Chapter 18: Estate Planning Garman/Forgue Personal Finance Tenth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

Copyright ©Houghton Mifflin Company. All rights reserved Introduction  Estate: your worldly possessions and financial wealth less any debts you owe.  Estate Planning: definite arrangements made during your lifetime that are consistent with your wishes for the administration, disposition, and transfer of your wealth and worldly possessions to your dependents and others when you die.

Copyright ©Houghton Mifflin Company. All rights reserved Your Next Five Years In the next five years: 1.Review the beneficiary and ownership designations in your life insurance policies, retirement plans, bank accounts, vehicles and other assets every three years or whenever your family situation changes.

Copyright ©Houghton Mifflin Company. All rights reserved Your Next Five Years 2.Write your will and a letter of last instructions and revise them as major life events occur. 3.Prepare and regularly update advance directive documents so others can make the right decisions for you if you become incapacitated.

Copyright ©Houghton Mifflin Company. All rights reserved Your Next Five Years 4.Discuss with your spouse or significant other your family’s financial and estate plans once each year. 5.Inform one or two close family members and friends of the location of your financial records, advance directives, and will.

Copyright ©Houghton Mifflin Company. All rights reserved Learning Objective #1 Identify the ways that your estate can be transferred through contracts and a will.

Copyright ©Houghton Mifflin Company. All rights reserved How Your Estate is Transferred  Probate Probate Court: special court specifically charged to conduct the distribution of assets of people who have died. Probate court-supervised process that allows creditors to present claims against an estate and ensures the transfer of a decedent’s assets to the rightful beneficiaries.

Copyright ©Houghton Mifflin Company. All rights reserved How Your Estate is Transferred  Nonprobate property: property that does not go through probate.  Most of your estate can be set up as nonprobate property and bypass the probate process.

Figure 18.1: How Your Estate Is Distributed Copyright ©Houghton Mifflin Company. All rights reserved

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate by Contracts  Transfers by beneficiary contract designation  Beneficiary: A person or organization designated to receive a benefit.

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate by Contracts  Beneficiary designation: legal form signed by the owner of an asset providing that the property goes to a certain person or organization in the event of the owners death.  Contingent (or Secondary) Beneficiary: The beneficiary in case the first-named beneficiary has died.

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate by Contracts  Transfers by property ownership contract designation  Joint Tenancy with Right of Survivorship (or Joint Tenancy): each person owns the whole of the asset, and can dispose of it without the approval of the other owner.

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate by Contracts  Transfers by payable-at-death contract designation  Payable-on-Death Designation: status granted to individuals who are not joint tenants and who might need to access accounts without going through probate.

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate Via a Will  Your will provides your instructions to the probate court.  Transfers with a will go to your desired heirs.  Testator: writer of a will and owner of the estate.

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate Via a Will  Codicil: legal instrument with which one can make minor changes to a will.  Executor (or Personal Representative): Person responsible for carrying out the provisions of a will and managing the assets until the estate is passed on to heirs.

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate Via a Will  Guardian: Person responsible for caring for and raising any child under the age of 18 and for managing the child’s estate.  Letter of Last Instructions: Nonlegal instrument that may contain suggestions and recommendations useful to the survivors.

Copyright ©Houghton Mifflin Company. All rights reserved Transfer Your Estate Via a Will  Without a will you have died intestate and your property may not go to the desired heirs.  Without a will, an estate transfers to various relatives according to the law in that state, e.g. spouse, children, parents  Right of Escheat: law by which an estate transfers to the state if no surviving relatives exist.

Copyright ©Houghton Mifflin Company. All rights reserved Spousal Estate Rights  Spouses have legal rights to each other’s estates  Partnership Theory of Marriage Rights: Presumes that wedded couples intend to share their fortunes equally.

Copyright ©Houghton Mifflin Company. All rights reserved Spousal Estate Rights  Community Property Laws: assume that the surviving spouse owns half of everything that both partners earned during the marriage.  Community Property: consists of property acquired during marriage, except for separable property.

Copyright ©Houghton Mifflin Company. All rights reserved Spousal Estate Rights  Separable Property: a property wholly owned by the one spouse.

Concept Check 18.1  What is probate, and why should people try to avoid probate court?  Distinguish between a probate and nonprobate property.  Give three examples of how people transfer some estates by contract.  Give an example of what could happen to one’ s estate when one dies without a will. Copyright ©Houghton Mifflin Company. All rights reserved

Copyright ©Houghton Mifflin Company. All rights reserved Learning Objective #2 Determine how trusts can be used to transfer assets and reduce estate taxes.

Copyright ©Houghton Mifflin Company. All rights reserved Trusts  Trust: legal arrangement through which you designate any or all of your assets to be owned by the trust either immediately or at some point in the future.  In estate planning, trusts are used to transfer assets and reduce estate taxes

Copyright ©Houghton Mifflin Company. All rights reserved Trusts  Grantor (or Settler, Donor, or Trustor): creator of a trust.  Trustee: Person charged with carrying out the trust for the benefit of the grantor(s) and heirs.

