copyright ©2004 pearson education, inc. all rights reserved. chapter 20 estate planning

Copyright ©2004 Pearson Education, Inc. All rights reserved.

Chapter 20

Estate Planning

Copyright ©2004 Pearson Education, Inc. All rights reserved. 20-2

Chapter Objectives

• Explain the use of a will

• Describe estate taxes

• Explain the use of trusts, gifts, and contributions

• Introduce other aspects of estate planning


Purpose of a Will

• 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


Purpose of a Will

• Will: a legal request for how your estate should be distributed upon your death. If can also identify a preferred guardian for any surviving children


Purpose of a Will

• 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


Purpose of a Will

• 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


Purpose of a Will

• 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, valued at $675,000 or more) that distributes half of the estate to the spouse and all the other half to any children or to a trust


Purpose of a Will

• Key components of a will

– Distribution of the estate

• Details the the distribution to the heirs, usually by percentage

– Executor (personal representative): the 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


Purpose of a Will

– 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


Financial Planning Online: Quiz for Preparing Your Own Will

• Go to: http://moneycentral.msn.com/articles/retire/will/tlwillq.asp

• This Web site provides a quiz that indicates your ability to create your own will.

http://moneycentral.msn.com/articles/retire/will/tlwillq.asp

http://moneycentral.msn.com/articles/retire/will/tlwillq.asp


Purpose of a Will

Exhibit 20.1: A Sample Will


Purpose of a Will

• Focus on Ethics: Undue influence on wills– Wills can be created under duress or from

undue influence

– Consider creating a will without consulting potential beneficiaries

– A financial planner can assist you


Purpose of a Will

• 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


Purpose of a Will

• 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


Estate Taxes

• 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


Estate Taxes

– In 2001, estates with values over $675,000 are subject to federal taxes of 37% to 50%

• Tax Relief Act of 2001 gradually increases tax free limit while reducing maximum tax rate

– Proper planning can reduce these taxes


Estate 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


Trusts, Gifts, and Contributions

• 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 changes, 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 $10,000 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


Financial Planning Online: How to Build Your Estate Plan

• Go to: http://moneycentral.msn.com/retire/home/asp

• Click on: Estate Planning

• Click on: Plan Your Estate

• This Web site provides step-by-step instructions for estate planning.

http://moneycentral.msn.com/retire/home/asp


Other Aspects of Estate Planning

• 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


Other Aspects of Estate Planning

– 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


Financial Planning Online: Legal Advice on Estate Planning

• Go to: http://www.nolo.com

• Click on: Estate Planning

• This Web site provides a background on estate planning decisions and the terminology used in estate planning.

http://www.nolo.com/


How Estate Planning Fits within Your Financial Plan

• 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?


Integrating Key Concepts


Integrating Key Concepts

• Part 1: Financial Planning Tools• Part 2: Liquidity Management• Part 3: Financing• Part 4: Protecting Your Assets and Income• Part 5: Investing• Part 6: Retirement and Estate Planning

– In Chapter 19 we learned about retirement planning

– In Chapter 20 we learned about estate planning

copyright ©2004 pearson education, inc. all rights reserved. chapter 20 estate planning

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