1. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill 19-1 C HAPTER 19 Personal Finance Estate Planning Kapoor Dlabay Hughes 6e

2. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill What is Estate Planning? Your estate consists of everything you own. An estate plan is how you set up to administer and distribute your property during your life (gifts) or after your death. Estate planning is not just for the wealthy. Estate planning includes both building your estate, and also transferring your estate upon your death. 19-2

3. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill What is Estate Planning? Most people give little or no thought to putting their personal and financial affairs in order for their families that survive them.  Naming a guardian.  Distribution of personal belongings. Demands of daily living can keep people from thinking about death. Plan while you are in good health. Estate planning is especially important for nontraditional households. 19-3 (continued)

4. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill What Estate Planning Involves Review and update your will on a regular basis, especially if you get married, divorced, or move to another state. Name an executor for your estate. Create and review trusts. Prepare a letter of last instructions. Organize current financial records and documents, and let family members know where they are. 19-4

5. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Important Documents for Which Proof will be Needed Social Security documents. Veteran documents. Insurance policies. Transfer records of joint bank accounts. Safe-deposit box records. Registration of automobiles. Title to stock and bond certificates. 19-5

6. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Wills A will is the legal declaration of a person’s mind as to the disposition of his or her property after death. Marriage and divorce affect your will.  Review your will with an attorney.  Marriage may revoke your will. Legal costs to prepare a will vary with how complex it is. A standard will costs between $200-$500 dollars. 19-6

7. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Types of Wills  Simple or an “I love you” will leaves everything to your spouse.  Traditional marital share will leaves half to spouse, half to children of your issue or heirs.  Exemption trust will.  Stated dollar amount will.  May be better to use percentages than actual dollar amounts. 19-7

8. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Formats of Wills Holographic will  A hand-written will you prepare yourself.  May not be legal in some states. Formal will.  Can be prepared by an attorney.  Can be typed or on a preprinted form.  Names beneficiaries.  Must be signed & have two witnesses. Statutory will.  A type of formal will done on a preprinted form.  May be invalid if you change preprinted wording.  May not reflect current law. 19-8

9. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Intestate and Probate Intestate.  Means you die without a will.  The state distributes your assets.  May mean the state will decide on a guardian for your children.  Very complicated if you also have a “blended” family. Probate.  Probate court generally validates wills and make sure your debts are paid. 19-9

10. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Choosing an Executor Find out if an executor is willing to accept this major responsibility. Find out if he/she is capable. If you don’t name one the court will. 19-10

11. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Responsibilities of an Executor Take control of assets of the estate. File an inventory of assets and liabilities with the court. Sell assets if necessary to pay liabilities. Distribute assets, based on the instructions in the will. Make a final accounting to the court. 19-11

12. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Selecting a Guardian Even if you don’t have a lot of assets, if you have children you need a will to name their guardian. A guardian assumes the responsibility for providing the children with personal care and managing the estate for them. Be sure the person would be willing to raise them. See if their values and child rearing practices match yours. 19-12

13. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Altering or Rewriting Your Will Add a codicil.  A document that modifies provisions in an existing will. Rewrite your will if there are major changes.  Divorce or remarriage.  Move to another state.  Add children or stepchildren.  If your assets change a great deal. 19-13

14. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Prenuptial Agreement Waive rights to each other’s property that was acquired before the marriage. Agree on a settlement if you should divorce. 19-14

15. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill A Living Will Provides for your wishes to be followed if you become so physically or mentally disabled that you are unable to act on your own behalf. Discuss your living will with those close to you, and your family doctor. Sign and date it before two witnesses. Give copies to those close to you. Requires careful thought. 19-15

16. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Power of Attorney Power of attorney.  Legal document authorizing someone to act on your behalf.  Can be limited or gives a great deal of power. Durable power of attorney for health care  If you are unable to make decisions regarding your health care this authorizes someone to do it for you. 19-16

17. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Letter of Last Instruction Not legally enforceable. Provides heirs with information. Should include...  Your funeral preferences.  Names of people you want notified.  Location of safe deposit box.  Assets and debts.  Social Security number.  Who gets personal effects. 19-17

18. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill What is a Trust? A trust is a legal arrangement through which a trustee holds your assets for your benefit or that of your beneficiaries.  Takes care of or manages your property.  Distribute your assets to your heirs from the trust after you die according to your will. All assets are taken out of your name and put in the name of the trust. Benefits of trusts: Reduce estate taxes, avoid probate, free you from managing assets, and provide income for a surviving spouse. 19-18

19. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Types of Trusts Credit-shelter trust. Disclaimer trust. Marital-deduction trust. Living or Inter vivos trust. Self-declaration trust. Testamentary trust. Grantor-retained annuity trust. 19-19 Life insurance trust. Charitable remainder trust. Qualified personal residence trust. Generation-skipping trust. Spendthrift trust.

20. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Make an Inventory of Your Estate Bank accounts, CDs, money market. Stocks, bonds and mutual funds. Life insurance, employee benefits and annuities. Your home and any other real estate. Business interests. Money due you. Interests and trusts. Antiques, art, collections, cars. 19-20

21. © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved. Irwin/McGraw-Hill Federal and State Estate Taxes Federal estate tax. Estate and trust federal income taxes. State inheritance tax. Gift tax. Tax avoidance and evasion. Charitable bequests. Calculating tax. Probate and administration costs. Paying tax owed. 19-21