Critical Thinking Questions
1. Compute the value of Saul’s probate estate.
The probate estate consists of the gross estate less non-probate assets. The gross estate amount of
$4,610,000 is calculated in #1 above. Saul’s non-probate assets consist of his life insurance
2. Compute the value of Saul’s gross estate.
Gross estate is:
Home $890,000
Vacation Cabin 485,000
3. Determine the total allowable deductions.
Deduction are:
Funeral Expenses $ 15,000
Debts 90,000
4. Calculate the estate tax base, taking into account the gifts to Eli and Kathleen
(remember that the annual exclusions “adjust” the taxable gifts).
The gift of stock was valued at $260,000 with half to Eli and half to Kathleen. Kathleen’s half
5. Use Exhibit 15.7 to determine the tentative tax on estate tax base.
Taxable estate with gifts = $4,736,000, from line 7 of Worksheet 15.2.
6. Subtract the appropriate unified tax credit (Exhibit 15.8) for 2012 from the tentative tax
on estate tax base to arrive at the federal estate tax due.
7. Comment on the estate shrinkage experienced by Robert’s estate. What might have
been done to reduce this shrinkage? Explain.
Primary techniques are:
Gift giving, gift an amount less than the annual exclusion each year to each person you desire to
receive some of your estate and there will be no tax due nor will there be a tax return due.
Elect portability for the unified tax credit. If the election is not made, each party to a marriage
only gets one credit. Not necessary in this case since his estate was less than $5,340,000 even
with his wife’s estate.
Terms Found in the Chapter
administrator The personal representative of the estate appointed by the court if the
decedent dies intestate.
annual exclusion Under the federal gift tax law, the amount that can be given each year
without being subject to the gift tax—for example, $14,000 in 2015.
This amount is indexed for inflation.
applicable exclusion
amount (AEA)
Credit given to each person that can be applied to the amount of
federal estate tax owed by that person at death. In 2009 the AEA was
$3,500,000. In 2015, the AEA is $5,400,000.
beneficiaries Those who receive benefits—property or income—from a trust or
from the estate of a decedent. A grantor can be a beneficiary of his
own trust.
codicil A document that legally modifies a will without revoking it.
community
property
All marital property co-owned equally by both spouses while living is
a community property state.
durable power of
attorney for
financial matters
Legal document that authorizes another person to take over someone’s
financial affairs and act on this or her behalf.
durable power of
attorney for health
care
A written power of attorney authorizing an individual to make health
care decisions on behalf of the principal when the principal is unable
to make such decisions. Also called advanced directive for health
care.
estate planning The process of developing a plan to administer and distribute your
assets in a manner consistent with your wishes and the needs of your
survivors, while minimizing taxes.
estate tax A tax levied on the value of property transferred at the owner’s death.
ethical will 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.
executor The personal representative of an estate designated in the decedent’s
will.
gift splitting A method of reducing gift taxes, a gift given by one spouse, with the
consent of the other spouse, can be treated as if each had given one-
half of it.
gift tax A tax levied on the value of certain gifts made during the giver’s
lifetime.
grantor A person who creates a trust and whose property is transferred into it.
Also called settlor, trustor creator.
gross estate All property that might be subject to federal estate taxes on a person’s
death.
intestacy The situation that exists when a person dies without a valid will.
irrevocable living
trust
A trust in which the grantor gives up the right to revoke or terminate
the trust.
Irrevocable life
insurance trust
An irrevocable trust in which the major asset is life insurance on the
grantor’s life.
joint tenancy A type of ownership by two or more parties, with the survivor(s)
continuing to hold all such property on the death of one or more of the
owners.
letter of last
instructions
An informal memorandum that is separate from a will and contains
suggestions or recommendations for carrying out a decedent’s wishes.
living (inter vivos)
trust
A trust created and funded during the grantor’s lifetime.
living will A document that precisely states the treatments a person wants if he or
she becomes terminally ill.
pour-over will 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.
probate estate The real and personal property owned by a person that can be
transferred at death.
probate process The court-supervised disposition of a decedent’s estate.
right of
survivorship
The right of surviving joint owners of property to receive title to the
deceased joint owner’s interest in the property.
revocable living
trust
A trust in which the grantor reserves the right to revoke the trust and
regain trust property. The grantor can serve as the initial trustee.
tenancy by the
entirety
A form of ownership by husband and wife, recognized in certain
states, in which property automatically passes to the surviving spouse.
tenancy in common A form of co-ownership under which there is no right of survivorship
and each co-owner can leave his or her share to whomever he or she
desires.
testamentary trust A trust created by a decedent’s will and funded through the probate
process.
testator The person who makes a will that provides for the disposition of
property at his or her death.
trust A legal relationship created when one party transfers property to a
second party for the benefit of third parties.
trustee An organization or individual selected by a grantor to manage and
conserve property placed in trust for the benefit of the beneficiaries.
unified rate
schedule
A graduated table of rates applied to all taxable transfers; used for
both federal gift and estate tax purposes.
unified tax credit The credit that can be applied against the tentative tax on estate tax
base.
will A written and legally enforceable document expressing how a person’s
property should be distributed on his or her death.
Preserving Your Estate
Chapter Outline
Learning Goals
I. Principles of Estate Planning
A. Who Needs Estate Planning?
1. People Planning
2. Asset Planning
B. Why Does an Estate Break Up?
C. What Is Your Estate?
D. The Estate Planning Process
*Test Yourself*
II. Thy Will Be Done…
A. Absence of a Valid Will: Intestacy
B. Preparing the Will
C. Common Features of the Will
D. Requirements of a Valid Will
E. Changing or Revoking the Will: Codicils
1. Changing the Will
2. Revoking the Will
F. Safeguarding the Will
G. Letter of Last Instructions
H. Administration of an Estate
I. Other Important Estate Planning Documents
1. Power of Attorney
2. Living Will and Durable Power of Attorney for Health Care
3. Ethical Wills
J. What about Joint Ownership?
1. Tenancy in Common
2. Community Property
*Test Yourself*
III. Trusts
A. Why Use a Trust?
1. Managing and Conserving Property
2. Income and Estate Tax Savings
B. Selecting a Trustee
C. Common Types and Characteristics of Trusts
1. Living Trusts
a. Revocable Living Trust
b. Irrevocable Living Trust
c. Living Trusts and Pour–Over Wills
2. Testamentary Trust
3. Irrevocable Life Insurance Trust
*Test Yourself*
IV. Federal Unied Transfer Taxes
A. Gifts and Taxes
B. Is It Taxable?
C. Reasons for Making Lifetime Gifts
*Test Yourself*
V. Calculating Estate Taxes
A. Computing the Federal Estate Tax
B. Portability
*Test Yourself*
VI. Estate Planning Techniques
A. Dividing
B. Deferring
C. Life Insurance as an Estate Planning Tool
D. Future of the Estate Tax
*Test Yourself*
Summary
Financial Planning Exercises
Applying Personal Finance
Prepare Your Will!
Critical Thinking Cases
15.1 A Long-Overdue Will for Carsten
15.2 Estate Taxes on Saul Schwab’s Estate
Money Online!