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 Goals
LG1 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.
LG2 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.
LG3 Explain how trusts are used in estate planning.
Trusts are useful to all to provide for minors and special needs situations. Trusts use to reduce tax
is for high income taxpayers and will be suggested by lawyers. For this course, the use of trusts is to
provide professional management of assets when the beneficiaries cannot do so themselves.
LG4 Determine whether a gift will be taxable and use planned gifts to reduce estate taxes.
The text does not spend a lot of time on what is or is not a gift. For this course do not worry
about the unusual situations concerning gifts. Just focus on the annual exclusion and the fact that it is for
all gifts during the year and applies per donee. So if you have ten grandkids, you can give away $140,000
per year with no tax or return required.
LG5 Calculate federal taxes due on an estate.
Worksheet 15.2 covers the computation of the tax. Going over that will be sufficient.
LG6 Use effective estate planning techniques to minimize estate taxes.
There is a short list in the chapter. You should discuss each of these. Because of these techniques,
commentators refer to the transfer tax as an “elective tax”, that is you elect to pay the tax because no
planning for the tax.
Lastly and again, estate planning is not tax planning alone. Estate planning is deciding what to do with
your assets after you are dead.
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.
• Estate planning is one of the key elements of personal financial planning.
Fact: One of the principal objectives of financial planning is to transfer as much
accumulated wealth to your heirs and designate beneficiaries as possible – a goal
that is made easier through effective estate planning.
• The wealthy are the only ones who need to make out wills.
Fantasy: Nothing could be further from the truth! While the wealthy many have
more motivation to do so, anyone who has accumulated an estate – no matter how
small – should have a will drawn up that sets out how the estate is to be distributed
to heirs and/or beneficiaries.
• 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.
• In order for a living trust to be legally enforceable, it must be irrevocable.
Fantasy: A legally enforceable living trust, which is created and exists during the
lifetime of the person(s) setting it up, may be either revocable (giving the grantor
the right to revoke the trust) or irrevocable (beyond the reach of the grantor).
• There are no federal estate taxes on estates of up to $5,430,000 for individuals.
Fact: Such estates pass to their heirs and/or beneficiaries free from estates taxes.
And this limit is doubled to $10,680,000 for married couples. Only larger estates are
subject to these taxes.
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 $5,430,000
for individuals.
Answers:
YOU CAN DO IT NOW
The “You Can Do It Now” cases may be assigned to the students as short cases or problems. They will
help make the topic more real or relevant to the students. In most cases, it will only take about ten
minutes to do, that is, until the student starts looking around at the web site. But they will learn by doing
so. In class, you could ask the students what they found on the sites.
YOU CAN DO IT NOW
Estate Planning Conversations
Dealing with the prospect of each other’s deaths in a family is never comfortable.
But careful estate planning will assure that your intentions are best served in light
of the family’s needs. A useful perspective on how to have such a conversation may
be found at: https://www.$delity.com/estate-planning-inheritance/estate-
planning/talking-estate-planning. The sooner the conversation happens, the
more confident you can be that your estate plan will have the intended results. You
can do it now.
YOU CAN DO IT NOW
Importance of Naming Alternative Beneciaries
When you name beneficiaries on financial accounts or in your will, it’s important to
name alternate (contingent) beneficiaries as well. This will make clear what happens
if your first choice beneficiary doesn’t outlive you. See
http://www.nolo.com/legal-encyclopedia/why-naming-alternate-
bene$ciaries-your-will-is-so-important.html for some useful tips on naming
beneficiaries and related key issues. You can do it now.
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 (Un) intended E!ects of Corbin’s Beneciary Designations
Corbin Brenner 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, Vanessa,
and two grown daughters, Lydia and Gina, 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. Corbin had been previously married to Patricia Brenner, who
survived him.
Corbin named his wife, Vanessa, as the beneficiary to most of his investment
accounts and designated one account to his daughter, Lydia, and one account to his
daughter, Gina. He intended for his daughters to get equal amounts. While trying to
be careful, Corbin forgot that he hadn’t changed the beneficiary on one investment
account from Patricia, his prior wife, to his current wife, Vanessa. That account was
worth $50,000 at his death.
