Prentice-Hall, Inc.1 Chapter 17 Estate Planning: Saving Your Heirs Money and Headaches

Prentice-Hall, Inc.2 Objectives of Estate Planning  Distribute property  Provide for dependents  Select guardians for minors  Minimize estate and inheritance taxes  Minimize settlement costs, including legal and accounting fees  Appoint power of attorney in case of physical or mental impairment

Prentice-Hall, Inc.3 The Estate Planning Process  Step 1: Determine what your estate is worth. –Estate net worth = value of estate’s assets – value of estate liabilities  Step 2: Choose your heirs and decide what they receive.

Prentice-Hall, Inc.4 The Estate Planning Process (cont’d)  Step 3: Determine the cash needs of the estate. – Liquid assets are needed to pay estate taxes  Step 4: Select and implement your estate planning techniques.

Prentice-Hall, Inc.5 Understanding and Avoiding Estate Taxes  Estate taxes  Gift taxes  Unlimited marital deduction  The generation- skipping tax  Calculating estate taxes

Prentice-Hall, Inc.6 Estate Taxes  $675,000 tax-free transfer threshold for 2000/2001 increasing to $1 million in  Tax rates of 37% to 55%, determined by exact value, will be assessed on estates valued over the tax-free transfer threshold.  Special treatment for small business and family farm owners.

Prentice-Hall, Inc.7 Gift Taxes  An individual can give $10,000 ($20,000 per couple) per year tax-free to an unlimited number of people.  The $10,000 amount will be indexed to inflation, but only in $1,000 increments.  Gifts in excess of the limit are nontax- exempt.

Prentice-Hall, Inc.8 Unlimited Marital Deduction  There is no limit on the value of an estate that can be passed tax-free to a spouse who is a U.S. citizen.  Unlimited marital deduction does not apply to non-U.S. citizen spouses.  Tax-free gift per year to non-citizen spouses is $100,000, beyond the tax- free transfer threshold.

Prentice-Hall, Inc.9 The Generation-Skipping Tax  Flat 55% tax, in addition to the regular estate tax, imposed on any wealth or property transfers to a person 2 or more generations younger than the donor.

Prentice-Hall, Inc.10 The Generation-Skipping Tax  Exemptions apply: – $10,000 gift tax exclusion as well as education and medical expense gift tax exclusions apply – Exemption of $1 million per individual ($2 million per couple) may be passed on to grandchildren

Prentice-Hall, Inc.11 Calculating Your Estate Taxes  Step 1: Calculate the value of the gross estate  Step 2: Calculate your taxable estate  Step 3: Calculate your gift-adjusted taxable estate  Step 4: Calculate your estate taxes

Prentice-Hall, Inc.12 Step 1: Calculate the Value of the Gross Estate  This is the value of all of the deceased’s assets.  This includes life insurance, pensions, investments, and any real or personal property.

Prentice-Hall, Inc.13 Step 2: Calculate Your Taxable Estate  This is equal to the gross value of the deceased’s estate minus funeral and administrative expenses, debts, liabilities, taxes and any marital or charitable deductions.

Prentice-Hall, Inc.14 Step 3: Calculate Your Gift- Adjusted Taxable Estate  This is equal to the deceased’s taxable estate plus any taxable lifetime gifts (cumulative).

Prentice-Hall, Inc.15 Step 4: Calculate Your Estate Taxes  Estate taxes are equal to the gift- adjusted taxable estate multiplied by the appropriate tax rate.  To determine the net tax owed calculate the total tax owed and subtract the unified gift and estate tax credit. In 2000/2001, the $675,000 estate tax transfer threshold equaled a credit of $220,500.

Prentice-Hall, Inc.16 Wills and What They Do  Will -- a legal document that transfers an estate after death  Beneficiaries -- the people who receive your property  Executor or personal representative -- the person who is responsible for carrying out the provisions of the will  Guardian -- cares for minor children and manages their property

Prentice-Hall, Inc.17 Wills and the Probate Process  Probate -- the process of distributing an estate's assets  Purposes of the probate process – appoint an executor, if one is not named – validate the will – allow for challenges to the will – oversee the distribution of assets – file a report with the court and close the estate

Prentice-Hall, Inc.18 Wills and the Probate Process (cont’d)  Disadvantages of the probate process – Numerous costs and fees – legal fees, executor fees, court fees – that can run to 1% to 8% of the estate value – Process can be slow, especially if there are challenges to the will or tax problems

Prentice-Hall, Inc.19 Why Do You Need a Will?  So state law will not dictate the – distribution of your assets – custody of children or care for those with special needs  To avoid a court-appointed administrator and associated costs

Prentice-Hall, Inc.20 The Basics of Writing a Will  Wills can be handwritten, computer generated, or oral  The safest way is to have a will drawn up by a lawyer  Wills must be signed, witnessed by 2 or more people, and notarized

Prentice-Hall, Inc.21 The Basics of Writing a Will (cont’d)  Wills should be stored in a safe place; however, a safety deposit box is not always a good place because it may be sealed upon your death.  Note: Always tell someone you trust where your will is so it can be found upon your death.

Prentice-Hall, Inc.22 The Basic Organization of a Will  Introductory statement  Payment of debt and taxes clause  Disposition of property clause  Appointment clause  Common disaster clause  Attestation and witness clause

Prentice-Hall, Inc.23 Introductory Statement  Identifies the owner of the will and revokes all previous copies of the will

Prentice-Hall, Inc.24 Payment of Debt and Taxes Clause  Directs the payment of debts, death and funeral expenses, and taxes.

Prentice-Hall, Inc.25 Disposition of Property Clause  Allows for the distribution of money and property.  Names the beneficiaries.  Contains a remainder clause stipulating the disposition of any assets not directly given.

