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- Chapter 15
Estate Planning
1
- Chapter Goals
Determine what estate planning is and how to
employ its key topics.
Conclude that estate planning isn’t only for the rich.
Recognize the merits of having a will.
Establish the steps in an overall estate plan.
Develop several tax reduction strategies.
Assess the advantages and disadvantages of many
estate planning tools.
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- Overview
The principal purpose of estate planning is to protect
and benefit others we care about after we die. Steps:
1) Understand What Estate Planning Is
2) Identify Objectives
3) Identify Assets
4) Establish a Will
5) Consider Other Estate Planning Tools to Meet Objectives
6) Evaluate Obstacles and Ways to Overcome Them
7) Become Familiar with All Types of Relevant Taxes
8) Determine Available Financial Planning Strategies
9) Incorporate Estate Risks
10) Consider Separately Estate Planning for Minors
11) Assess Anticipated Resources
12) Finalize the Estate Plan
13) Implement the Plan
14) Review Periodically
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- Understanding What Estate Planning Is
Estate planning is analyzing and deciding on how
your assets are to be managed and apportioned to
others in the event of your death or disability.
The goal is to establish an estate structure that will
maximize assets left to your beneficiaries and
achieve your other wishes in an efficient way.
The process, while varying in the amount of
supervision needed, can be the same whether it is
for a large or small estate.
Estate planning is not reserved just for the wealthy; it
4 concerns virtually everyone.
- Identify Objectives
Questions to ask when establishing objectives:
– What am I trying to accomplish?
– Am I trying to set aside monies for the people with the
greatest need?
– Do I want to provide for people I care most about?
– Do I want to gift at least in part now or wait until my death?
When we speak of maximization of assets as an
objective we have to decide on the priority that we
give to others as compared with ourselves.
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- Identify Assets
All household assets currently available should be
identified and their owner specified.
Information should include whether assets are joint
or separately owned, the original cost, and current
fair market value.
The total amount, cost, and way that assets are titled
are relevant to the outcome strategies that you will
select.
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- Establish a Will
A will is a legal instrument that specifies who is to
receive a person’s assets upon death and that
expresses other wishes.
– If you don’t execute a will, the state in effect provides one
for you - but its standards and wishes, not yours.
The will generally includes clauses such as:
– Who gets what assets.
– The powers of the executor who is in charge of
administering the estate, complying with legal requirements,
and liquidating its assets.
A guardian, where appropriate, who is in charge of people
7 unable to care for themselves.
- General Evaluation of a Will
A will should be evaluated for factors such as:
– Does the will reflect your wishes?
– Are your wishes unambiguously stated in the will?
– Once written, is the will completely up to date?
– Are there overlooked assets?
– Can the will cause conflict?
– Is the will stored in a safe place?
– Does the will comply with state law?
– If there are assets in other states, does the will comply
with their laws as well?
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- Intestate
Many people do not have a will, for reasons such
as:
– Not recognizing its importance.
– Believing you don’t have assets worth giving away.
– Feeling when young that you have time to set one up.
– Having difficulty determining whom to name as heirs or as
executors or guardians.
– Finding the subject too uncomfortable to think about.
Intestate means dying without a will. The division of
assets can then depend on the state you live in, the
size of your assets, and how they are titled.
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- Selected Reasons for Having a Will
Reasons for having a will include:
– You may want your spouse to receive all your assets.
– States may mandate that assets be given to elderly parents
who may not need the money.
– To assign a preferred guardian.
– To ensure that wishes as to who gets items of sentimental
worth would are accommodated.
– To avoid conflict over distribution of assets.
– Assets would otherwise pass to the children at age 18 or 21
when they might not be mature enough.
– To include important friends.
– Items vary by state.
10 – The will can provide for tax advantaged trusts.
- Consider Other Estate Planning Tools
to Meet Objectives
There are a variety of other instruments that can
help in overall estate planning. They include:
– Trusts.
– Gifts.
– Titling.
– Insurance.
– Powers of attorney.
– Letters of instruction.
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- Trusts
Trusts are separate legal entities in which a third
party manages property for the benefit of another
person.
The person who manages the trust assets is called
the trustee.
The person to whom the property is given or for
whom the property is being managed is called the
beneficiary.
The person setting up the trust to comply with their
own specifications is called the grantor or trustor.
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- Trusts, cont.
Advantages of a trust:
– To obtain professional management.
– For tax purposes.
– For control purposes.
– To bypass probate.
– For strengthening protection from creditors and
dissatisfied relatives.
– To consolidate management.
– Can provide for different people over time.
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- Trusts, cont.
Disadvantages of a trust:
– Cost.
– Potential trustee deviation from wishes.
– Effort required to set up.
– Possible resentment by beneficiaries.
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- Types of Trusts
A living trust is one set up during a grantor’s life.
A testamentary trust comes about after death.
A revocable trust is one that can be revoked or
changed by the grantor whenever desired.
An irrevocable trust is one that cannot be altered.
– Its main advantage over other trusts is the ability to qualify
for favorable estate tax treatment.
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- Gifts
Gifts are irrevocable transfers of property to others.
– They are called intervivos transfers because they happen
while the giftor is alive.
– Gifts can provide funds when needed, thereby raising the
satisfaction of the recipient and donor.
In order for an item to be considered a gift it must:
– Be given without any characteristics of control left with the
giftor.
– Cannot be exchanged for an agreement to provide a
contra gift or service.
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- Gifts, cont.
Gifts are combined with estate assets to establish
the exemption from estate taxes.
The first $1 million of lifetime gifts depending on
year will not be subject to federal taxes.
In smaller estates no federal estate or gift tax will
be due at all.
By a gift of property, the recipient there takes the
cost basis of the person providing the gift. When
the property is sold, the recipient will pay an income
tax at capital gains rates on the difference between
the proceeds received and the cost basis.
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- Gifts, cont.
Gifts that don’t count as a deduction from the
lifetime exemption, an additional benefit include:
– Gifts between married people.
– Gifts of under $11,000 per year.
Each person is allowed to make a gift of $11,000 per year per
person without it affecting the estate tax exemption.
Spouses can combine their deduction to gift $22,000 per year
to each person.
If they wished to, for their child’s family of four they could gift
$88,000 per year by gifting $22,000 to each member.
– Charitable gifts.
An unlimited amount of money may be donated to
charitable institutions for estate tax purposes.
A charitable contribution is income-tax deductible
based on its fair market value at the time of the gift.
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- Gifts, cont.
Two principal types of charitable trusts for gifting
purposes are:
– Charitable remainder trust: The donor receives a stream
of annual income for a fixed period or for life, and the
remainder is given to the charity. The NPV of the
remainder portion is deductible for income tax purposes.
– Charitable lead trust: The charity receives the stream of
income for a designated term, and the balance thereafter
goes to an heir. The income tax deduction in this case
comes from the NPV of the charity’s income received.
The government will not allow tax benefits for any
charitable transaction that lacks charitable intent.
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- Titling and Transferring of Assets
It is very important to determine the way an asset is
titled for both inheritance and tax purposes.
Property owned jointly with someone else can be
titled in one of three ways:
– Joint Tenancy with Right of Survivorship: Allows a person
to automatically inherit the property upon the death of the
other owner. The surviving co-owner’s right to the
property takes precedence over the provisions stated in a
will and, as mentioned, bypasses probate.
– Tenancy by the Entirety: In the event of death the
surviving co-owner receives full ownership. However, it is
only available to married persons and can only be undone
by consent of both parties. Only some states allow.
– Tenancy in Common: Each co-owner owns a specified
percentage of a property.
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