Chapter 19

Learning Objectives (1 of 3)

Explain why it is important to have a will

Distinguish between a will and a letter of last instructions

Describe the key features of a will Explain the advantages of a codicil Describe the probate process

Learning Objectives (2 of 3)

Show how to avoid probate Discuss how to select an executor List the duties of an executor Describe what a living will

accomplishes Explain the concept of

guardianship

Learning Objectives (3 of 3)

Define a trust Describe various trusts, including a

revocable living trust, a Bypass or AB Trust, and a life insurance trust

Outline the basic rules of estate and gift taxation

Compute the net taxable estate

Importance of a will Can save on federal estate and state

inheritance taxes Reduces likelihood of relatives

fighting over the assets Can make special gifts of any assets If die intestate, state’s rules for

allocation of asset may not be the best

Letter of Last Instructions To be read as soon as a person

dies, whereas a will is usually read after the funeral services

May contain burial preferences Indicates where assets are located Identifies key contact people (e.g.,

lawyer, banker, broker)

Key features of a will Testamentary capacity is established It should be the last (most recent) will Properly witnessed Appoints an executor (or executrix) Names beneficiaries, legatees,

devisees, and guardians May give power of appointment

Codicils Allow for short amendments to a will

Should represent minor changes or clarifications, not fundamental changes (e.g., not used to disinherit a child)

Must be signed and witnessed Too many codicils imply a will needs

to be rewritten

Probate A will is presented to the Probate

Court and validated Once probated, it becomes a public

document Legal authority is given to the

executor This authority established via either

Letters testamentary Letters of administsration

Avoiding probate (1 of 2) Some people seek to avoid

because It can be time consuming Attorney’s fees may take 5% or more Privacy lost in probate

Avoiding probate (2 of 2) Techniques to avoid probate:

Reduce estate below that required to file Use asset titles that place assets outside

of probated estate (e.g., POD, JTWROS, TIC)

Place assets in accounts not included in probate (e.g., IRAs, Keoghs)

Remember, the costs of avoiding probate may exceed the benefits

Choosing an Executor Make sure person willing to do so

Executors can renounce appointments Select executors with the knowledge,

time, interest, and resources for the job

Consider co-executors Consider an institution (e.g., bank

trust dept.) as a co-executor

Duties of an Executor Probate will if necessary Reconcile all monies owed to and by

the deceased Inventory the assets (obtain

appraisals) Liquidate assets not bequeathed Pay debts and taxes due Distribute estate

Living Wills Medical form, has nothing to do

with an estate Gives someone else the right to

make medical decisions if a person is unable to do so (e.g., “pull the plug” for a person in a coma)

Different levels of permission Everyone over 18 should have one

Guardianship May be appointed anytime, not just

in a will Starts with filing a petition to

determine capacity If court convinced of a need, a

guardian can be appointed for anyone

Guardians must file statements with the court

Trusts (1 of 2) A fiduciary arrangement whereby

the legal title of property is held and the property is managed by someone for the benefit of another

Key parties: Grantor Trustee Beneficiary

Trusts (2 of 2) Beneficiaries may include:

Income beneficiary Remainderman

Trust assets known as principal or corpus

Trust may be: inter vivos (Grantor alive when

created) Testamentary (created in a will

Types of Trusts (1 of 4) Revocable living trust

A trust that can be revoked, amended, or terminated by the grantor and the property recovered

Commonly used to reduce estate passed in the will

Types of Trusts (2 of 4) ByPass or AB Trust

When a parent dies, income from assets in part A go to surviving spouse, and assets to children on death of second spouse

Irrevocable living trust Removes taxation of income from

assets from the grantor

Types of Trusts (3 of 4) Charitable Remainder Trust

Income from trust goes to income beneficiary such as children, and remainderman is a charity

Provides some tax benefits Residence Trust

Removes market value of residence from an estate

Types of Trusts (4 of 4) Life insurance trust

Usually set up to pay federal estate taxes

Keeps death benefit out of grantor’s estate

Trust must be created first, and then given enough money to pay the first year’s premium

Basic rules of Estate and Gift Taxation (1 of 2) Gifts and bequests exempt from

taxation Anything to a spouse Anything to charities

Annual gift tax exemption For 2002 ($11,000 per year per

person per spouse

Basic rules of Estate and Gift Taxation (1 of 2) Unified tax credit for 2002 (&

2003) is $229,800 This provides exemption for the first

$700,000 of an estate & gifts in excess of the annual gift exemption

The cost basis of all assets owned by a deceased have the cost bases stepped up to current market value at time of death

Net Taxable Estate (1 of 2) Gross Estate – Allowable

Deductions = Net Taxable Estate Gross Estate inlcudes

Financial Assets (based on market value on date of death)

Personal Property (e.g., home, furnishings, cars, jewerly)

Net Taxable Estate (2 of 2) Allowable Deductions include:

All debts and taxes owed at time of death

Marital deduction (up to entire estate) Charitable deductions (must be

qualified charities) Final expenses (funeral costs) Administrative expenses (including

executor’s fee if there is one)

State estate taxes Frequently called inheritance or

death taxes Tremendous variations among

states, some essentially have no estate taxes and others may be extensive

Future of Federal Estate Taxes In 2010, scheduled to be abolished However, step-up in cost bases

would be eliminated also This creates capital gains taxes for

assets sold at a gain Many people will pay more in income

taxes than would have under old system

Many won’t know the cost bases