Prentice-Hall, Inc.26 Appointment Clause  Names the executor of the will  Appoints guardians for all children under 18 years of age

Prentice-Hall, Inc.27 Common Disaster Clause  Identifies which spouse is assumed to have died first in the event of simultaneous death

Prentice-Hall, Inc.28 Attestation and Witness Clause  Dates and validates the will with a signature before 2 or more witnesses, who also must sign the document.

Prentice-Hall, Inc.29 Requirements of a Valid Will  Mental competence  Under no undue influence from another person  Will must conform to the state laws

Prentice-Hall, Inc.30 Updating or Changing Your Will -- The Codicil  Institutes minor changes in the original will  Must be signed, witnessed, and attached to the original will  Note: If the changes are major then a new will should be drafted.

Prentice-Hall, Inc.31 Letter of Last Instruction  Not a legally binding agreement  Provides information and direction, Including the location of your will  Lists the people to be notified of your death  Lists the location of all pertinent legal documents  Contains funeral and burial instructions

Prentice-Hall, Inc.32 The Duties of an Executor  Ensures that the deceased's wishes are carried out  Sends copies of the will to all beneficiaries  Publishes the death notice  Pays debts and liabilities on behalf of the estate  Manages the deceased's property until the will is executed and the estate closed

Prentice-Hall, Inc.33 Other Estate -- Planning Documents  Durable power of attorney  Living will  Health care proxy

Prentice-Hall, Inc.34 Durable Power of Attorney  Provides for someone to act on your behalf in the event you should become mentally or physically incapacitated.  This document is separate from the will and goes into effect before death.  This document should be very specific as to which legal powers it transfers.

Prentice-Hall, Inc.35 Living Will and Health Care Proxy  A living will states your wishes regarding medical treatment in the event of a terminal illness or injury.  A health care proxy designates someone to make health care decisions should you be unable to do so for yourself.

Prentice-Hall, Inc.36 Ways to Avoid Probate  Joint ownership – tenancy by the entirety – joint tenancy with the right of survivorship – tenancy in common -- will controls distribution of deceased’s share – community property -- state law and will control distribution of the property

Prentice-Hall, Inc.37 Ways to Avoid Probate (cont’d)  Gifts –Exception for life insurance policies –Unlimited gift tax exclusion on payments made for medical and educational expenses –Charities  Naming beneficiaries in contracts  Trusts – Living -- take effect before death – Testamentary -- take effect upon death

Prentice-Hall, Inc.38 The Benefits of Using Trusts for Estate Transfer  Avoid probate  Are much more difficult to challenge in court than are wills  Reduce estate taxes  Allow for professional management  Provide for confidentiality

Prentice-Hall, Inc.39 The Benefits of Using Trusts for Estate Transfer (cont’d)  Can be used to provide for children with special needs  Can be used to hold money until a child reaches maturity  Can assure that children from a previous marriage will receive some inheritance

Prentice-Hall, Inc.40 Living Trusts  Revocable trust  Irrevocable living trusts

Prentice-Hall, Inc.41 Revocable Trusts  Allow for unlimited control by the trust’s owner, because the owner retains title to all the assets in the trust.  Do not provide any tax advantages.  Do not pass through probate.  Provide greater ease and privacy of distribution upon death.

Prentice-Hall, Inc.42 Irrevocable Living Trusts  Can not be changed by the owner once established, because the trust becomes another entity which owns all the assets contained in the trust.  Are not subject to estate taxes.  Do not pass through probate.

Prentice-Hall, Inc.43 Testamentary trusts  Standard family trusts  Qualified terminable interest property (Q-TIP) trusts  Sprinkling trusts

Prentice-Hall, Inc.44 Standard Family Trusts  Holds the assets of the first spouse to die until the second spouse dies.  Spouse has access to income from the trust, or the trust principal, if necessary.  Reduces the estate of the second spouse so that the estate taxes can be reduced.

Prentice-Hall, Inc.45 Qualified Terminable Interest Property (Q-TIP) Trusts  Provides a means to pass income to the surviving spouse without turning over control of the assets.  Ensures that assets will be passed to your children upon the death of the surviving spouse.

Prentice-Hall, Inc.46 Sprinkling Trusts  Distributes assets on a need basis rather than according to some preset plan to a designated group of beneficiaries.

Prentice-Hall, Inc.47 A Last Word on Estate Planning  Do it now!  Write a will.  Depending on estate size and other needs, get professional help with estate planning.  Tell someone the location of your estate planning documents.

Prentice-Hall, Inc.48 What Should You Do for 2000/2001?  If your estate is worth less than $675,000 you have no estate tax problems. –Write a will –Consider a trust for managing property of children  If you’re married and your estate value is between $675,000 and $1.35M, to avoid taxes –Take advantage of the tax-free estate transfer –Consider a standard family trust

Prentice-Hall, Inc.49 What Should You Do for 2000/2001? (cont’d)  If you’re single and have an estate of over $675,000 or are married have an estate over $1.35M –Reduce the value of the estate to avoid taxes »Spend »Give money away »Give away life insurance

Prentice-Hall, Inc.50 Summary  The estate planning process consists of – determining what your estate is worth. – choosing your heirs and deciding what they receive. – determining the cash needs of the estate. – selecting and implementing your estate planning techniques.  Your will and the probate process

Prentice-Hall, Inc.51 Summary (cont’d)  Other estate planning documents – Durable power of attorney – Living will – Letter of last instruction  Types of trusts – living trusts -- take effect before death – testamentary trusts -- take effect upon death

Prentice-Hall, Inc.52 Summary (cont’d)  Benefits of using trusts – avoid probate – more difficult to challenge than are wills – reduce estate taxes – allow for professional management – provide for confidentiality – allow options for meeting the needs of children  Reducing the taxable value of an estate