principles of estate planning
TRANSCRIPT
Principles of Estate Planning
DLSU RVR COB Financial Management Department
What is Estate Planning ? The process of developing a plan to
administer and distribute one’s assets after death in a manner consistent with one’s wishes and the needs of its heirs while at the same time minimizing taxes
During one’s lifetime – one (1)accumulates, (2)preserves, (3)distributes wealth upon death
Estate Planning requires knowledge of wills trusts taxes & various administrative costs
Estate planning goes beyond financial issues & includes plans to manage affairs in case one becomes disabled, thus will include a statement of your personal wishes for medical care should you become unable to make them clear yourself
Major objective is to minimize tax exposure to increase the amount ultimately passed on to the heirs
Insurance & retirement planning Objectives
- to provide for family during death - achieve a comfortable standard of living during
retirement
Potential Problems of Estate Planning Taxes & estate administrative expenses
higher than necessary Insufficient cash; not enough assets that are
quickly & inexpensively convertible to cash to meet tax demands & other costs
Beneficiaries receive the wrong assets or the proper assets in the wrong manner at the wrong time
Capital is insufficient or not readily convertible to income producing status
High medical costs; capital insufficient or not readily convertible to income producing status; difficulty in reducing living standards
Excessive taxes, inflation, improper investment planning
Special problems : a family member with serious illness; children of prior marriage; beneficiaries who have extraordinary medical or financial needs; beneficiaries who cannot agree on how to handle various estate matters, business problems, opportunities
Who needs Estate Planning ? Two Main Areas of Estate Planning
People Planning anticipating psychological & financial needs of
loved ones providing enough income or capital to ensure
continuation of their way of life Keeping mother’s cameo brooch in the family Preserving the business that Lolo started Planning for minors, intellectually gifted children,
the emotionally, mentally, physically handicapped Spouses who cannot or don’t want to handle
money, securities or the business
Asset Planning To stabilize & maximize its assets and income
producing values To avoid problems – lawyers’ fees, taxes
Why does an Estate Break Up? Death related costs – medical bills, funeral
expenses, lawyer fees, appraisers, accountants, administrative costs, federal estate taxes, state death taxes, unpaid bills – mortgages, business loans, installment contracts, unpaid income taxes, property taxes
Inflation – failure to rearrange, reappraise an estate plan to counter the effects of inflation can impair the ability of assets to provide
Lack of liquidity – insufficient cash to cover death costs & other estate obligations
Improper use of vehicles for transfer – spendthrift spouses or minors may be left large sums of money outright in the form of life insurance, through joint ownership of a savings account or as beneficiaries of an employee fringe benefit
Disabilities – Prolonged & expensive disability of a family wage earner is called Living Death.
What is your Estate? Probate estate consists of real & personal
property owned that can be transferred at death
Gross estate is a larger amount of property & includes all property – probate & non probate, that might be subject to federal estate tax at death
Non-probate : life insurance, jointly held property, property passing under certain employee benefit plan
Estate Planning Process1. Assess your family situation & set estate
planning goals2. Gather comprehensive & accurate data3. List all assets and determine the value of
your estate4. Designate beneficiaries of your estate’s
assets5. Estimate estate transfer costs6. Formulate & implement plan7. Review the plan periodically & revise as
necessary
Data Personal data Property classification, title, indebtedness,
marketable securities Life insurance, agent’s names & addresses Medical insurance company, policy numbers
benefits Business interest – names, address,
ownership, names of account Employee benefits – Group insurance plans Family income – Income of client, spouse
Other data : retirement plan, retirement age, potential sources of retirement income, required amount, expected sources of income
Listing of liabilities, creditors, amounts Authorization : Life insurance, executor
Will – a written and legally enforceable document expressing how a person’s property should be distributed on his death
Intestacy – the situation that exists when a person dies without a valid will
Distribution of Intestate Who are the survivors?
