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FIN 200: Personal Finance
Topic 23–Estate PlanningLawrence Schrenk, Instructor
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Learning Objectives
1. Explain the reasons for and elements of a will. ▪
2. Discuss the tax implications of estate planning.
3. Describe trusts, gifts, and contributions . ▪
Wills: Terminology
Estate: Assets of a deceased person after all debts are paid
Estate Planning: Planning 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
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Reasons for a Will
Ensures that your estate is distributed as you desire
Beneficiaries (Heirs): Persons specified in a will to receive a part of an estate
Intestate: Condition of dying without a will Court appoints an administrator who may not
make the decisions you preferred
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Validity of a Will
Minimum Age: 18 or 21 Mentally Competent Not under Undue Influence of Others Must be Signed and Dated 2 or 3 Witnesses who are not Beneficiaries Attorney Recommended
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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 all the other half to any children or to a trust
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Key Components of a Will
Distribution of estate usually by percentage Executor (Personal Representative)
Collects debts owed, pays debts owed, distributes proceeds of the estate
Guardian for dependent children Signature Validates Will Letter of Last Instruction
Wishes regarding funeral arrangements , etc.
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Changing your Will
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
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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, Makes a list of assets and liabilities of deceased,
pays debts, Sells necessary assets, etc.
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Estate Taxes
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
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Estate Taxes (cont’d)
During 2004 and 2005, the first $1 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 range from 45 and 48 percent.
Tax Relief Act of 2001 gradually increases tax free limit while reducing maximum tax rate
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Estate Taxes (cont’d)
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
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Trusts, Gifts, and Contributions
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
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Trusts, Gifts, and Contributions (cont'd)
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, but can provide grantor income Standard Family Trust (Credit-Shelter Trust): A trust
established for children in a family Testamentary Trust: A trust created by a will
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Trusts, Gifts, and Contributions (cont'd) Gifts
Tax-free distribution of up to $11,000 per year from one persona to another
Not subject to tax for the giver or the recipient Contributions to Charitable Organizations
Not subject to estate taxes
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Other Documents
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 in the event that you are incapable
Durable Power of Attorney for Health Care: A legal document granting a person the power to make specific health care decisions for you
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Estate Planning Online
Estate Planning Money Central Estate Planning Provides step-by-step instructions for estate
planning Legal Advice
Nolo.com Click on: Wills and Estate Planning
Provides a background on estate planning decisions and the terminology used in estate planning
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Three Questions
Should you create a will? How can you limit your estate taxes? Should you create a living will or
designate an individual to have power of attorney?
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