pfin 4 preserving your estate 15 copyright ©2016 cengage learning. all rights reserved. may not be...
TRANSCRIPT
![Page 1: PFIN 4 Preserving Your Estate 15 Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly](https://reader037.vdocument.in/reader037/viewer/2022110212/56649e0f5503460f94af94cb/html5/thumbnails/1.jpg)
PFIN 4
Preserving Your Estate
15
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GITMAN/ JOEHNK/ BILLINGSLEY
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2Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
1 Describe the role of estate planning in personal financial planning, and identify the seven steps involved in the process
2 Recognize the importance of preparing a will and other documents to protect you and your estate
3 Explain how trusts are used in estate planning
LEARNING OUTCOMES
PFIN4 | CH15
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3Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4 Determine whether a gift will be taxable and use planned gifts to reduce estate taxes
5 Calculate federal taxes due on an estate
6 Use effective estate planning techniques to minimize estate taxes
LEARNING OUTCOMES (continued)
PFIN4 | CH15
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Estate Planning
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• Developing a plan to administer and distribute assets after death according to:• Deceased’s wishes• Needs of survivors
PFIN4 | CH15
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Exhibit 15.1
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Potential Estate Planning Problems and Major Causes or Indicators
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Who Needs Estate Planning ?
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• People planning• Anticipate psychological and financial needs
of loved ones• Provide adequate resources to maintain life of
loved ones• Asset planning
• Ensuring that assets are received by desired beneficiaries upon a person’s death or incapacity
PFIN4 | CH15
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Reasons for an Estate Break Up
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• Death-related costs• Inflation• Lack of liquidity• Improper use of vehicles of transfer• Disabilities
PFIN4 | CH15
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Types of Estate
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Exhibit 15.2
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Steps in the Estate Planning Process
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Will
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• Expresses how a person’s property should be distributed upon his or her death• Written and legally enforceable document
• Intestacy: Situation that exists when a person dies without a valid will
• Testator: Person who makes a will that provides for disposition of property at his or her death
PFIN4 | CH15
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Requirements of Preparing the Will
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• Provide a plan for distributing the testator’s assets according to:• Testator’s wishes and beneficiaries’ needs• Federal and state dispositive and tax laws
• Consider the changes in family conditions occurring after execution of the will
• Be concise and complete in describing the testator’s desires
PFIN4 | CH15
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Features of a Will
12Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15
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Will
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• Requirements for being valid• Mental capacity• Freedom of choice• Proper execution
• Changing• Codicil: Document that legally modifies a will
without revoking it• Ways of revoking
• Making a later will that revokes prior wills
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Will
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• Making a codicil that expressly revokes all wills the one being modified
• Making a later will that is inconsistent with a former will
• Physically mutilating, burning, tearing, or defacing the will with the intention to revoke it
• Safe guarding• Original will needs to be kept in a safe-
deposit box• Lodging of the will - Filling and safekeeping
the will in the office of the probate court
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Will
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• Letter of last instructions• Informal memorandum that is separate from
a will• Contains suggestions for carrying out a
decedent’s wishes
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Administration of an Estate
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• Probate process: Court supervised disposition of a decedent’s estate
• A local court supervises probate process through the executor and administrator• Executor: Personal representative of an estate
designated decedent's will• Administrator: Personal representative of the
estate appointed by the court if the decedent died intestate
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Other Estate Planning Documents
17Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15
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Forms of Joint Ownership
18Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15
• Joint tenancy• Ownership by two or more parties with the
survivor holding all property upon death of one or more of the owners
• Tenancy by entirety• Ownership by husband and wife in which
property passes to the surviving spouse
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Characteristics of Joint Ownership
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• Right of survivorship: Surviving joint owners of property receive title to the deceased joint owner’s interest in the property
• Joint tenancy may consist of any number of persons without any relation
• Tenancy by entirety can exist only between husband and wife
