Chapter 18 Estate Planning

Copyright © Houghton Mifflin Company. All rights reserved.18 | 2 Learning Objectives 1.Identify the ways that your estate can be transferred through contracts and a will. 2.Determine how trusts can be used to transfer assets and reduce estate taxes. 3.Summarize the benefits of preparing advance directive documents. 4.Explain the potential impact of estate and inheritance taxes.

Copyright © Houghton Mifflin Company. All rights reserved.18 | 3 Introduction Estate: your personal 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.18 | 4 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.18 | 5 How Your Estate is Distributed >

Copyright © Houghton Mifflin Company. All rights reserved.18 | 6 Transfer Your Estate by Contracts Transfers by beneficiary contract designation Beneficiary: A person or organization designated to receive a benefit. 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.18 | 7 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. Transfers by payable-at-death contract designation Payable-at-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.18 | 8 Wills Transfer the rest of your estate by will. Transfers with a will go to your desired heirs Testator: writer of a will and owner of the estate. 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.18 | 9 Wills 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. 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.18 | 10 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. Used to transfer assets and reduce estate taxes 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.18 | 11 Trusts Grantor (or Settler, Donor or Trustor) – The person who makes a grant of assets to establish a trust. Trustee - The person or corporation to whom the property is entrusted to manage for the use and benefit of the beneficiary or beneficiaries. Corpus - The assets put into a trust. Beneficiary - The person for whose benefit a trust is created Remainder Beneficiaries – The parties named in the trust who are to receive the corpus (funds) upon termination of the trust agreement.

Copyright © Houghton Mifflin Company. All rights reserved.18 | 12 Trusts Living Trust: a trust that takes effect while the grantor is still alive. Testamentary Trust: a trust that takes effect only upon the grantor’s death. 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.18 | 13 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.18 | 14 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.

Copyright © Houghton Mifflin Company. All rights reserved.18 | 15 Estate Rights Spouses have legal rights to each other’s estates. Separable Property: a property wholly owned by the one spouse. Partnership Theory of Marriage Rights: Presumes that wedded couples intend to share their fortunes equally. 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.18 | 16 Advance Directive Documents Prepare advance directive documents in case you become incapacitated! 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. 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.18 | 17 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. 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.

Copyright © Houghton Mifflin Company. All rights reserved.18 | 18 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. Exclusion Amount: The value of assets that may be transferred to heirs without incurring an estate tax. For 2012, the first $5.1 million of a taxable estate is exempt from the federal estate tax. Then 35% tax rate above $5.1M. In 2013,everything goes back to the 2001 rules, so the estate tax exemption will only be $1 million, with a 55% tax rate. 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.

Copyright © Houghton Mifflin Company. All rights reserved.18 | 19 Nebraska Inheritance Tax The following table provides information on the inheritance tax rates in the state of Nebraska: Relationship StatusProperty AmountInheritance Tax Rate Immediate relatives$ 40, and more1% Remote relatives$ 15, % Others$ 0 - $ 10,000.00Exempt $ 10, % Nebraska Inheritance Tax Exemptions In the state of Nebraska exemption from inheritance tax is provided in the following cases: If the deceased was a resident of Nebraska, then his or her spouse is eligible to receive a household allowance of $7,500 per month. If the deceased has no spouse, then his or her minor children would receive a household allowance of $7,500 per month. This money would, however, be divided amongst the minor children of the deceased.

Copyright © Houghton Mifflin Company. All rights reserved.18 | 20 The Top 3 Financial Missteps In Estate Planning People experience challenges with investing in estate planning when they do the following: 1.Not having a will. 2.Not having signed advance directive documents. 3.Forgetting to update forms you have signed that contractually award assets, like life insurance and retirement and checking accounts, to ex-spouses, parents, siblings and others because those instructions do override your will.

Copyright © Houghton Mifflin Company. All rights reserved.18 | 21 Good Money Habits in Estate Planning Review the beneficiary and ownership designations in your life insurance policies, retirement plans, bank accounts, and other assets to make certain they will transfer the property according to your wishes. Be positive that certain family members or friends know where you keep financial records, advance directives, your will, and an estate planning checklist. Always have both an up-to-date will and a letter of last instructions, and revise them as major life events occur. Prepare and regularly update advance directive documents so others can make the right decisions for you if you become incapacitated.