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Chapter 19

Chapter 19. Estate Planning. Chapter 19 Learning Objectives. LO19-1 Analyze the personal aspects of estate planning . LO19-2 Assess the legal aspects of estate planning . LO19-3 Distinguish among various types and formats of wills .

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Chapter 19

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  1. Chapter 19 Estate Planning

  2. Chapter 19Learning Objectives LO19-1 Analyze the personal aspects of estate planning. LO19-2 Assess the legal aspects of estate planning. LO19-3 Distinguish among various types and formats of wills. LO19-4 Appraise various types of trusts and estates. LO19-5 Evaluate the effects of federal and state taxes on estate planning. 19-2

  3. Why Estate Planning? LO19-1: Analyze the personal aspects of estate planning. • Estate consists of everything you own, including bank accounts, stocks, bonds, real estate, and personal property • WHAT IS ESTATE PLANNING? • Estate planning is a definite plan for the administration and disposition of one’s property during one’s lifetime and at one’s death • Essential part of retirement planning and has two components • Build your estate through savings, investments, and insurance • Transfer your estate as you wish at death 19-3

  4. Why Estate Planning?(continued) • If married, include spouse and children in estate planning process • If unmarried, make sure beneficiaries have information about your estate that they will need • New lifestyles means unique challenges, which means plan early and get expert help 19-4

  5. The Opportunity Cost of Rationalizing • Demands of daily living can keep people from thinking about death • Your beneficiary will have to meet with morticians, clergy, lawyers, insurance agents, clerks of federal government agencies, etc. • Plan while you are in good health • LIMRA International booklet, What Do You Do Now? 19-5

  6. Legal Aspects of Estate Planning LO19-2: Assess the legal aspects of estate planning. • GATHER NECESSARY DOCUMENTS • Birth and marriage certificates • Legal name changes • Social Security documents • Military service records • Insurance policies • Transfer records of joint bank accounts • Safe-deposit box records • Registration of automobiles • Title to stock and bond certificates 19-6

  7. Wills • A will is the legal declaration of a person’s mind as to the disposition of his or her property after death • Transfers property according to your wishes • State law determines distribution of your estate if you die intestate (without a will) • Marriage and divorce affect your will • Review your will with an attorney • Marriage may revoke your will • Legal costs of a will vary. A standard will costs between $300 and $600 • Probate is legal procedure proving a valid or invalid will 19-7

  8. Types of Wills LO19-3: Distinguish among various types and formats of wills. • A SIMPLE WILL leaves everything to your spouse • A TRADITIONAL MARITAL SHARE WILL leaves half to spouse and half to children or heirs • An EXEMPTION TRUST WILL passes everything to your spouse except for an amount equal to the exemption, which passes into a trust. The trust can provide a lifelong income • A STATED DOLLAR AMOUNT WILL • Designated amount is passed to spouse; percentages are better due to investment risk 19-8

  9. Formats of Wills • Holographic will • A will that you write, date and sign, entirely in your handwriting • May not be recognized in some states • Formal will • Usually prepared with attorney’s assistance • You must sign and have two witnesses, neither of whom can be beneficiaries (people named to receive property under the will) • Statutory will • Type of formal will on a preprinted form • Has rigid provisions, may not meet current laws, and may be invalid if you change provisions 19-9

  10. Writing Your Will • Selecting An Executor • This person follows your instructions • Find out if the person is willing and able to carry out the complicated tasks involved • Can be any U.S. citizen over 18 who has not been convicted of a felony • Person could be a family member, friend, attorney, accountant, or a bank representative • If you don’t name one, the court will • Executor’s fees are set by state law 19-10

  11. Writing Your Will(continued) • Major Responsibilities of an Executor • Prepare an inventory of assets • Collect any money due and pay off any debts • Prepare and file all income and estate tax returns • Liquidate and reinvest other assets if necessary to pay claims • Distribute assets, based on the instructions in the will • Make a final accounting to beneficiaries and to the probate court 19-11

  12. Writing Your Will(concluded) • Selecting a Guardian • If you have children, you need a will to name their guardian and/or trustee • A guardian assumes the responsibility for providing the children with personal care and managing the estate for them • Trustee will manage property for benefit of children • Be sure the person would be willing to raise them and that their philosophy matches yours 19-12

  13. Altering or Rewriting Your Will • Review your will if there are changes • If you move to a different state • If you have sold property mentioned in the will • If the size and composition of your estate have changed • If you have married, divorced or remarried • If new potential heirs have died or been born • Add a codicil if only a few changes are needed; this is a document that explains, adds, or deletes provisions in your existing will • Consider a new will if making major changes 19-13

