Preserving Your Estate
Chapter 15
How Will This Affect Me?
No, you can‘t take it with you . But there’s a next best thing: A carefully designed estate plan
will allow your loved ones and family to keep as much of your accumulated wealth as possible.
This chapter explains the role of estate planning and the importance of a will. It discusses the
use and design of living wills, advance medical directives, and trusts. It also explains how
federal estate taxes are calculated. After reading this chapter you should understand the key
elements in handling and preserving your estate for your loved ones.
Goal is not to make the students lawyers, but the chapter does include some legal terms that are
important to understand. Included are:
1. Estate planning involves deciding what to distribute to which of your heirs, people
planning and asset planning
2. The difference between probate and gross estate
3. Types of ownership on property, especially right of survivorship
4. Use of lifetime gifts equal or less than annual exclusion to reduce gross estate without
using any credit
5. The Applicable Exclusion Amount that is derived from the credit amount and the
importance of the portability of the credit between spouses
6. Use of a life insurance trust to exclude life insurance from the gross estate
Learning Objectives
15-1 Describe the role of estate planning in personal financial planning, and identify the seven
steps involved in the process.
The students need to understand the difference between people planning and asset
planning even though there is no estate tax. If this planning is not done, the estate will
incur significant and unnecessary costs.
15-2 Recognize the importance of preparing a will and other documents to protect you and
your estate.
The sections and content of a will is in the chapter. Let the students read it—better to
spend your class time on what happens if there is no will. When the court appoints an executor
in cases with there is no will, the court will also approve a fee that is about 4% of the estate.
With a will, the fee can be waived.
15-3 Explain how trusts are used in estate planning.
15-4 Determine whether a gift will be taxable and use planned gifts to reduce estate taxes.
15-5 Calculate federal taxes due on an estate.
15-6 Use effective estate planning techniques to minimize estate taxes.
Financial Facts or Fantasies?
These may be used as “teasers” to get the students on the right page with you. Also, they may be
used as quizzes after you covered the material or as “pre–test questions” to get their attention.
• Due to recent changes in the law, a person no longer has to be mentally competent in
order to draw up a valid will.
Fantasy: A person still must be mentally competent in order to draw up (or have
drawn up) a legally enforceable will.
• Once a will is drawn up, it is relatively simple to make minor changes to it.
Fact: As long as the changes are minor, a simple and convenient way to legally modify
an existing will is a
codicil
, which is a short, legal document that specifies the changes.
Financial Facts or Fantasies?
These may be used as a quiz or as a pre-test to get the students interested.
1. True False Estate planning is one of the key elements of personal financial
planning.
2. True False The wealthy are the only ones who need to make out wills.
3. True False Due to recent changes in the law, a person no longer has to be
mentally competent in order to draw up a valid will.
4. True False Once a will is drawn up, it is relatively simple to make minor
changes to it.
5. True False In order for a living trust to be legally enforceable, it must be
irrevocable.
6. True False There are no federal estate taxes on estates of up to $5,430,000
for individuals.
Answers:
YOU CAN DO IT NOW
The “You Can Do It Now” cases may be assigned to the students as short cases or problems.
They will help make the topic more real or relevant to the students. In most cases, it will only
take about ten minutes to do, that is, until the student starts looking around at the web site. But
they will learn by doing so. In class, you could ask the students what they found on the sites.
YOU CAN DO IT NOW
Estate Planning Conversations
YOU CAN DO IT NOW
Importance of Naming Alternative Beneficiaries
Financial Impact of Personal Choices
Read and think about the choices being made. Do you agree or not? Ask the students to discuss
the choices being made.
The Unintended Effects of Lewis’s Beneficiary Designations
Lewis Jenkins died suddenly in 2015. He had amassed a significant estate and had an
attorney write a will that would distribute his assets among his wife, Mila, and two
grown daughters, Lyla and Zara, as he wished. Apart from his will, he had heard that it
made sense to name beneficiaries on his investment accounts so that those assets
would go directly to his family and bypass the sometimes long and costly probate
process. Lewis had been previously married to Elise Jenkins, who survived him.