So what was the effect of Corbin’s beneficiary designations? His wife Vanessa
received most of the investment accounts as he had intended. However, the
$50,000 account that had not been updated to name Vanessa as the beneficiary
went to Corbin’s prior wife, Patricia, which is not what he intended. While it seemed
fair to Corbin to designate one investment account to each of his daughters and the
accounts had the same initial values, the accounts had grown to different values by
the time of his death. Lydia’s account had grown to $100,000 while Gina’s account
had grown to $200,000. Corbin had intended that his daughters receive equal
amounts but they did not. Corbin could have achieved his objective by naming both
of his daughters as beneficiaries on both of the accounts. And had Corbin reviewed
his beneficiary designations at least once a year, he may well have discovered that
he’d forgotten to make an important change.
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 The real and personal property owned by a person that can be transferred at
death.
gross estate All property that might be subject to federal estate taxes on a person’s death.
The states versus federal interest in estates is that the property of the decedent goes to the person it is
supposed to go to. At death property is transferred by property law and by probate law. Any property that
is jointly owned with right of survivorship will be transferred by property to the joint owner—such
The gross estate is the federal term for all property owned in any way by the decedent. Thus, 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:
1. Assess your family situation and set estate planning goals.
2. Gather comprehensive and accurate data.
3. List all assets and determine the ownership and value of your estate.
15-3 What is a will? Why is it important? Describe the consequences of dying intestate.
will A written and legally enforceable document expressing how a person’s
property should be distributed on his or her death.
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
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 will.
Section 15-2c of the chapter discusses the common features of the will and appears on pages 607-609.
The will must do three things:
Provide a plan for distributing the testator’s assets according to his or her wishes, the
Section 3 and 4 specifies the disposition of the property and appoints an executor to take care of the
15-5 How can changes in the provisions of a will be made legally? In what four ways can a will
be revoked?
Minor changes in the will may be made by a codicil, a short document that reaffirms all existing
provisions in the will except the one to be changed. The codicil should be executed and witnessed in the
same formal manner as a will.
The will may be revoked by any one of the following:
1. Making a later will that expressly revokes prior wills.
15-6 Explain these terms: (a) intestacy, (b) testator, (c) codicil, (d) letter of last instructions.
intestacy The situation that exists when a person dies without a valid will.
codicil A document that legally modifies a will without revoking it.
15-7 What is meant by the probate process? Who is an executor, and what is the executor’s role
in estate settlement?
In the probate process, money owed to the decedent is collect, creditors (including tax authorities) are
paid, and what remains is distributed to the appropriate persons. The person who makes this happens is
the executor as named in the decedent’s will or if no will, by the laws of intestacy which provide for the
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 your property in
every sense of the word. If you do not wish to give complete control, you may execute a limited power
Living Will: A document that precisely states the treatments a person wants if he or she becomes
Durable Power of Attorney for Health Care: Through the durable power of attorney for health care, you
authorize an individual to make health care decisions for you if you are unable to do so either by
Ethical Wills: A personal statement left for family, friends, and community that shares your values
blessings, life’s lessons, and hopes and dreams for the future. Also called legacy letter. It does not
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?
Joint tenancy describes a type of property ownership where there are more than one owner and that all
surviving owners take ownership of all the property at the death of one of the owners.
Tenancy by the entirety is a special form of joint tenancy between a husband and wife. The advantage
Tenancy in common has more than one owner, hence joint owners, but there is no right of survivorship.
Joint ownership in general, allows multi parties to join together to invest in some property without
15-10 What is the right of survivorship? What is community property and how does it differ
from joint tenancy with regard to the right of survivorship?
right of survivorship The right of surviving joint owners of property to receive title to the
deceased joint owner’s interest in the property.
If the state used community property laws, the property that a person acquires while married is considered
15-11 Describe the basic trust arrangement, and discuss typical reasons for establishing trusts.