  14. Altering or Rewriting Your Will(continued) • Prenuptial agreement • Agreement between spouses prior to marriage • One or both spouses often waive a right to receive property under the other’s will or under state law • Consult an attorney 19-14

  15. Living Will and Advance Directives • Advance directives include: • A living will • Provides for your wishes if you become physically or mentally disabled • Not a substitute for a traditional will • 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 • A health care proxy (durable power of attorney) • A letter of last instruction (after-death wishes) 19-15

  16. Ethical Will • New type of will that is a way to pass on your values and beliefs to your heirs • It is not a legally binding document • Share lessons you’ve learned in life • Express love and address any regrets • Requires self-examination • Writer and recipients say the results are an invaluable legacy 19-16

  17. Social Media Will • Allows you to decide how to handle your online content and identity • Review privacy policies of each website • State how you would like your profile to be handled • Give the social media executor a document that lists all the websites where you have a profile with usernames and passwords • State in your will that the online executor should have a copy of your death certificate (to take action on websites)

  18. Power of Attorney • DURABLE POWER OF ATTORNEY • Also known as a health care proxy • Legal document authorizing someone to act on your behalf • Can be limited or gives a great deal of power • If you are unable to make decisions regarding your health care, this authorizes someone to do it for you 19-18

  19. Letter of Last Instruction • After-death wishes • Not legally enforceable (in some states) • Provides heirs with important information, such as the details of your funeral arrangements, names of people to be notified of your death, the locations of your bank accounts, safe-deposit box, etc. 19-19

  20. Types of Trusts and Estates LO19-4: Appraise various types of trusts and estates. • 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 • Used to protect assets from creditors or to manage property for young children, etc. • All assets are taken out of your name and put in the name of the trust 19-20

  21. Types of Trusts and Estates(continued) • Trusts are either revocable or irrevocable • With a revocabletrust, you retain the right to end the trust or change its terms during your lifetime • May avoid the lengthy probate process • Does not provide shelter from federal or state estate taxes • With an irrevocable trust, you cannot change the terms or end the trust • For tax purposes the trust becomes a separate entity • If a large estate, used to reduce estate taxes and avoids probate 19-21

  22. Benefits of Establishing Trusts • Reduce or provide payment of estate taxes • Avoid probate and transfer your assets immediately to your beneficiaries • Free you from managing assets • Provide income for a surviving spouse or other beneficiaries • Ensures property serves desired purpose after your death 19-22

  23. Types of Trusts • Credit-Shelter Trust (also called bypass trust, a residuary trust, an A/B trust, an exemption equivalent trust, or a family trust) • Disclaimer Trust • Living or Inter Vivos Trust (property management arrangement established while you are alive) • Testamentary Trust (established by your will) • Life Insurance Trust 19-23

  24. Estates • MAKE AN INVENTORY OF YOUR ESTATE • Cash, bank accounts, CDs, money market funds • Stocks, bonds, and mutual funds • Life insurance, employee benefits, and annuities • Your home and any other real estate • Business interests and farm assets • Money owed to you (Receivables) • Interests in trusts • Antiques, art, collectibles, cars, and personal effects • Community property is any property that has been acquired by either spouse during the marriage, but not by gift, bequest, or inheritance; half of the community assets included in each spouse’s estate 19-24

  25. Joint Ownership • Spouses often own property as Joint Tenants With Right of Survivorship (JT/WROS) • The property will automatically pass to your spouse upon your death with no estate tax paid at the first death • Estate tax is paid when surviving spouse dies • Tenants in Common — each individual is considered to own a proportionate share and each can choose who gets share at death • Tenancy by the Entirety — when one spouse dies, the other gets the property automatically 19-25

  26. Life Insurance and Employee Benefits • Life insurance proceeds are free from probate and income tax • Assignment of ownership to your beneficiary can remove a life insurance policy from your estate • Unless payable to the estate, death benefits from qualified pension, profit sharing, or Keogh plans are excluded from your estate 19-26

  27. Federal and State Estate Taxes LO19-5: Evaluate the effects of federal and state taxes on estate planning. • Federal estate tax • Estate and trust federal income tax returns • State inheritance tax • Federal and State Gift taxes • Tax avoidance and evasion • Charitable gifts and bequests • Calculating tax, debts, and liabilities • Probate and administration costs • Paying tax owed 19-27

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