Lewis named his wife, Mila, as the beneficiary to most of his investment accounts and
designated one account to his daughter, Lydia, and one account to his daughter, Lyla,
and one account to his daughter, Zara. He intended for his daughters to get equal
amounts. While trying to be careful, Lewis forgot that he hadn’t changed the beneficiary
on one investment account from Elise, his prior wife, to his current wife, Mila. That
account was worth $50,000 at his death.
So what was the effect of Lewis’s beneficiary designations? His wife Mila received most
Financial Planning Exercises
1. Estate planning objectives. Generate a list of estate planning objectives that apply to
your personal family situation. Be sure to consider the size of your potential estate as well
as people planning and asset planning. Estate planning is not just about taxes.
The student may not share information about their family, rather just using general family
2. Importance of writing a will. Emilia and Kevin Boyd are in their mid-30s and have two
children, ages 8 and 5. They have combined annual income of $150,000 and own a house in
joint tenancy with a market value of $410,000, on which they have a mortgage of $300,000.
Darrell has $100,000 in group term life insurance and an individual universal life policy of
$150,000. However, the Boykins haven’t prepared their wills. Kevin plans to draw one up
soon, but they think that Emilia doesn’t need one because the house is jointly owned. As
their financial planner, explain why it’s important for both Emilia and Kevin to draft will
as soon as possible.
Both Emilia and Kevin should have wills. One major reason is they need to name the guardian
for their children in the event they die in a common accident. Further, Emilia should also have a
3. Qualifications of estate executor. Your best friend has asked you to be executor of his
estate. What qualifications do you need, and would you accept the responsibility?
4. Will and last letter preparation. Prepare a basic will for yourself, using the guidelines
presented in the text; also prepare your brief letter of last instructions.
5. Topics in an ethical will. State the topics you would cover in your ethical will. Would
you consider recording it digitally?
6. Trusts in estate planning. Frank Shaw, 48, and Victoria Ferguson, 44, were married five
years ago. There are children from their prior marriages, two children for Frank and one
child for Victoria. The couple’s estate is valued at $1.4 million, including a house valued at
$475,000, a vacation home in the mountains, investments, antique furniture that has been
in Victoria’s family for many years, and jewelry belonging to Frank’s first wife. Discuss
how they could use trusts as part of their estate planning and suggest some other ideas for
them to consider when preparing their wills and related documents.
7. Calculation of estate taxes. Use Worksheet 15.1. When Jackson Holmes died unmarried
in 2018 he left an estate valued at $15,850,000. His trust directed distribution as follows:
$20,000 to local hospital, $160,000 to his alma mater, and the remainder to his three adult
children. Death-related costs and expenses were $6,800 for funeral expenses, $40,000 paid
to attorneys, $5,000 paid to accountants, and $30,000 paid to the trustee of his living trust.
In addition, there were debts of $125,000. Use Exhibits 15.5 and 15.6 to calculate the
federal estate tax due on Jackson’s estate.
Worksheet 15.2 [as a word table] is below.
Computing Federal Estate Tax Due
Name: Jackson Holmes
Date: May 4, 2018
Line
Computation
Item
Amount
Total Amount
1
Gross Estate
$15,850,000
2
Subtract sum of
a) Funeral Expenses
$6,800
b)Administrative Expenses
75,000
c)Debts
125,000
Total
(206,800)
3
Result
Adjusted Gross Estate
$15,643,200
4
Subtract:
a) Marital deduction
b) Charitable deduction
180,000
Total
(180,000)
5
Result
Taxable estate
$15,463,200
6
Add
Post-1976 taxable gifts
0
7
Result
Estate Tax Base
$15,463,200
8
Compute Tax
Tentative tax on estate tax base
$6,131,080
9
Subtract sum of
a) Gift Tax paid on post 1976 gifts
0
b) Unified Tax Credit—2018 credit
4,417,800
4,417,800
10
Result
1,713,280
11
Subtract
Other Credits
0
12
Result:
Federal estate Tax Due
$1,713,280
Use Exhibit 15.5 to calculate the tentative tax.
Use Exhibit 15.6 to determine the appropriate unified tax credit.
Note: the amount on line 7, the estate tax base is significant since many states will assess their
estate tax as a percentage of the federal estate tax base.
