PFIN 4 Preserving Your Estate 15 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GITMAN/ JOEHNK/ BILLINGSLEY

2 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1Describe the role of estate planning in personal financial planning, and identify the seven steps involved in the process 2Recognize the importance of preparing a will and other documents to protect you and your estate 3Explain how trusts are used in estate planning LEARNING OUTCOMES PFIN4 | CH15

3 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4Determine whether a gift will be taxable and use planned gifts to reduce estate taxes 5Calculate federal taxes due on an estate 6Use effective estate planning techniques to minimize estate taxes LEARNING OUTCOMES (continued) PFIN4 | CH15

Estate Planning 4 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Developing a plan to administer and distribute assets after death according to: Deceased’s wishes Needs of survivors PFIN4 | CH15

Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Potential Estate Planning Problems and Major Causes or Indicators

Who Needs Estate Planning ? 6 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. People planning Anticipate psychological and financial needs of loved ones Provide adequate resources to maintain life of loved ones Asset planning Ensuring that assets are received by desired beneficiaries upon a person’s death or incapacity PFIN4 | CH15

Reasons for an Estate Break Up 7 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Death-related costs Inflation Lack of liquidity Improper use of vehicles of transfer Disabilities PFIN4 | CH15

Types of Estate 8 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Real and personal property owned by a person that can be transferred at death by will Probate Property owned by the decedent is subject to federal estate taxes upon a person’s death Gross Property which won’t be part of the estate for federal estate tax purposes yet will pass to the family upon a person’s death Nonprobate PFIN4 | CH15

Exhibit Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Steps in the Estate Planning Process

Will 10 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Expresses how a person’s property should be distributed upon his or her death Written and legally enforceable document Intestacy: Situation that exists when a person dies without a valid will Testator: Person who makes a will that provides for disposition of property at his or her death PFIN4 | CH15

Requirements of Preparing the Will 11 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Provide a plan for distributing the testator’s assets according to: Testator’s wishes and beneficiaries’ needs Federal and state dispositive and tax laws Consider the changes in family conditions occurring after execution of the will Be concise and complete in describing the testator’s desires PFIN4 | CH15

Features of a Will 12 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Introductory clause Direction of payments Disposition of property Appointment clause Tax clause Simultaneous death clause Execution and attestation clause Witness clause

Will 13 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Requirements for being valid Mental capacity Freedom of choice Proper execution Changing Codicil: Document that legally modifies a will without revoking it Ways of revoking Making a later will that revokes prior wills

Will 14 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Making a codicil that expressly revokes all wills the one being modified Making a later will that is inconsistent with a former will Physically mutilating, burning, tearing, or defacing the will with the intention to revoke it Safe guarding Original will needs to be kept in a safe- deposit box Lodging of the will - Filling and safekeeping the will in the office of the probate court

Will 15 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Letter of last instructions Informal memorandum that is separate from a will Contains suggestions for carrying out a decedent’s wishes

Administration of an Estate 16 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Probate process: Court supervised disposition of a decedent’s estate A local court supervises probate process through the executor and administrator Executor: Personal representative of an estate designated decedent's will Administrator: Personal representative of the estate appointed by the court if the decedent died intestate

Other Estate Planning Documents 17 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Authorizes another person to take over someone’s financial affairs and act on his or her behalf Durable power of attorney for financial matters States the treatments a person wants incase of a terminal illness Living will Authorizes an individual to make health care decisions on behalf of the principal Durable power of attorney for healthcare Personal statement that shares values, blessings, experience and hopes and dreams for the future, with loved ones Ethical will

Forms of Joint Ownership 18 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Joint tenancy Ownership by two or more parties with the survivor holding all property upon death of one or more of the owners Tenancy by entirety Ownership by husband and wife in which property passes to the surviving spouse

Characteristics of Joint Ownership 19 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Right of survivorship: Surviving joint owners of property receive title to the deceased joint owner’s interest in the property Joint tenancy may consist of any number of persons without any relation Tenancy by entirety can exist only between husband and wife

Joint Ownership 20 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Each joint tenant can unilaterally sever the tenancy in a joint tenancy Tenancy by entirety can be severed only by mutual agreement, divorce, or conveyance by both spouses to a third party Co-owners must have equal interests

Other Forms of Ownership 21 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Tenancy in common Co-ownership where there is no right of survivorship Allows each co-owner to leave their share to whomever they desire Community property Marital property co-owned equally by both spouses while living in a community property state

Trusts 22 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Created when one party transfers property to a second party for the benefit of third parties Grantor: Person who creates a trust and whose property transferred into it Trustee: Organization or individual Selected by a grantor to manage and conserve property in a trust Beneficiaries: People who receive benefits from a trust

Trusts 23 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Purposes Attain income and estate tax savings Manage and conserve property

Qualities of a Trustee 24 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Posses sound business knowledge and judgment Have an intimate knowledge of the beneficiary’s needs and financial situation Being skilled in investment and trust management Being available to beneficiaries Ability to make impartial decisions

Types and Characteristics of Trusts 25 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Living: Created and funded during grantor’s lifetime Pour-over wills: Provides for passing of the estate to an existing living trust Revocable living: Grantor reserves the right revoke the trust and regain property Irrevocable living: Grantor gives up the right revoke or terminate the trust

Types and Characteristics of Trusts 26 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Testamentary: Created by decedent’s will and funded through probate process Irrevocable life insurance: Major asset is life insurance on the grantor’s life

Federal Unified Transfer Taxes 27 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Tax on right to transfer property from one individual to another which affects: Gift tax: Tax levied on the value of gifts made during the giver’s life time Estate tax: Tax levied on the value of property transferred at the owner’s death Applicable exclusion amount (AEA): Credit applicable to the amount of federal estate tax owed by the person at death Unified rate schedule: Applied to all taxable transfers

Means for Reducing Amount for Tax Purposes 28 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Annual exclusions: Amount given each year without being subject to gift tax Gift splitting: Method of reducing gift taxes Charitable deductions Marital deductions Qualified Terminable Interest Trust (QTIP)

Steps in Computation of Federal Estate Tax 29 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Determine the gross estate Find the adjusted gross estate Calculate the taxable estate Compute the estate tax base Determine the total death taxes Determine federal estate tax due

Estate Planning Techniques 30 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15 Gift giving program Use of the unified transfer tax credit Charitable contributions Life insurance trust Trusts Valuation issues Minority interest Marketability discount Blockage discount

31 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Estate planning Probate estate Gross estate Will Intestacy Testator Codicil Letter of last instructions Probate process Executor KEY TERMS Administrator Durable power of attorney for financial matters Living will Durable power of attorney for health care Ethical will Right of survivorship Joint tenancy Tenancy by the entirety PFIN4 | CH15

32 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Tenancy in common Community property Trust Grantor Trustee Beneficiaries Living (inter vivos) trust Revocable living trust Irrevocable living trust Pour-over will Testamentary trust KEY TERMS Irrevocable life insurance trust Gift tax Estate tax Applicable exclusion amount (AEA) Unified rate schedule Annual exclusions Gift splitting Unified tax credit PFIN4 | CH15

33 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUMMARY Estate planning involves developing a plan to administer and distribute assets after death according to deceased’s wishes, and needs of survivors A will is an important document as it expresses how a person’s property should be distributed upon his or her death Trusts facilitate the transfer of property and the income earned from it to another party PFIN4 | CH15

34 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUMMARY Federal unified transfer tax affects gift tax and estate tax Federal estate taxes are levied on the transfer of property at death Estate planning techniques Gift giving program Using unified transfer tax (UTT) credit Investing in life insurance Establishing trusts PFIN4 | CH15