What essential qualities should a trustee possess?
trust A legal relationship created when one party transfers property to a second
party for the benefit of third parties.
The grantor transfers property to the trust. The provisions of the trust are carried out by the trustee. The
The essential qualities for a trustee are to honest and knowledgeable. The text specifies five qualities:
1. Possess sound business knowledge and judgment.
2. Have an intimate knowledge of the beneficiary’s needs and financial situation.
15-12 What is a living (inter vivos) trust? Distinguish between a revocable living trust and in
irrevocable living trust.
living (inter vivos)
trust
A trust created and funded during the grantor’s lifetime.
Revocable means that the trust may be revoked or discarded at the option of the grantor. Irrevocable
means that the grantor cannot change their mind, the trust cannot be revoked by the grantor. For federal
15-13 Explain each of these terms: (a) grantor, (b) trustee, (c) beneficiary, (d) pour-over will,
testamentary trust, and (f) irrevocable life insurance trust.
grantor A person who creates a trust and whose property is transferred into it. Also
called settlor, trustor creator.
beneficiaries Those who receive benefits—property or income—from a trust or from the
pour-over will,
testamentary trust
A provision in a will that provides for the passing of the estate—after debts,
expenses, taxes, and specific bequests—to an existing living trust. A
Irrevocable life
insurance trust
An irrevocable trust in which the major asset is life insurance on the
grantor’s life. If establish at least three years before the decedent’s death,
15-14 What is a gift, and when is a gift made? Describe the following terms as they relate to the
federal gift taxes: (a) annual exclusion, (b) gift splitting, (c) charitable deduction, and
(d) marital deduction.
A gift is a transfer for less than full and adequate consideration. The donor must have charitable or
altruistic motives. The gift is made when the ownership of the property is transferred to the donee.
Annual exclusion: In order to reduce the administrative burden on the taxpayer and the government, gifts
Gift splitting: Basically the provision allows a joint return for gifts. At the option of the spouses, gift by
Charitable deduction: Similar to the income tax, gifts to a 501(c)(3) organization may be deducted when
Marital deduction: Any gift between spouses may be deductible on a gift tax return. (Same is true for an
15-15 Discuss the reasons estate planners cite for making lifetime gifts. How can gift giving
be used to reduce estate shrinkage?
The estate tax is assessed on the property owned by the decedent at the time of their death. If the property
was gifted before their death, it is not in the gross estate. Any taxable gift made after 1976 will be added
back to the gross estate in determining the taxable estate, but the amount added is the value when the gift
15-16 Explain the general nature of the federal estate tax. How does the unified tax credit affect
the amount of estate tax owed? What is the portability concept?
The unified transfer tax applies to two type of transfers: transfers by gift [referred to as the gift tax] and
transfers through an estate [referred to as the estate tax]. The beginning point for the estate tax is the
gross estate, all property owned, in whole or part, by the decedent on the date of death. From this amount
deductions are taken including expenses relating to the estate, charitable deductions and marital
Effective in 2011, a decedent could elect to allow their spouse to use any unneeded credit to reduce their
[the second spouse to die] tax referred to as the portability concept. Thus, with the election, a married
15-17 Explain the general procedure used to calculate the federal estate tax due.
Compute the gross estate, subtract the total deductions, add taxable gifts since 1976, compute tax using
15-18 Describe and discuss each of the techniques used in estate planning.
Primary techniques are:
Gift giving, gift an amount less than the annual exclusion each year to each person you desire to receive
Charitable Contributions, better to give while you are alive rather than through the estate. If given while
Elect portability for the unified tax credit. If the election is not made, each party to a marriage only gets
one credit.
Use Life Insurance Trust. If you set up a life insurance trust at least three years before death, the amount
Valuation issues. The gross estate is the fair market value on the date of death. Because of the way the
market reacts to large amounts of stock or real estate being sold during a short period, valuation of
Trusts. Trusts may be used in certain cases to reduce the transfer taxes. These cases involve large estates