IMch21 - CHAPTER 21 Financial and Estate Planning FINANCIAL...

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CHAPTER 21 Financial and Estate Planning FINANCIAL PLANNING ESTATE PLANNING Estate Transfer Costs Debts Administrative Costs Death Taxes Estate Planning Tools Wills Life Insurance Gifts Trusts A CASE STUDY: THE JOHNSON FAMILY The Facts of the Case Risk of Premature Death Problems Resulting from Gwen’s Premature Death Problems Resulting from Tim’s Premature Death Possible Solutions Loss of Health CONSIDERATIONS IN BUYING LIFE AND HEALTH INSURANCE Selecting an Insurer Coverage Needed Evaluating Financial Strength Evaluating Service Selecting a Contract Contractual Provisions Cost Factors KEY TERMS AND CONCEPTS Administrator Financial planning Probate court Buy-sell agreements Inheritance tax Right of survivorship Charitable deduction Inter vivos Second-to-die life insurance Credit shelter trust Intestacy laws Surrender cost index Decedent Intestate Survivorship life insurance Donor Life insurance trust Testamentary trust Estate planning Living trust Trust Estate shrinkage Marital deduction Trustee Estate tax Net payment index Unified transfer tax credit Probate Will ANSWERS TO QUESTIONS FOR REVIEW AND DISCUSSION 1. Financial planning is the process of establishing financial goals, developing and implementing a plan for achieving those goals, and periodically reviewing and revising the overall plan. 1
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2. The personal risk management process is properly classified as a subset of the personal financial planning process. 3. The executor fund is primarily composed of the expenses related to settling the deceased person’s estate and transferring the assets to his or her heirs. Some specific expenses that would be paid from the executor fund include funeral and burial expenses, debts of the decedent, legal fees, appraisal fees, court costs, executor fees, bond premium, and estate and inheritance taxes. 4. Four specific objectives of estate planning are: (1) minimizing the cost of transferring property, (2) providing liquid funds to pay transfer costs in the most economical manner, (3) assuring that estate assets will be transferred to the desired beneficiaries, and (4) planning for the most efficient use of estate assets. 5. Debts are the unpaid balances of loans and other legally enforceable obligations that the decedent was obligated to pay at the time of death. Administrative costs are costs incurred during the estate administration process and may include legal fees, court costs, accounting charges, appraisal fees, etc. Death taxes include estate taxes levied by the federal government and sometimes by state governments against the estate. Inheritance taxes may be charged by the state against the heirs who receive the estate property. 6. a. An executor is appointed by a probate court to oversee the administration of an estate of a decedent who died with a valid will in force. An administrator is appointed by a court to oversee the administration of an estate of a decedent who did not leave a valid will.
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