1. Retirement and Wills
Chapter 36

2. 36.1 Retirement Income Public Pension Plans
The federal government administers: social security, railroad pensions, military pensions, and civil service pensions.

3. Social Security
Provides income to people when their regular incomes due to retirement, disability, or death of someone who had provided them income.
While working at a job that makes you eligible for benefits, you receive work credits- units that stand for a specific amount of money earned during a calendar quarter
Workers can earn up to four credits in one year
Example 1

4. With certain exceptions, workers need 40 work credits to be eligible for social security benefits.
This is equal to 10 years of contributions to the fund
These years do NOT need to be consecutive
The actual amount paid in benefits depends on your average earnings over a period of years.
The more you earn, the more benefits you receive up to a certain limit.

5. Age Requirements for Social Security Benefits
People Born in:
Receive Full Benefits at Age:
1938
65 and 2 months
1939
65 and 4 months
1940
65 and 6 months
1941
65 and 8 months
1942
65 and 10 months 66
1955
66 and 2 months
1956
66 and 4 months
1957
66 and 6 months
1958
66 and 8 months
1959
66 and 10 months
1960 or later 67

6. Workers are entitled to disability benefits under the social security law if they have a physical or mental condition that prevents them from doing substantial, gainful work and if the condition has lasted or is expected to last for at least 12 months.
Conditions expected to result in death are also eligible to receive disability benefits.

7. Employer Retirement Plans
Pension plan- retirement plan funded at least in part by an employer
Noncontributory pension plan- funded entirely by the employer
401 (k) plan- employees agree to forgo a bonus or take a salary reduction to invest in a retirement plan
Employers sometimes match the amount contributed by the employee

8. 403 (b)- similar plan offered to employees of nonprofit organizations
No taxes taken until the money is withdrawn
Cannot withdraw without penalty before age 59 ½
Lower income workers are entitled to tax credits when they save for retirement

9. Defined-Benefit Plans
Most common employer pension plan
Employees receive a definite, predetermined amount of money upon retirement or disability
The fixed amount is based on the employee’s years of service
The amount of the monthly benefit is an amount of money fixed in advance for each year of service
Example 2

10. Payments may also be calculated based on a percentage of wages over the years.
The employer must contribute necessary amounts to ensure that benefits will be paid at retirement.

11. Defined-Contribution Plans
An employer pays a certain amount into a pension fund every month or year for each employee
The amount contributed is usually a fixed percentage of the employee’s wages or salary

12. Employee Retirement Income Security Act
ERISA- employers must place employees’ pension contributions into a pension trust, independent of the employer
Employee’s contributions vest immediately
Vesting- act of giving a worker a guaranteed right to receive a future pension

13. Workers may transfer benefits from:
Portability- ability to transfer pension benefits from one job to another
Workers may transfer benefits from:
one company’s pension plan to the plan of another company
from one company’s pension plan to an IRA
from an IRA plan to a company plan

14. Personal Retirement Plans
Self-employed persons and employees who are not covered by a company pension plan have the same retirement needs as others.

15. Individual Retirement Accounts
IRA- an individual’s own personal pension plan
It is a system of providing for retirement by saving part of your earnings every year.
The earlier you start saving, the more you will have when you retire.

16. Various Types of IRAs Type of IRA Features
Regular / Traditional
Tax deferred interest and earnings
$5,000 annual limit – indexed for inflation
Limited eligibility for tax-deductible contributions
Contributions do not reduce current taxes
Roth
$5,000 annual limit on individual contributions– indexed for inflation
Withdraws are tax-free in specific cases
Coverdale Education Savings Account
Tax-deferred interest and earning
10% early withdrawal penalty is waved when money is used for higher edu.
$2,000 annual limit on contributions
Simplified Employee Pension Plan (SEP)
Pay yourself first payroll reduction contributions
Pre-tax contributions
Tax-deferred interest and earnings

17. Keogh Plans
Keogh plan- retirement plan for self-employed people and their employees
Contributions to the plan are tax deductible
Tax-deferred until the money is withdrawn
Savings can build until age 70 ½ at which time the retiree must begin to withdrawal

