Chapter 20: Estate Planning
Estate planning involves the planning and documentation of how an individual’s assets will be distributed upon death. A key goal of estate planning is to minimize taxes on assets passed to beneficiaries. The most important task in estate planning is the creation of a will.
A will describes how the estate should be distributed upon death and appoints a guardian for any surviving minor children. Without a will, (intestate) the court will appoint an administrator for the estate and the estate will be divided according to the laws of the state rather than the wishes of the deceased.
To create a valid will, the individual must be of minimum age, usually 18 or 21, be mentally competent, and not subject to undue influence. The will must be written, dated, and signed. One or two individuals who are not named in the will must also witness it. A simple will may specify that the entire estate be distributed to a person’s spouse. If the estate is large, however,
a traditional marriage share will may be more appropriate. This type of will divides the estate between the spouse and the children, or a trust. A traditional marital share will is useful in reducing estate taxes.
In addition to describing how the estate should be distributed, a will should name an executor to carry out the instructions of the deceased, a guardian for minor children, and describe the individual’s preferences as far as funeral arrangements.
Trust, gifts, and contributions are vehicles used to avoid estate taxes
Options:
A living trust assigns the assets of an individual to a trustee while the individual is still alive.
An irrevocable living trust cannot be changed. The assets in the trust no longer belong to the individual and are not a part of the estate to be taxed.
Testamentary trusts are created by a will. One type of testamentary trust is a standard family trust, which helps individuals avoid estate taxes. The law currently allows gifts of up to $12,000 per taxpayer, per recipient, per year (increasing in $1,000 increments over time with inflation). Gifts are tax-free.
Many individuals leave a portion of their estate to charitable organizations. These gifts are also tax-free.
Living Wills
In addition to wills and trust, a part of estate planning includes preparing a living will and a power of attorney. A living will is a simple legal document in which individuals specify their preferences if they become mentally or physically disabled. Many individuals express a desire not to be placed on life support if they become terminally ill. A power of attorney allows someone to make specific decisions for an individual if the individual become incapacitated. A durable power of attorney for health care grants a person the right to make specific health care decisions for another individual. Key estate planning documents should be kept in a safe and accessible place.
Your Will Should Include:
A will should include:
(a) Distribution of the estate: how the estate should be divided among beneficiaries. This may be a percentage amount of the estate or a dollar amount;
(b) Executor: the person responsible for carrying your wishes as described in the will. The executor will collect any money owed the estate, pay off any debts, and then distribute the remainder of the estate in accordance with the will. The executor is entitled to be paid by the estate for services provided;
(c) Guardian: if there are minor children, the will should name the person who would be responsible for the care of the children and for the management of any estate left to the children. One should also make sure the person selected is willing to be a guardian. The will may specify an amount of money to be distributed to the guardian to care for the children;
(d) Signature: this is needed to validate the will;
(e) Letter of last instructions: describes preferences regarding funeral arrangements and specifies where key financial documents are stored.
Who you are:
You and your spouse started a successful mail-order craft kit business out of your home in 1980. It quickly expanded and you were able to move the business out of your home and purchase a warehouse for your business operations. In addition to the warehouse, you also own a 4 unit apartment building which is also on the property. You have 4 children and 2 of them are still minor’s. You believe in giving back to the community and have been donating 5% of your after-tax profits to local non-profits for the past 20 years. You estimate your net worth to be 1.1 million dollars. It is time for you to create your estate plan…………..