💰Personal Financial Management Unit 14 – Estate Planning Fundamentals

What's Estate Planning?

• Involves preparing for the transfer of a person's wealth and assets after their death
• Aims to maximize the value of the estate by minimizing taxes and other expenses
• Ensures assets are distributed according to the owner's wishes
• Helps to avoid legal challenges and disputes among beneficiaries
• Provides for the care of minor children or dependents with special needs
• Can include plans for incapacity or disability before death
• May involve setting up trusts to manage assets during life and after death

Key Players in Estate Planning

• Estate owner: The person whose assets are being planned for and distributed
• Beneficiaries: Individuals or entities designated to receive assets from the estate
  • Can include family members, friends, charities, or other organizations
• Executor: The person appointed to manage and distribute the estate's assets according to the owner's wishes
  • Also known as a personal representative
• Trustee: Manages assets placed in a trust for the benefit of the trust's beneficiaries
• Estate planning attorney: Provides legal advice and drafts necessary documents
• Financial advisors: Offer guidance on financial aspects of estate planning, such as minimizing taxes and managing investments
• Accountants: Assist with tax planning and preparation of estate tax returns

Essential Estate Planning Documents

• Last Will and Testament: Specifies how assets should be distributed after death
  • Names an executor to manage the estate
  • Can include guardianship provisions for minor children
• Power of Attorney: Grants authority to another person to make financial decisions on behalf of the estate owner
  • Can be durable, meaning it remains in effect even if the owner becomes incapacitated
• Healthcare Power of Attorney: Designates someone to make medical decisions on behalf of the owner if they become incapacitated
• Living Will: Provides instructions for end-of-life medical care, such as whether to use life-sustaining treatments
• Trusts: Legal arrangements that can help manage and protect assets during life and after death
• Beneficiary Designations: Specifies who should receive assets from retirement accounts, life insurance policies, and other financial accounts

Trusts and Their Role

• A legal arrangement where a trustee holds and manages assets for the benefit of designated beneficiaries
• Revocable Trusts: Can be modified or terminated by the grantor during their lifetime
  • Assets remain part of the grantor's estate and are subject to estate taxes
  • Becomes irrevocable upon the grantor's death
• Irrevocable Trusts: Cannot be easily modified or terminated once established
  • Assets are removed from the grantor's estate, potentially reducing estate taxes
• Testamentary Trusts: Created through a will and take effect after the grantor's death
• Living Trusts: Created during the grantor's lifetime and can be revocable or irrevocable
• Special Needs Trusts: Designed to provide for beneficiaries with disabilities without jeopardizing their eligibility for government benefits
• Charitable Trusts: Used to make donations to charitable organizations while providing tax benefits to the grantor or their estate

Tax Considerations in Estate Planning

• Estate Tax: A tax on the transfer of assets from a deceased person's estate to their beneficiaries
  • Applies to estates above a certain threshold ($12.06 million per individual in 2022)
• Gift Tax: A tax on transfers of money or property to another person during the donor's lifetime
  • Applies to gifts above the annual exclusion amount ($16,000 per recipient in 2022)
• Generation-Skipping Transfer (GST) Tax: Applies to transfers that skip a generation, such as from grandparents to grandchildren
• Step-Up in Basis: When an inherited asset's cost basis is adjusted to its fair market value at the time of the owner's death, potentially reducing capital gains taxes for beneficiaries
• Portability: Allows a surviving spouse to use their deceased spouse's unused estate tax exemption
• Irrevocable Life Insurance Trusts (ILITs): Can be used to remove life insurance proceeds from the estate, reducing estate taxes

Common Estate Planning Strategies

• Annual Gifting: Making gifts up to the annual exclusion amount to reduce the size of the estate
• Irrevocable Trusts: Transferring assets into an irrevocable trust to remove them from the estate
• Charitable Giving: Donating to qualified charities to reduce the size of the estate and obtain tax deductions
• Family Limited Partnerships (FLPs): Pooling family assets into a partnership to reduce estate taxes and maintain control
• Qualified Personal Residence Trusts (QPRTs): Transferring a primary residence or vacation home into a trust to remove it from the estate
• Grantor Retained Annuity Trusts (GRATs): Transferring assets into a trust while retaining the right to receive annuity payments, potentially reducing gift and estate taxes
• Life Insurance Planning: Using life insurance to provide liquidity for paying estate taxes and other expenses

Legal and Ethical Issues

• Capacity: Ensuring the estate owner has the mental capacity to make decisions and sign documents
• Undue Influence: Protecting the estate owner from being pressured into making decisions against their will
• Fiduciary Duties: The legal and ethical obligations of executors, trustees, and other professionals involved in estate planning
  • Duty of Loyalty: Acting in the best interests of the estate and its beneficiaries
  • Duty of Care: Managing the estate's assets prudently and responsibly
• Confidentiality: Maintaining the privacy of the estate owner's personal and financial information
• Conflicts of Interest: Avoiding situations where the interests of professionals involved in estate planning conflict with those of the estate or its beneficiaries
• Probate: The legal process of validating a will and administering the estate, which can be time-consuming and expensive
• Contests and Disputes: Resolving legal challenges to the estate plan, such as disputes over the validity of a will or the distribution of assets

Estate Planning in Action: Case Studies

• The Importance of Updating Beneficiary Designations: A case where outdated beneficiary designations led to unintended consequences
• Using a Special Needs Trust: An example of how a special needs trust provided for a beneficiary with disabilities while preserving their eligibility for government benefits
• The Benefits of a Living Trust: A case demonstrating how a living trust helped avoid probate and ensure the smooth transfer of assets
• Charitable Giving as an Estate Planning Strategy: An example of how incorporating charitable giving into an estate plan reduced estate taxes and left a lasting legacy
• The Consequences of Poor Communication: A case where lack of communication among family members led to a contested will and strained relationships
• Balancing Fairness and Equality: An example of how an estate plan was designed to distribute assets fairly among beneficiaries with different needs and circumstances
• The Role of Life Insurance in Estate Planning: A case illustrating how life insurance provided liquidity to pay estate taxes and support beneficiaries