18. Assignment
Page 778 #1-4
Critical Thinking Activity

19. 36.2 Estate Planning Making a Will
Will-document signed during your lifetime that provides for the distribution of your property upon death
Testate- a person who dies with a with a will
Male – testator
Female – testatrix

20. Bequest- gift of personal property that is made by will
Devise- a gift of real property that is made by will
Beneficiaries- those who receive property by will

21. Who May Make a Will
Any person who is of sound mind and has reached adulthood may make a will.
You reach eighteen on the day before your 18th birthday
To be of sound mind, you must have sufficient mental capacity to do the following:
Understand the nature and extent of your property
Know who would be the natural persons to inherit your property even though you may leave your property to anyone you choose
Know that you are making a will
Be free from delusions that might influence the dispensation of your property

22. Formal Requirements of a Will
To be valid, a will must confirm exactly to the law of the state where it is made.
A will that is made legally in one state will be recognized as valid in every state.
With the exceptions of oral wills of personal property by soldiers and mariners, a will must be in writing.
It must be signed and witnessed by the number of witnesses required by state law – usually two
In many states a holographic will- written entirely in the handwriting of the testator is valid without witnesses

23. Revoking or Changing a Will
In some states, a will may be revoked by burning, tearing, canceling, or obliterating the will with the intent to:
revoke it
execute a new one
marrying after the will was created
A divorce usually revokes gifts made under will to a former spouse.

24. Codicil- formal document used to supplement or change an existing will
Must be signed and witnessed just like a will to be valid

25. Family Protection
State laws contain provisions designed to protect surviving family members when a spouse dies.
Family allowance- money taken from the decedent’s estate to meet the family’s needs while the estate is being settled
Homestead exemption- puts the family home beyond the reach of creditors up to a certain limit
Exempt property- certain - property of the decedent that passes to the surviving spouse or children and is beyond the reach of creditors

26. Protection of Spouses
Forced share-a surviving spouse who doesn’t like the provisions of a deceased spouse’s will may choose to take a different portion of the estate set by state statute

27. Protection of Children
Children who can prove that they were mistakenly left out of a parent’s will are protected by the laws of most states
Example 3
Adopted children are treated, in most states, as though they are the naturally born children of their adopted parents.
They inherit from their adopted parents rather from their biological parents.

28. Dying Without a Will Intestate- a person who dies without a will
The deceased person’s personal property is distributed according to the laws of the intestate succession of the state in which the deceased was domiciled (lived)
In contrast, real property is passed according to the law where the property is located
Many problems can be avoided by ensuring a will is in place before death

29. Typical Distribution of Intestate Property
If you are survived by:
Your estate is distributed:
Spouse and child(ren)
One half to spouse, one half to children
Spouse, no children, but next of kin (including parents, siblings, niece, nephew, aunt, uncle, cousin, etc.)
Where the estate is less than $200,000, all to spouse.
If the estate is larger than $200,000, the first $200,000, plus one half of everything in excess of $300,000 to spouse. The remainder to next of kin in this order: parent(s), siblings, nieces and nephews, grandparents, uncles and aunts, and cousins.
Spouse, no child, no next of kin
All to spouse
No spouse, one or more children
All to children
No spouse, no child, but next of kin
All to next of kin, in the order listed in #2
No spouse, no child, no next of kin
All “escheats” to the state, that is, all turned over to the state because there are no heirs or beneficiaries.

30. Settling an Estate
Probated- estate must be settled under the supervision of the probate court
The first job of the probate court is to establish the validity of the will
If no one opposes the probating of the will this can be a simple matter
Sometimes, however, heirs how are left out of a will may contest it

31. Executor- male representative to carry out the terms of the will
Executrix- female version of the executor
If there is no will or the named executor/executrix fail to perform, someone must petition the court to settle the estate
That person, when appointed, is called the administrator or administratrix
They are responsible for gathering estate assets, paying debts and taxes, and distributing the remainder of the assets according to the terms of the will or state law

32. Assignment
Page 785 #1-6