Copyright ©Houghton Mifflin Company. All rights reserved Trusts  Corpus: assets placed into the trust.  Beneficiary: person for whose benefit the trust was created.  Remainder Beneficiary(s): person(s) to receive the trust assets at the termination of the trust

Copyright ©Houghton Mifflin Company. All rights reserved Trusts  Living Trust: a trust that takes effect while the grantor is still alive.

Copyright ©Houghton Mifflin Company. All rights reserved Trusts  Revocable Living Trust: grantor maintains the right to change the trust’s terms or cancel it at any time, for any reason, during his or her lifetime.

Copyright ©Houghton Mifflin Company. All rights reserved Trusts  Irrevocable Living Trust: arrangement in which the grantor permanently gives up ownership and the right to control of the property, to change the beneficiaries, and to change the trustees.

Copyright ©Houghton Mifflin Company. All rights reserved Trusts  Testamentary Trusts: become effective upon the death of the grantor according to the terms of the grantor’s will or a revocable living trust.

Concept Check 18.2  List some reasons why people establish trusts.  Distinguish between a grantor and a trustee.  Summarize the difference between living and testamentary trusts.  Explain what is so important about the difference between revocable and irrevocable trusts. Copyright ©Houghton Mifflin Company. All rights reserved

Copyright ©Houghton Mifflin Company. All rights reserved Learning Objective #3 Summarize the benefits of preparing advance directive documents.

Copyright ©Houghton Mifflin Company. All rights reserved Advance Directive Documents  Prepare advance directive documents in case you become incapacitated!

Copyright ©Houghton Mifflin Company. All rights reserved Advance Directive Documents  Durable Power of Attorney: a document in which you appoint someone, called an attorney-in-fact, to handle your legal or business matters and sign his or her name to documents.

Copyright ©Houghton Mifflin Company. All rights reserved Advance Directive Documents  Limited (or Special) Power of Attorney: narrower in scope and could be restricted to one specified act or a certain time period.  Springing Power of Attorney: “jumps” into effect when a specified event occurs.

Copyright ©Houghton Mifflin Company. All rights reserved Advance Directive Documents  Advance Medical Directive: a medical guideline that pertains to treatment preferences.  Health Care Proxy: legal document in which individuals designate another person to make health care decisions if they are rendered incapable of making his or her wishes known.

Copyright ©Houghton Mifflin Company. All rights reserved Advance Directive Documents  Living Will: instructs health care providers of your wishes should you become terminally ill with no hope of survival and unable to express your wishes.

Concept Check 18.3  What does a durable power of attorney accomplish, and who should consider having one?  Distinguish between a limited power of attorney and a springing power of attorney.  Summarize the difference between a living will and a medical power of attorney. Copyright ©Houghton Mifflin Company. All rights reserved

Copyright ©Houghton Mifflin Company. All rights reserved Learning Objective #4 List the questions and documents needed to simplify the settlement and transfer of your estate.

Concept Check 18.4  List five estate planning documents that should be easily found by your survivors.  List five different types of assets about which your survivors will need detailed information in order to claim them after your death. Copyright ©Houghton Mifflin Company. All rights reserved

Copyright ©Houghton Mifflin Company. All rights reserved Learning Objective #5 Explain the potential impact of estate and inheritance taxes.

Copyright ©Houghton Mifflin Company. All rights reserved Estate and Inheritance Taxes  Federal Estate Tax: Assessed against a deceased person’s estate before property is transferred to heirs or assigned according to terms of a will or state intestacy laws.

Copyright ©Houghton Mifflin Company. All rights reserved Estate and Inheritance Taxes  Exclusion Amount: The value of assets that may be transferred to heirs without incurring an estate tax. The first $3.5 million (in 2009) of a taxable estate is exempt from the federal estate tax. Will be unlimited in 2010 and revert to $1 million in 2011 unless Congress acts.

Copyright ©Houghton Mifflin Company. All rights reserved Estate and Inheritance Taxes  Marital Deduction: allows an estate to pass on an unlimited amount of assets to a surviving spouse free of estate taxes.  Inheritance Tax: based on how much the beneficiaries get and their right to receive it.

Concept Check 18.5  What is the exclusion amount on the federal estate tax?  Tell how the marital deduction works in estate planning.  Comment on the likely impact of estate taxes and inheritance taxes at the state level on most people. Copyright ©Houghton Mifflin Company. All rights reserved

Copyright ©Houghton Mifflin Company. All rights reserved The Top 3 Financial Missteps In Estate Planning People slip up in investing in estate planning when they do the following: 1. Not having a will. 2. Not having signed advance directive documents.

Copyright ©Houghton Mifflin Company. All rights reserved The Top 3 Financial Missteps In Estate Planning 3. Forgetting to update forms you have signed that contractually award assets, like life insurance and retirement and checking accounts, to ex-spouses, siblings, parents, and others because those instructions override your will.

Copyright ©Houghton Mifflin Company. All rights reserved Do It NOW! Estate planning is not just for older persons or those with high levels of wealth. Start today by: 1.Taking an inventory of your inheritable assets and deciding to whom you would like them to go in the event of your death.

Copyright ©Houghton Mifflin Company. All rights reserved Do It NOW! 2.Determining how all of your bank and investment accounts are owned and changing the ownership form as appropriate to individual or joint. 3.Preparing a will.