13 - 1 Chapter 13 Estate Planning Copyright© 2011 Money...

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Unformatted text preview: 1 Chapter 13 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 Transfer Objectives 6 Information about prospective heirs and legatees needs to be collected to properly arrange for any transfer that the client wants to make. 1. 2. 3. 4. 5. 6. 7. 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: • Wills • 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 the principal. Limited Power of Attorney - Gives the agent very specific, detailed powers. 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 regarding sustainment of life under specific 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 categories: • Real 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 (JTWROS) 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 property. 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 couples. 2. Neither tenant is able to sever their interest without the consent of the other tenant (spouse). 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 20 Advantages 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 gift? • 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 reported? • 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 $5,000,000 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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