1. PFIN 15 Preserving Your Estate 5 BILLINGSLEY/ GITMAN/ JOEHNK
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2. LEARNING OUTCOMES
Describe the role of estate planning in personal financial planning, and identify the seven steps involved in the process
Recognize the importance of preparing a will and other documents to protect you and your estate
Explain how trusts are used in estate planning
PFIN5 | CH15
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3. Calculate federal taxes due on an estate
LEARNING OUTCOMES (continued)
Determine whether a gift will be taxable and use planned gifts to reduce estate taxes
Calculate federal taxes due on an estate
Use effective estate planning techniques to minimize estate taxes
PFIN5 | CH15
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4. Estate Planning
Developing a plan to administer and distribute assets after death according to:
Deceased’s wishes
Needs of survivors
PFIN5 | CH15
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5. Exhibit 15.1
Potential Estate Planning Problems and Major Causes or Indicators
PFIN5| CH15
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6. Who Needs Estate Planning ?
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
PFIN5 | CH15
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7. Reasons for an Estate Break Up
Death-related costs
Inflation
Lack of liquidity
Improper use of vehicles of transfer
Disabilities
PFIN5| CH15
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8. Types of Estate Probate Gross Nonprobate
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
PFIN5 | CH15
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9. Exhibit 15.2 Steps in the Estate Planning Process PFIN5| CH15
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10. Will
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
PFIN5 | CH15
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11. Requirements of Preparing the Will
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
PFIN5 | CH15
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12. Features of a Will Introductory clause Direction of payments
Disposition of property
Appointment clause
Tax clause
Simultaneous death clause
Execution and attestation clause
Witness clause
PFIN5| CH15
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13. Requirements for being valid
Will
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
PFIN5 | CH15
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14. Will
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
PFIN5| CH15
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15. Letter of last instructions
Will
Letter of last instructions
Informal memorandum that is separate from a will
Contains suggestions for carrying out a decedent’s wishes
PFIN5 | CH15
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16. Administration of an Estate
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
PFIN5 | CH15
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17. Other Estate Planning Documents
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
PFIN5| CH15
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18. Forms of Joint Ownership
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
PFIN5 | CH15
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19. Characteristics of Joint Ownership
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
PFIN5| CH15
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20. Co-owners must have equal interests
Joint Ownership
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
PFIN5 | CH15
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21. Other Forms of Ownership
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
PFIN5| CH15
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22. Trustee: Organization or individual
Trusts
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
PFIN5 | CH15
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23. Trusts Purposes Attain income and estate tax savings
Manage and conserve property
PFIN5 | CH15
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24. Posses sound business knowledge and judgment
Qualities of a Trustee
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
PFIN5 | CH15
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25. Types and Characteristics of Trusts
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
PFIN5 | CH15
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26. Types and Characteristics of Trusts
Testamentary: Created by decedent’s will and funded through probate process
Irrevocable life insurance: Major asset is life insurance on the grantor’s life
PFIN5 | CH15
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27. Federal Unified Transfer Taxes
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
PFIN5 | CH15
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28. Means for Reducing Amount for Tax Purposes
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)
PFIN5 | CH15
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29. Steps in Computation of Federal Estate Tax
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
PFIN5 | CH15
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30. Estate Planning Techniques
Gift giving program
Use of the unified transfer tax credit
Charitable contributions
Life insurance trust
Trusts
Valuation issues
Minority interest
Marketability discount
Blockage discount
PFIN5 | CH15
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31. KEY TERMS Administrator Estate planning
Probate estate
Gross estate
Will
Intestacy
Testator
Codicil
Letter of last instructions
Probate process
Executor
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
PFIN5 | CH15
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.

32. KEY TERMS Irrevocable life insurance trust Tenancy in common
Community property
Trust
Grantor
Trustee
Beneficiaries
Living (inter vivos) trust
Revocable living trust
Irrevocable living trust
Pour-over will
Testamentary trust
Irrevocable life insurance trust
Gift tax
Estate tax
Applicable exclusion amount (AEA)
Unified rate schedule
Annual exclusions
Gift splitting
Unified tax credit
PFIN5| CH15
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.

33. 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
PFIN5 | CH15
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.

34. Federal unified transfer tax affects gift tax and estate tax
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
PFIN5 | CH15
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.