Download Estate Planning

GITMAN/ JOEHNK/ BILLINGSLEY
PFIN
4
15
Preserving
Your Estate
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.
LEARNING OUTCOMES
1
Describe the role of estate planning in
personal financial planning, and identify the
seven steps involved in the process
2
Recognize the importance of preparing a will
and other documents to protect you and your
estate
3
Explain how trusts are used in estate
planning
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
2
LEARNING OUTCOMES (continued)
4
Determine whether a gift will be taxable and
use planned gifts to reduce estate taxes
5
Calculate federal taxes due on an estate
6
Use effective estate planning techniques to
minimize estate taxes
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
3
Estate Planning
• Developing a plan to administer and
distribute assets after death according to:
• Deceased’s wishes
• Needs of survivors
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
4
Exhibit 15.1 Potential Estate Planning Problems
and Major Causes or Indicators
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
5
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
6
Reasons for an Estate Break Up
•
•
•
•
•
Death-related costs
Inflation
Lack of liquidity
Improper use of vehicles of transfer
Disabilities
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
7
Types of Estate
Probate
• Real and personal property owned by a person that can be
transferred at death by will
Gross
• Property owned by the decedent is subject to federal estate
taxes upon a person’s death
Nonprobate
• 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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
8
Exhibit 15.2 Steps in the Estate Planning
Process
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
9
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
10
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
11
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
12
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
13
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 safedeposit box
• Lodging of the will - Filling and safekeeping
the will in the office of the probate court
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
14
Will
• Letter of last instructions
• Informal memorandum that is separate from a
will
• Contains suggestions for carrying out a
decedent’s wishes
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
15
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
16
Other Estate Planning Documents
Durable power of attorney for financial matters
• Authorizes another person to take over someone’s financial affairs and act on
his or her behalf
Living will
• States the treatments a person wants incase of a terminal illness
Durable power of attorney for healthcare
• Authorizes an individual to make health care decisions on behalf of the
principal
Ethical will
• Personal statement that shares values, blessings, experience and hopes and
dreams for the future, with loved ones
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
17
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
18
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
19
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
20
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
21
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
22
Trusts
• Purposes
• Attain income and estate tax savings
• Manage and conserve property
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
23
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
24
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
25
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
26
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
27
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)
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
28
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
29
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
30
KEY TERMS
•
•
•
•
•
•
•
•
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
31
KEY TERMS
•
•
•
•
•
•
•
•
•
•
•
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
32
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
33
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
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
PFIN4 | CH15
34