Spouse & children of legal spouse Grandchildren Children not of the spouse or illegitimate children If no spouse, no children, parents become heirs
Distribution by Law (U.S.) 50% to the legal spouse 50% remaining equally divided to the
legitimate children If no children : 100% to the surviving/legal
spouse If no spouse, no children – equally to parents If still no parents – the estate may be passed
on to the state for the benefit of the state school funds
Preparing the Will Testator – person directing the disposition of
property at his death Preparation & drafting
two pages, about USD150 complex document, costing USD1,500 state objectives consider income gifts, estate tax laws knowledge of corporate, trust, real estate,
securities laws may be ineffective, misinterpret wish of the dying
Proper preparation includes 3 items A Plan for distribution according to wishes of
the dying, needs of the beneficiaries, tax laws Consider changes in family circumstances
that might occur after its execution i.e. divorce, new children, death
Must be concise and complete in describing the testator’s desires
Common features of a Will Introductory Clause Direction of Payments Disposition of Property Appointment Clause Tax Clause Simultaneous Death Clause Execution & Attestation Clause Witness Clause
Requirements of a Will Mental capacity : Person must be of sound mind
to make a valid will Freedom of choice Proper execution
Changes In Wills Health or financial status of beneficiary changes
significantly Births, deaths, marriages, divorces Moving to a different state, changes in tax laws An executor, trustee, guardian can no longer
serve
Basic Concept of Succession (De Leon) The Civil Code defines succession as a mode
of acquisition of property, rights, obligations of a person transmitted through death to another by his will or by law
Three elements are Decedent – the person whose property is transmitted
through succession, if there is a will he is also called Testator
Successor – the person to whom the property or property rights will pass
Inheritance or estate – the subject matter of the succession
Kinds of Successor Heir – person called to the succession either
by will or by law, he succeeds from the moment of the latter’s death
Devisee – person to whom a gift of real property is given by virtue of a will
What does an inheritance include?- All property, rights, obligations of a person not
extinguished by death- Heirs are not liable for the obligations of the
decedent beyond the value inherited
Kinds of Succession Testamentary – resulting from the
designation of an heir, made in a will executed in the form by law
Intestate – that which takes place when a person dies without a will or a void will or a will that lost its validity or if no one succeeds under his will
Mixed – effected partly by will and partly by operation of law
Who else are involved?Executor is a person or trust company named in the willto carry out its provisions.
Administrator is a person or trust company appointed by theCourt to administer and distribute the estate of the decedentIf there is no will or if no executor is named in the will or If the named executor does not act.
Definitions Legitime – testator’s property that cannot be disposed
because the law has reserved it for the compulsory heirs Free portion – the part of the inheritance in excess of the
legitime which the testator may dispose of freely Compulsory heirs (forced heirs)
a. Legitimate children & descendants b. If no children, legitimate parents c. Surviving spouse d. Acknowledged natural children & natural children by
law e. Illegitimate childrenC,d,e – their shares are taken from the free portion of the
estate, if there are legitimate children, legitimate parents are excluded
Legitime Legitimate children – ½ of the estate divided
equally Surviving spouse – ½ of the estate One legitimate child situation :
½ to the child ¼ to the spouse ¼ remaining is free portion
Legitime No child situation
½ to the legitimate parents ¼ to the spouse ¼ free portion
Two or more legitimate children situation ½ to the children dividend equally Spouse gets a share equal to the share of each child or
descendant The rest is the free portion
Order of Intestate Succession Legitimate children & descendants Legitimate parents – excluded by legitimate
children Illegitimate children & descendants – always
inherit The surviving spouse – always inherit Collateral relatives within the fifth degree The State – excluded by any above
Illustration X died leaving an estate of P143,470, in his
will he provided that his properties be divided equally to
C – legitimate child W – surviving wife M – legitimate mother D – daughter in law N - nephew
Illustration If the will is valid,
Legitime of C = ½ Legitime of W = ¼ Free portion – ¼
Mother has no legitime because there is a child.The distribution will be
c = ½ = P71,735 W = ¼ = P35,867.50 Free portion = ¼ P 35,867.50 --------------------- Total 100%
Illustration Free Portion Free Portion (1/4)
Mother – 1/3 = P 11,955.83 Daughter in Law – 1/3 = P 11,955.83 Nephew – 1/3 = P 11,955.83Total = P 35,867.50
If last will is Void.M, D, N are NOT heirs. Estate will be
distributed only to Child, and Surviving Wife, equally or
P71,735 each.
Reference : Hector S. De Leon, Hector M. De Leon Jr. ,THE LAW ON TRANSFER AND BUSINESS TAXATION 2009 Rex Bookstore Inc.
End of Presentation