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Estate Planning Copyright© 2011 Money Education, LLC Chapter 13 Estate Planning
2 Is broadly defined as the process of accumulation,
management, conservation, and transfer of wealth
considering legal, tax, and personal objectives. Goal of estate planning is the effective and efficient
transfer of assets. Effective transfer occurs when a person’s assets are
transferred to the person or institution intended by that
person. Efficient transfer occurs when transfer costs are
minimized. Copyright© 2011 Money Education, LLC Chapter 13 Goals and Objectives
3 Fulfill client’s property transfer wishes.
Minimize transfer taxes.
Minimize transfer costs.
Maximize net assets to heirs.
Provide for guardianship of children or others.
Provide needed liquidity at death.
Fulfill client’s healthcare decision.
• An heir is a person who inherits under state law.
• A legatee is a person named in a will. Chapter 13 Copyright© 2011 Money Education, LLC Estate Planning Process
4 Six basic steps:
1. Establish the client/planner relationship.
2. Gather client information, including the client’s current
financial statements and establish the client’s transfer
objectives, including family and charitable objectives.
3. Determine the client’s financial status.
4. Develop a comprehensive plan of transfers consistent with all
information and objectives.
5. Implement the estate plan.
6. Review the estate plan periodically and update the plan when
necessary (especially for changes in family situations). Copyright© 2011 Money Education, LLC Chapter 13 Establish the Client/Planner Relationship
5 Clients are often reluctant to seek out a planner to plan
their estate. Opportunity to discuss the issue of estate planning
generally arises when the planner is meeting with the
client for financial planning matters. Copyright© 2011 Money Education, LLC Chapter 13 Collecting Client Information and Defining
6 Information about prospective heirs and legatees needs to
be collected to properly arrange for any transfer that the
client wants to make.
8. Chapter 13 Transfer property as desired and minimize estate and
transfer taxes to maximize the assets received by heirs.
Avoid the probate process.
Use lifetime transfers – gifts.
Meet liquidity needs at death.
Plan for children.
Plan for the incapacity of the transferor.
Provide for the needs of the transferor’s surviving spouse.
Fulfill the transferor’s charitable intentions.
Copyright© 2011 Money Education, LLC Basic Documents Included
in an Estate Plan
7 Basic documents are:
• Side letters of instruction
• Powers of attorney for property
• Durable powers of attorney for health care
• Living wills or advance medical directives
• Do not resuscitate orders Copyright© 2011 Money Education, LLC Chapter 13 Wills
8 Are legal documents that gives the testator (willmaker)
the opportunity to control the distribution of his property
at death, and thus avoid his state’s intestacy laws. May be amended or revoked by the testator at any time
prior to his death, provided that the testator is
competent. The will is the voice of the decedent directing how
probate assets should be administered and distributed
through the probate process.
Copyright© 2011 Money Education, LLC Chapter 13 Types of Wills
9 In most states, the only requirements necessary to
execute a valid will are:
• Will must be in writing.
• Will must be signed at its logical end by the testator. Three basic forms of wills include:
• Statutory- professionally drafted by attorney
• Holographic- handwritten/not typed
• Nuncupative- oral or dying declarations Chapter 13 Copyright© 2011 Money Education, LLC Powers of Attorney
10 Power of Attorney - Is a legal document that authorizes a trusted
person to act on one’s behalf.
General Power of Attorney - Person who is given the power of
attorney will be able to act in the principal’s place as though he is
Limited Power of Attorney - Gives the agent very specific, detailed
Copyright© 2011 Money Education LLC Chapter 13 Powers of Appointment
11 Power of Appointment – Is the power to appoint the assets of one person to
another and may be either general or limited.
General Power of Appointment - If the agent dies before the principal and is
holding a general power of appointment over assets of the principal, the agent’s
gross estate will include the fair market value of the principal’s assets over
which the agent held the power of appointment. Limited Power of Appointment – Is the power to affect the beneficial
enjoyment of property. Copyright© 2011 Money Education, LLC Chapter 13 Directives Regarding Health Care
12 Durable Power of Attorney for Health Care - Is a legal
document that appoints an agent (someone with
authority to act on behalf of another) to make health care
decisions on behalf of a principal who is unable to make
those decisions for him/herself. Living Will / Advance Medical Directive - Is a legal
document expressing an individual’s last wishes
circumstances. Do Not Resuscitate Order (DNR) - Declare the principals
wish to avoid having CardioPulmonary Resuscitation
(CPR) performed in the event their heart stops beating. Chapter 13 Copyright© 2011 Money Education, LLC Ownership and Transfer of Property
13 All property interests are classified into one of three
property includes land and anything
permanently attached to the land
• Tangible personal property consists of all property
that is not realty and hat has physical substance
• Intangible personal property is property that is not
real property and is without physical substance Copyright© 2011 Money Education, LLC Chapter 13 Sole Ownership – Fee Simple
14 Fee Simple Ownership - Is the complete ownership of
property by one individual who possesses all ownership
rights associated with the property, including the right
to use, sell, gift, alienate, convey, or bequeath the
property. Number of Owners Only 1 Right to Transfer Freely Automatic Survivorship Feature No, transfers at death via will or intestacy laws
Included in the Gross Estate Yes, 100% Included in the Probate Estate Yes, 100% Copyright© 2011 Money Education, LLC Chapter 13 Tenancy In Common (TIC)
15 Tenancy in common is an interest in property held by
two or more related or unrelated persons. Number of Owners 2 or more Right to Transfer Freely without the consent of other co-tenants Automatic Survivorship Feature No, transfers at death via will or intestacy laws
Included in the Gross Estate Usually the FMV of ownership percentage Included in the Probate Estate Yes, fair market value of interest Partitionable Yes, with or without consent of joint owner Chapter 13 Copyright© 2011 Money Education, LLC Joint Tenancy With Right Of Survivorship
16 Joint Tenancy – Is an interest in property held by two or more
related or unrelated persons called joint tenants.
