Estate Planning

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.

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

Creating a valid 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

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

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

Guardian Parents should name a person to

be responsible for caring for any dependent children

Signature Validates will

Letter of last instruction Describes your wishes regarding funeral

arrangements and tells the location of any key financial documents

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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

Probate: a legal process that declares a will valid and ensures the orderly distribution of assets

An 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

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.

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

Proper planning can reduce these taxes

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.

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

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

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 $11,000 per year from one person to another Not subject to tax for the giver or the recipient

Contributions to charitable organizations Not subject to estate taxes

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

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

Key decisions about estate planning for your financial plan are:

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?

Plans need flexibility; Disclaimer trust planning allows a

surviving spouse to decide if and how to fund trusts at the death of first spouse;

Powers of appointment allow surviving spouse to change disposition of trusts established at first spouse’s death.

Trust Protectors

FLPs and the accompanying discounts are alive and well;

$13,000 annual gift exemption remains;

Can accelerate gifts using lifetime gift exclusion;

Trust protects assets from future “new” spouse, creditors of surviving spouse changes in tax laws.

Protects assets from kids’ creditors;Protects assets from kids’ soon to be

ex-spouse;Protects assets from kids’

dependencies and addictions;Allows for Special Needs planning for

kids and grandkids

Number of people eligible for medical assistance programs continues to climb;

If assets are held by the individual, they must be spent down before eligible for assistance;

If assets are held in a Special Needs Trust, trust assets are exempt and protected

Some states have “de-coupled” from the federal estate tax;

Minnesota has a $1,000,000 exemption;

Iowa and Nebraska have an inheritance tax.