Dr. Steven Hays Personal Finance BKHS

 Explain the use of a will  Describe estate taxes  Explain the use of trusts, gifts, and contributions  Introduce other aspects of estate planning 20- 2

 Estate: the assets of a deceased person after all debts are paid  Estate planning: the act of planning for how your wealth will be allocated on or before your death 20- 3

 Will: a legal request for how your estate should be distributed upon your death. If can also identify a preferred guardian for any surviving children

 Reasons for having a will ◦ Ensures that your estate is distributed as you desire ◦ Beneficiaries (heirs): the persons specified in a will to receive a part of an estate ◦ Intestate: the condition of dying without a will  Court appoints an administrator who may not make the decisions you preferred 20- 5

 Creating a valid will ◦ Minimum age — 18 or 21 ◦ Mentally competent ◦ Not under undue influence of others ◦ Must be signed and dated ◦ 2 or 3 witnesses who are not beneficiaries ◦ Attorney recommended

 Common types of wills ◦ Simple will: a will suitable for smaller estates that specifies that the entire estate be distributed to the person’s spouse ◦ Traditional marital share will: a will suitable for larger estates, valued at $675,000 or more) that distributes half of the estate to the spouse and all the other half to any children or to a trust 20- 7

 Key components of a will ◦ Distribution of the estate  Details the the distribution to the heirs, usually by percentage ◦ Executor (personal representative): the designated in a will to execute your instructions regarding the distribution of your assets  Collects debts owed to the estate, pays debts owed by estate, and distributes proceeds of the estate 20- 8

◦ Guardian  Parents should name a person to be responsible for caring for any dependent children ◦ Signature  Validates will ◦ Letter of last instruction  Describes your wishes regarding funeral arrangements and tells the location of any key financial documents 20- 9

 Go to: retire/will/tlwillq.asp retire/will/tlwillq.asp  This Web site provides a quiz that indicates your ability to create your own will

Exhibit 20.1: A Sample Will

Exhibit 20.1: A Sample Will

 Focus on Ethics: Undue influence on wills ◦ Wills can be created under duress or from undue influence ◦ Consider creating a will without consulting potential beneficiaries ◦ A financial planner can assist you

 Changing your will ◦ May be necessary if you move to a state with different laws or if you marry or divorce ◦ Major changes may require a new will ◦ Codicil: a document that specifies changes in an existing will  Appropriate for minor revisions

 Executing the will during probate ◦ Probate: a legal process that declares a will valid and ensures the orderly distribution of assets ◦ Executor files forms in probate court, provides a copy of the will, a list of assets and liabilities of deceased, pays debts and sells necessary assets  Typically opens a bank account for this purpose

 Without a surviving spouse, a large estate is subject to estate taxes  Determining estate taxes ◦ Value of estate is the value of all assets minus any liabilities minus funeral and administrative expenses

◦ In 2001, estates with values over $675,000 are subject to federal taxes of 37% to 50%  Tax Relief Act of 2001 gradually increases tax free limit while reducing maximum tax rate ◦ Proper planning can reduce these taxes

 Other related taxes ◦ Some states also impose taxes on estates  Valuing your estate to assess potential estate taxes ◦ It is important to calculate the value of your estate periodically so that you can plan appropriately if your net worth exceeds the tax-free limit

 These may help avoid estate taxes  Trust: a legal document in which one person transfers assets to another who manages them for designated beneficiaries ◦ Grantor: the person who creates a trust ◦ Trustee: the person or institution named in a trust to manage the trust assets for the beneficiaries

◦ Living trust: a trust in which you assign the management of your assets to a trustee while you are living  Revocable living trust: a living trust that can be dissolved  Irrevocable living trust: a living trust that cannot be changes, although it can provide income to the grantor

◦ Standard family trust (credit-shelter trust): a trust established for children in a family  Testamentary trust: a trust created by a will  Gifts: a tax-free distribution of up to $10,000 per year from one person to another ◦ Not subject to tax for the giver or the recipient  Contributions to charitable organizations ◦ Not subject to estate taxes

 Go to: asp asp  Click on: Estate Planning  Click on: Plan Your Estate  This Web site provides step-by-step instructions for estate planning

 Living will: a legal document in which individuals specify their preferences if they become mentally or physically disabled  Power of attorney: a legal document granting a person the power to make specific decisions for you in the event that you are incapable

◦ Durable power of attorney for health care: a legal document granting a person the power to make specific health care decisions for you  Maintaining estate plan documents ◦ Need to be kept in a safe, convenient place ◦ Key individuals need to know where they are kept

 Go to:  Click on: Estate Planning  This Web site provides a background on estate planning decisions and the terminology used in estate planning

 Key decisions about estate planning for your financial plan are: ◦ Should you create a will? ◦ How can you limit your estate taxes? ◦ Should you create a living will or designate an individual to have power of attorney?

20- 27