Each person holds an undivided, equal interest in the whole
Each joint tenant shares equally in the income and expenses of
the property in proportion to his interest. Number of Owners 2 or more Right to Transfer Freely without the consent Automatic Survivorship Feature Yes, transfers at death to owners
Included in the Gross Estate Yes, FMV times the % contributed Included in the Probate Estate No Partitionable Yes, with or without consent of joint owner
Copyright© 2011 Money Education, LLC Chapter 13 Tenancy by the Entirety (TE)
17 Tenancy by the entirety is very similar to joint tenancy between a husband
and wife. The four key components are:
1. Tenancy by the entirety applies to joint ownership only between married
2. Neither tenant is able to sever their interest without the consent of the other
3. Property ownership interest is automatically transferred to the surviving
spouse upon death.
4. It may involve the ownership interest of either real or personal property.
Number of Owners
2 - spouses only
Right to Transfer Need consent of other spouse Automatic Survivorship Feature Yes, transfers at death to other spouse
Included in the Gross Estate Yes, always 50% of FMV Included in the Probate Estate No Partitionable No, without consent of spouse / joint owner
Copyright© 2011 Money Education, LLC Chapter 13 Community Property and Separate Property
in Community Regimes
18 Community Property – Married individuals own an equal
undivided interest in all property accumulated during
their marriage. Property acquired before the marriage and property
received by gift or inheritance during the marriage retains
its status as separate property. Chapter 13 Copyright© 2011 Money Education, LLC Probate Process
19 The probate process is the legal process through which the
decedent’s assets that are not automatically transferred to
their heirs by contract or law are retitled in the name of the
heirs. Testate vs. Intestate Succession:
• If the decedent did not establish his own estate plan by
executing a will, the state in which he is domiciled has
created one for him under the state intestacy laws.
• A person who dies with a valid will is said to die testate,
whereas a person who dies without a valid will is said to
die intestate. Copyright© 2011 Money Education, LLC Chapter 13 Probate
1. Implements disposition objectives of testator.
2. Provides for an orderly administration of assets.
3. Provides clean title to heirs or legatees.
4. Increases the chance that parties of interest have notice of
proceedings and, therefore, a right to be heard.
5. Protects creditors by insuring that debts of the decedent are paid. Disadvantages
1. Can be complex and excruciatingly slow – Delays
2. Can result in substantial monetary costs – Costs
3. The process is open to public scrutiny - Publicity
Copyright© 2011 Money Education, LLC Chapter 13 Trust Property
21 Trusts provide for the management of assets and flexibility
in the operation of the estate plan. A trust is a structure that vests legal title to assets in one
party, the trustee, who manages those assets for the
benefit of others, the beneficiaries of the trust. Chapter 13 Copyright© 2011 Money Education, LLC Why Use a Trust?
22 Management – A principal reason for establishing a
trust is to provide for the management of the trust
property. Creditor Protection – If property is placed in a trust
with appropriate spendthrift protection provisions
instead of being transferred outright, the creditors of
the beneficiary will not be able to access the funds in the
trust to satisfy outstanding creditor claims. Copyright© 2011 Money Education, LLC Chapter 13 Gift Tax System
23 The gift tax is an excise tax on the right to transfer assets
gratuitously to another person during life. The overall scheme of gift taxation can be understood by
asking four basic questions:
• Disregarding all other factors, is the transfer a taxable
• Is the gift nontaxable because of an available
exemption, exclusion, or due to legislative grace?
• If the gift is taxable, what is the tax due and how is it
• Is the gift appropriate considering the objectives and
goals of donor and donee? Copyright© 2011 Money Education, LLC Chapter 13 Estate Tax
24 An estate tax is imposed on the decedent’s right to
transfer property to his heirs. Gift tax system imposes a transfer tax on transfers
during life. The generation-skipping transfer tax system
taxes transfers made during life, or at death, to skip
persons. Chapter 13 Copyright© 2011 Money Education, LLC 2011 Update for Estate, Gifts, and GST Tax
25 Estate Tax Exemption - $5,000,000
• Credit Equivalency - $1,730,800
Maximum Estate Tax Rate – 35%
Gift Tax Exemption - $5,000,000
• Credit Equivalency - $1,730,800
Maximum Gift Tax Rate – 35%
Generation Skipping Transfer Tax Exemption
Generation Skipping Tax Rate Flat – 35%
Annual Exclusion per Donee / per Donor - $13,000 - Copyright© 2011 Money Education, LLC Chapter 13 2011 Basis of Property Received
26 Step to the fair market value of the assets as of the date
of death of the transferor. Chapter 13 Copyright© 2011 Money Education, LLC ...
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