1. RETIREMENT AND ESTATE PLANNING Chapter 15

2. Defining Your Retirement Needs How much income do you need? Keep the house or move? What type of investment strategy? What type of insurance? How do you beat inflation?

3. Estate Planning Tools Estate – all that a person owns, less debts owed, at the time of the person’s death. Estate planning – preparing a plan for transferring property during one’s lifetime and at one’s death.

4. Estate Planning Goals Minimize taxes on the estate Make known how you want your possessions distributed Provide a smooth transfer of your possessions

5. Estate Planning Tools Wills Power of attorney Trusts Joint ownership

6. Wills A legal document that tells how you want your estate to be distributed after your death. Executor – named in the will, person to carry out the transfer of your estate. Any person 18 and over and of sound mind can make a legally valid will. Person creating a will is called the testator.

7. Types of Wills Simple Will – short document that lists the people you want to inherit and what you want each to receive. Holographic Will – written in a person’s own handwriting. Legally valid in 19 states and should be witnessed. Often easier to contest.

8. Wills Die without a will – said to be intestate, person’s property is distributed according to the laws of the state. Once will is made, small changes are made with a document called a codicil. It lists modifications and then reaffirms the rest of the original will document.

9. Power of Attorney Legal document authorizing someone to act on your behalf. Special – limited in scope or duration General – power to do anything you could do

10. Trusts Legal document in which an individual (the trustor) gives someone else (the trustee) control of property, for the ultimate distribution to another person (the beneficiary) Inter vivos or living trust – trust existing during the lifetime of the trustor Testamentary trust or trust will – takes effect upon the death of trustor Money and property left to a minor – must have a legal guardian – who makes accounting for the money and property Balance given to minor at a later age (25, 30, 35, etc.)

11. Trusts Purpose – two fold -Provide for beneficiaries who might not be able to effectively manage assets for themselves -Minimize inheritance or estate taxes and avoid probate (court-supervised process of paying your debts and distributing your property to your heirs)

12. Joint Ownership Two or more people own interest in the property. Joint ownership with a spouse – joint tenants with rights of survivorship (ownership is split 50-50 for estate tax purposes) Joint ownership with out survivorship – passes to his/her heirs

13. Taxation of Estates Federal estate taxes – tax on property transferred from deceased people to their heirs. Estate needs to be over certain amount. (currently $5.43 million) State death taxes – inheritance tax - tax on an heir who receives property from a deceased person’s estate. The difference is who pays a tax. Laws vary greatly between states.

14. Taxation of Estates Federal gift taxes Method to distribute property before death to avoid estate and inheritance taxes. Gift tax is tax on gift of money or property to be paid by the giver. Can give up to $14,000 per person per year. Timing of gift matters given within 3 years of death – still must pay taxes on the value of the gift.

15. Taxation of Estates Federal/state income taxes Income taxes must be paid on income the decedent earned that year. Executor must file this tax return and pay taxes before estate can be distributed.

16. Personal Retirement Accounts Individual retirement accounts (IRAs) Keogh plans – Self-employed Simplified employee pension (SEP) plans Annuities Pre-taxed savings

17. Individual Retirement Accounts (IRAs) Traditional IRA – deduct your contribution each year from your taxable income (pay taxes on earning as well contributions when you retire) Roth IRA – taxes the contributions, but not the money withdrawn at retirement (don’t pay taxes on the earnings) Education IRA – contributions are not deductible/not taxable when withdrawn

18. Employer-Sponsored Retirement Plans Defined-benefit plans – a company-sponsored retirement plan in which employees receive a specified monthly amt. based on wages earned and number of years of service (i.e. pension) – Must be vested Defined-contribution plans – a company-sponsored retirement plan in which employees may choose to contribute part of their salary as a tax-deferred investment  401(k) plans – employees of companies  403(b) plans – employees of government or not-for- profit

19. Government-Sponsored Pension Plans Social security benefits – eligible to receive when you retire if you paid social security taxes during your lifetime. The amount of your benefit is based on your earnings and contributions to social security. Military benefits – retired military personnel receive pensions after 20 years of active duty in the US armed forces. Pensions are payable in full regardless of other sources of income and are subject to income taxes.