8. Lifetime gifting strategy. Camila Ortiz has accumulated substantial wealth and plans
to gift some of her wealth to her son Diego. She is considering two assets: a beach house,
which cost $300,000 twenty years ago and now has a fair market value of $750,000; and
shares in three mutual funds, which cost her $550,000 five years ago and now have a fair
market value of $750,000. Prepare a memo advising Rosa which property to give to
Marcos. In your memo, consider two scenarios: one where Diego sells the property and
one where he does not.
Student memo formats may vary but should include some of the following information regarding
Camila’s gift to her son Diego and whether he decides to keep the gift or sell it.
Giving gifts reduce the taxable estate in two ways. First, any future appreciation of the gifted
9. Calculating federal transfer tax on estate. Ronald Knight died in 2018, leaving an estate of
$23 million. Ronald’s wife died in 2015. In 2009, Ronald gave his son Jamie, property that
resulted in a taxable gift of $3 million and upon which Ronald paid $885,000 in transfer
taxes. Ronald had made no other taxable gifts during his life. His will provided a charitable
bequest of $1 million to his church. Determine the federal transfer tax on Ronald’s estate.
Worksheet 15.2 [as a word table] is below.
Computing Federal Estate Tax Due
Name: Ronald Knight
Date: May 4, 2018
Line
Computation
Item
Amount
Total Amount
1
Gross Estate
$23,000,000
2
Subtract sum of
a) Funeral Expenses
b)Administrative Expenses
c)Debts
Total
3
Result
Adjusted Gross Estate
23,000,000
4
Subtract:
a) Marital deduction
b) Charitable deduction
1,000,000
Total
(1,000,000)
5
Result
Taxable estate
$22,000,000
6
Add
Post-1976 taxable gifts
3,000,000
3,000,000
7
Result
Estate Tax Base
$25,000,000
8
Compute Tax
Tentative tax on estate tax base
$9,945,800
9
Subtract sum of
a) Gift Tax paid on post 1976 gifts
0
b) Unified Tax Credit—2018 credit
4,417,800
4,417,800
10
Result
5,528,000
11
Subtract
Other Credits
0
12
Result:
Federal estate Tax Due
$5,528,000
Use Exhibit 15.5 to calculate the tentative tax.
Use Exhibit 15.6 to determine the appropriate unified tax credit.
Note: the amount on line 7, the estate tax base is significant since many states will assess their
estate tax as a percentage of the federal estate tax base.
10. Recent estate taxes legislation. Summarize important legislation affecting estate taxes,
and briefly describe the impact on estate planning. Explain why getting rid of the estate
tax doesn’t eliminate the need for estate planning.
Congress is not likely to modify the transfer tax before 2019, if then. But if it does, the changes
will be either eliminate the tax altogether or modify the amount of the credit and subsequent
Test Yourself
15-1 Discuss the importance and goals of estate planning. Explain why estates often
break up. Distinguish between the probate estate and the gross estate.
probate estate
gross estate
15-2 Briefly describe the steps involved in the estate planning process.
Exhibit 12.2 list seven steps in the estate planning process. They are:
15-3 What is a will? Why is it important? Describe the consequences of dying intestate.
will
You can’t take your property with you when you die, so it has to be transferred to someone. As
mentioned in 1 above, jointly owned property and property subject to a contract that specifies a
named beneficiary will be transferred by property law. The probate estate is the rest of your
property and the state government looks to you to tell them where the property should go. You
do this through a will. If you do not have a will, you are said to die intestate and the state
15-4 Describe the basic clauses normally included in a will and the requirements
regarding who may make a valid will.
Exhibit 15.5 displays a sample will with eight sections or clauses that are normally found in a
15-5 How can changes in the provisions of a will be made legally? In what four ways can
a will be revoked?
15-6 Explain these terms: (a) intestacy, (b) testator, (c) codicil, (d) letter of last
instructions.
intestacy
testator
codicil
letter of last
instructions
15-7 What is meant by the probate process? Who is an executor, and what is the
executor’s role in estate settlement?
15-8 Describe briefly the importance of these documents in estate planning: (a) power of
attorney, (b) living will, (c) durable power of attorney for health care, and (d)
ethical will.
Power of Attorney: Through a power of attorney, you give a person complete control over your
financial affairs. The “attorney” may sell your property, write checks on your accounts, manage
15-9 Define and differentiate between joint tenancy and tenancy by the entirety. Discuss
the advantages and disadvantages of joint ownership. How does tenancy in common
differ from joint tenancy?