Personal finance 6th madura chapter 20 estate planing

Personal Finance
SIXTH EDITION

Chapter 20
Estate
Planning

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Chapter Objectives
20.1 Explain the use of a will
20.2 Describe estate taxes
20.3 Explain the use of trusts, gifts, and
contributions
20.4 Introduce other aspects of estate planning
20.5 Explain how estate planning fits within your
financial plan

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (1 of 8)
• 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (2 of 8)
• 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (3 of 8)
• 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
– Use of an attorney recommended

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (4 of 8)
• 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 the other half to any children or to a trust

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (5 of 8)
• Key components of a will
– 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (6 of 8)
– Guardian
 Parents should name a person to be responsible for caring for
any dependent children

– Signature
 Validates will

– Letter of last instruction: Supplement to the will that
describes your wishes regarding funeral arrangements
and tells the location of any key financial documents

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (7 of 8)
• 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Purpose of a Will (8 of 8)
• Executing the will during 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, a list of assets and liabilities of deceased,
pays debts and sells necessary assets
 Typically opens a bank account for this purpose

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved

Exhibit 20.1 A Sample Will (1 of 2)
EXHIBIT 20.1 A Sample Will
WILL of James T. Smith
I, James T. Smith of the City of Denver, Colorado, declare this to be my will.
ARTICLE 1
My wife, Karen A. Smith, and I have one child, Cheryl D. Smith.
ARTICLE 2 Payment of Debt and Taxes
I direct my Executor to pay my funeral expenses, my medical expenses, the costs of administration, and my debts.
ARTICLE 3 Distribution of the Estate
I direct that my estate be distributed to my wife, Karen A. Smith. If my wife predeceases me, my estate shall be distributed
to my Trustee, to be managed as explained in Article 4.
ARTICLE 4 Trust for Children
4A. Purpose. This trust provides for the support of my daughter, Cheryl D. Smith, and any other children born to me.
4B. Use of Funds. The Trustee shall use as much of the trust income and principal as necessary to care for my child (or
children). When the youngest of my children reaches the age of 25, the assets of this trust shall be split equally among the
children.
4C. No Survivors. If no child of mine survives until age 25, assets of the trust shall be liquidated and 100% of the
proceeds shall be donated to the San Diego Humane Society.
4D. Nomination of Trustee. I appoint my brother, Edward J. Smith, to serve as Trustee. If he is unable or unwilling to
serve, I appoint my sister, Marie S. Smith, to serve as Trustee.
ARTICLE 5 Executor
I appoint my wife, Karen A. Smith, to serve as Executor. If she is unable or unwilling to serve, I appoint my brother,
Edward J. Smith, to serve as Executor.
Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Exhibit 20.1 A Sample Will (2 of 2)
EXHIBIT 20.1 A Sample Will

ARTICLE 6 Guardian
If my spouse does not survive me, I appoint my brother, Edward J. Smith, to serve as Guardian of my children. If he is
unable to serve as Guardian, I appoint my sister, Marie S. Smith, to serve as Guardian.
ARTICLE 7 Power of Executor
My Executor has the right to receive payments, reinvest payments received, pay debts owed, pay taxes owed, and
liquidate assets.
ARTICLE 8 Power of Trustee
My Trustee has the right to receive income generated by the trust, reinvest income received by the trust, sell assets in the
trust, and use the proceeds to invest in other assets.
IN WITNESS WHEREOF, I hereby sign and declare this document to be my Will.
_________________________________________
James T. Smith

__________________________________________
Date

The above-named person signed in our presence, and in our opinion is mentally competent.
Signatures of Witnesses
_________________________________________

Addresses of Witnesses

Kenneth Tagan
_________________________________________

44241 Lemon Street
Denver, Colorado 80208

Barbara Russell

101 Courtney Street
Denver, Colorado 80208

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Estate Taxes (1 of 3)
• 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Estate Taxes (2 of 3)
– In 2015, the first $5.43 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 can be as high as 40% in
2015
– Proper planning can reduce these taxes

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Estate Taxes (3 of 3)
• 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Trusts, Gifts, and Contributions (1 of 3)
• 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Trusts, Gifts, and Contributions (2 of 3)
– 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Trusts, Gifts, and Contributions (3 of 3)
– 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 $14,000 per
year (2015 limits) from one person to another
– Not subject to tax for the giver or the recipient

• Contributions to charitable organizations
– Not subject to estate taxes

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Other Aspects of Estate Planning (1 of 4)
• 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved

Other Aspects of Estate Planning (2 of 4)
– 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

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Other Aspects of Estate Planning (3 of 4)
Key Documents to keep in one location
 Estate planning information
 Life insurance policies
 Retirement account information
 Home ownership and mortgage information
 Ownership of other real estate
 Personal property
 Personal loans
 Credit card debt information
 Ownership of businesses
 Personal legal documents

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Other Aspects of Estate Planning (4 of 4)
 Recent personal tax returns

 Bank account information
 Investment information

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


Financial Planning Online
• Go to
• Click “Wills, Trusts & Probate”
• This Web site provides guidance on creating a will
and other functions of estate planning.

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


How Estate Planning Fits Within Your
Financial Plan (1 of 4)
• Key decisions about estate planning for your
financial plan are:
– Should you create a will?
– Do you need to establish a trust?
– Should you create a living will or designate an
individual to have power of attorney?

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved


How Estate Planning Fits Within Your
Financial Plan (2 of 4)
EXHIBIT 20.2 How Estate Planning Fits Within Stephanie Spratt’s Financial Plan

GOALS FOR ESTATE PLANNING
1. Create a will.
2. Establish a plan for trusts or gifts if my estate is subject to high taxes.
3. Decide whether I need to create a living will or assign power of attorney.
ANALYSIS
Estate Planning and Related Issues
Issue

Status

Possible heirs to my estate?

My sister and parents.

Tax implications for my estate?

Small estate at this point; exempt from taxes.

Power of attorney necessary?

Yes; I want someone to make decisions for me if I am unable.

Living will necessary?

Yes; I do not want to be placed on life support.

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved