Personal Finance SIXTH EDITION Chapter 20 Estate Planning Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Chapter Objectives 20.1 Explain the use of a will 20.2 Describe estate taxes 20.3 Explain the use of trusts, gifts, and contributions 20.4 Introduce other aspects of estate planning 20.5 Explain how estate planning fits within your financial plan Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (1 of 8) • 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 • Will: a legal request for how your estate should be distributed upon your death It can also identify a preferred guardian for any surviving children Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (2 of 8) • 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (3 of 8) • Creating a valid will – Minimum age—18 or 21 – Mentally competent – Not under undue influence of others – Must be signed and dated – or witnesses who are not beneficiaries – Use of an attorney recommended Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (4 of 8) • 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 that distributes half of the estate to the spouse and the other half to any children or to a trust Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (5 of 8) • Key components of a will – Distribution of the estate Details the distribution to the heirs, usually by percentage – Executor (personal representative): the person 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (6 of 8) – Guardian Parents should name a person to be responsible for caring for any dependent children – Signature Validates will – Letter of last instruction: Supplement to the will that describes your wishes regarding funeral arrangements and tells the location of any key financial documents Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (7 of 8) • 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Purpose of a Will (8 of 8) • 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Estate Taxes (1 of 3) • 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Estate Taxes (2 of 3) – In 2015, the first $5.43 million of an estate can be distributed to children or others tax-free – Beyond this limit, the federal estate tax rates on the taxable part of the estate can be as high as 40% in 2015 – Proper planning can reduce these taxes Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Estate Taxes (3 of 3) • 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Trusts, Gifts, and Contributions (1 of 3) • 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Trusts, Gifts, and Contributions (2 of 3) – 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 changed, although it can provide income to the grantor Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Trusts, Gifts, and Contributions (3 of 3) – 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 $14,000 per year (2015 limits) from one person to another – Not subject to tax for the giver or the recipient • Contributions to charitable organizations – Not subject to estate taxes Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Other Aspects of Estate Planning (1 of 4) • 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Other Aspects of Estate Planning (2 of 4) – 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Other Aspects of Estate Planning (3 of 4) Key Documents to keep in one location Estate planning information Life insurance policies Retirement account information Home ownership and mortgage information Ownership of other real estate Personal property Personal loans Credit card debt information Ownership of businesses Personal legal documents Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Other Aspects of Estate Planning (4 of 4) Recent personal tax returns Bank account information Investment information Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Financial Planning Online • Go to http://www.nolo.com • Click “Wills, Trusts & Probate” • This Web site provides guidance on creating a will and other functions of estate planning Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved How Estate Planning Fits Within Your Financial Plan (1 of 4) • Key decisions about estate planning for your financial plan are: – Should you create a will? – Do you need to establish a trust? – Should you create a living will or designate an individual to have power of attorney? Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved How Estate Planning Fits Within Your Financial Plan (2 of 4) EXHIBIT 20.2 How Estate Planning Fits Within Stephanie Spratt’s Financial Plan GOALS FOR ESTATE PLANNING Create a will Establish a plan for trusts or gifts if my estate is subject to high taxes Decide whether I need to create a living will or assign power of attorney ANALYSIS Estate Planning and Related Issues Issue Status Possible heirs to my estate? My sister and parents Tax implications for my estate? Small estate at this point; exempt from taxes Power of attorney necessary? Yes; I want someone to make decisions for me if I am unable Living will necessary? Yes; I not want to be placed on life support Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved How Estate Planning Fits Within Your Financial Plan (3 of 4) EXHIBIT 20.2 How Estate Planning Fits Within Stephanie Spratt’s Financial Plan DECISIONS Decision Regarding a Will: I will create a will that stipulates a contribution of $5,000 to a charity I plan to make my parents my heirs if they are alive; otherwise, I will name my sister as the heir I will designate my sister to be executor Decision Regarding Trusts and Gifts: My estate is easily under the limit at which taxes are imposed, so it would not be subject to taxes at this point Therefore, I not need to consider establishing trusts or gifts at this time Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved How Estate Planning Fits Within Your Financial Plan (4 of 4) EXHIBIT 20.2 How Estate Planning Fits Within Stephanie Spratt’s Financial Plan Decision on a Power of Attorney and Durable Power of Attorney: I will assign my mother the power of attorney and the durable power of attorney I will hire an attorney who can complete these documents along with my will in one or two hours Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved .. .Chapter Objectives 20. 1 Explain the use of a will 20. 2 Describe estate taxes 20. 3 Explain the use of trusts, gifts, and contributions 20. 4 Introduce other aspects of estate planning 20. 5... Ownership of other real estate Personal property Personal loans Credit card debt information Ownership of businesses Personal legal documents Copyright © 201 7, 201 4, 201 1 Pearson Education,... 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 Copyright © 201 7, 201 4,