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Joint Ownership
20Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15
• Each joint tenant can unilaterally sever the tenancy in a joint tenancy• Tenancy by entirety can be severed only by
mutual agreement, divorce, or conveyance by both spouses to a third party
• Co-owners must have equal interests
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Other Forms of Ownership
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• Tenancy in common• Co-ownership where there is no right of
survivorship• Allows each co-owner to leave their share to
whomever they desire• Community property
• Marital property co-owned equally by both spouses while living in a community property state
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Trusts
22Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15
• Created when one party transfers property to a second party for the benefit of third parties
• Grantor: Person who creates a trust and whose property transferred into it
• Trustee: Organization or individual• Selected by a grantor to manage and conserve
property in a trust• Beneficiaries: People who receive benefits
from a trust
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Trusts
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• Purposes• Attain income and estate tax savings• Manage and conserve property
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Qualities of a Trustee
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• Posses sound business knowledge and judgment
• Have an intimate knowledge of the beneficiary’s needs and financial situation
• Being skilled in investment and trust management
• Being available to beneficiaries• Ability to make impartial decisions
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Types and Characteristics of Trusts
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• Living: Created and funded during grantor’s lifetime• Pour-over wills: Provides for passing of the
estate to an existing living trust• Revocable living: Grantor reserves the
right revoke the trust and regain property• Irrevocable living: Grantor gives up the
right revoke or terminate the trust
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Types and Characteristics of Trusts
26Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15
• Testamentary: Created by decedent’s will and funded through probate process
• Irrevocable life insurance: Major asset is life insurance on the grantor’s life
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Federal Unified Transfer Taxes
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• Tax on right to transfer property from one individual to another which affects:• Gift tax: Tax levied on the value of gifts made
during the giver’s life time • Estate tax: Tax levied on the value of property
transferred at the owner’s death• Applicable exclusion amount (AEA): Credit
applicable to the amount of federal estate tax owed by the person at death
• Unified rate schedule: Applied to all taxable transfers
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Means for Reducing Amount for Tax Purposes
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• Annual exclusions: Amount given each year without being subject to gift tax
• Gift splitting: Method of reducing gift taxes• Charitable deductions• Marital deductions• Qualified Terminable Interest Trust (QTIP)
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Steps in Computation of Federal Estate Tax
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• Determine the gross estate• Find the adjusted gross estate• Calculate the taxable estate• Compute the estate tax base• Determine the total death taxes• Determine federal estate tax due
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Estate Planning Techniques
30Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PFIN4 | CH15
• Gift giving program• Use of the unified transfer tax credit• Charitable contributions• Life insurance trust• Trusts• Valuation issues
• Minority interest• Marketability discount• Blockage discount
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31Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• Estate planning• Probate estate• Gross estate• Will• Intestacy• Testator• Codicil• Letter of last
instructions• Probate process• Executor
KEY TERMS
• Administrator• Durable power of
attorney for financial matters
• Living will• Durable power of
attorney for health care
• Ethical will• Right of survivorship• Joint tenancy• Tenancy by the
entirety PFIN4 | CH15
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32Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• Tenancy in common• Community property• Trust• Grantor• Trustee• Beneficiaries• Living (inter vivos)
trust• Revocable living trust• Irrevocable living trust• Pour-over will• Testamentary trust
KEY TERMS
• Irrevocable life insurance trust
• Gift tax• Estate tax• Applicable exclusion
amount (AEA)• Unified rate schedule• Annual exclusions • Gift splitting• Unified tax credit
PFIN4 | CH15
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33Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SUMMARY
• Estate planning involves developing a plan to administer and distribute assets after death according to deceased’s wishes, and needs of survivors
• A will is an important document as it expresses how a person’s property should be distributed upon his or her death
• Trusts facilitate the transfer of property and the income earned from it to another party
PFIN4 | CH15
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34Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
SUMMARY
• Federal unified transfer tax affects gift tax and estate tax
• Federal estate taxes are levied on the transfer of property at death
• Estate planning techniques• Gift giving program• Using unified transfer tax (UTT) credit• Investing in life insurance• Establishing trusts
PFIN4 | CH15
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