involves planning what happens to your accumulated wealth and dependents when you die. Designate beneficiaries, executor, and guardian in your will and review periodically. Use trusts to avoid probate.

32. © 2013 Pearson Education, Inc. All rights reserved.17-32 Checklist 17.1