Personal Financial Planning Study Set 5

Business

Quiz 15 :

Preserving Your Estate

Quiz 15 :

Preserving Your Estate

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Use Worksheet 15.2. When Russell Hypes died unmarried in 2012, he left an estate valued at $7,850,000. His trust directed distribution as follows: $20,000 to the local hospital, $160,000 to his alma mater, and the remainder to his three adult children. Death-related costs and expenses were $16,800 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 Worksheet 15.2 and Exhibits 15.7 and 15.8 to calculate the federal estate tax due on his estate. (Reference Worksheet 15.2 and Exhibits 15.7 and 15.8 ) img img img
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Since Person RH died in 2012, the tax regulations for 2012 will be used to fill in the worksheet to calculate the federal estate tax due. Each line item is described below.
1) This is the gross estate value. Enter $7,850,000.
2a) This is the funeral expenses. Enter $16,800.
2b) This is the total of the administrative expenses. $40,000 was paid to attorneys, $5,000 to accountants and $30,000 paid to the trustee of his living trust, for a total of $75,000 in administrative expenses. Enter $75,000.
2c) This is the amount of debts. Enter $125,000.
3) This is the adjusted gross estate. The total of items 2a, 2b and 2c is $216,800. This amount is subtracted from the gross estate to obtain the adjusted gross estate.
img The adjusted gross estate is $7,633,200
4a) This is the marital deduction. Since the deceased was unmarried, enter $0.
4b) This is the total of all Charitable donations. $20,000 was donated to the local hospital and $160,000 was donated to the alma mater, for a total of $180,000. Enter $180,000.
5) The Taxable estate is the adjusted gross estate less the marital and charitable deductions.
img 6) This is the amount of adjustable taxable gifts. No gifts were mentioned. Enter $0.
7) The estate tax base is equal to the taxable estate since there was no adjustable taxable gift. Enter $7,453,200.
8) This is the tentative tax, which is found using the Federal Unified Transfer Tax Rates. The values for each rate of the taxes are found in the brackets shown below. Since the taxable estate value is over $500,000, the tentative tax is 35% on the excess over $500,000.
Federal Unified Transfer Tax Rates
img The tentative taxes are computed as follows:
img Enter $2,589,420.
9) This is the unified tax credit obtained from the Unified Credits and Applicable Exclusion Amounts for Estates and Gifts. Since the estate is valued at over $5,120,000, the Unified Tax credit is $1,772,800. Enter $1,772,800.
10) This is the Total estate taxes, which is the tentative tax with the Unified tax credit applied.
img 11) There are no other credits. Enter $0.
12) This is the estate tax due. Since there are no other credits, the estate tax due is the total estate tax that was found in step 10. The estate tax due is $816,620.
The worksheet is shown below:
img

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Discuss the importance and goals of estate planning. Explain why estates often break up. Distinguish between the probate estate and the gross estate.
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Discuss the importance and goals of estate planning:
Estate planning is the process of developing a plan to administer and distribute the person's assets after death in a manner consistent with his wishes and needs of his survivors while minimizing taxes. To minimize the tax exposure is the major goal of estate planning. Estate planning is used by people to accumulate enough capital to meet their personal needs as well as financial security to the family members in case of death, major physical disability and retirement. Estate planning can be done mainly in the area of people planning and asset planning.
People planning include predicting the needs, both psychological and financial, of close and loved ones and providing enough income and capital so that they can continue their life in the way in which they want. When an estate involves closely held business, estate planning is essential to stabilize and maximize its asset and income producing values, both during the owner's lifetime and at the owner's death or disability.
Explain why estates often breakup:
The estates often break up. The estate die with people because of number of reasons which includes; death related costs, inflation, lack of liquidity, improper use of vehicle of transfer, and disabilities.
• Death related costs: During the lifetime, generally people do not account for death related costs. Sometime, death related cost is so much that they have to spend their whole estate to cover up them. Medical bills for final illness, funeral expenses, fees for attorneys, appraisers and accountants, administrative expenses, federal estate taxes and state death taxes, current bills unpaid, outstanding long term obligations and unpaid taxes are some of the examples of death related costs.
• Inflation: The value of the money decreases with the time. So, the value of the estate has to be rearranging periodically to counter the effect of inflation someone fails to do so, then it can hamper the ability of assets to provide steady and adequate levels of financial security and reduces its usefulness.
• Lack of liquidity: When people do not have enough capital to cover their death related cost, and then their estate tends to shrink.
• Improper use of vehicles of transfer: It involves passing property to the unintended beneficiaries or to the proper beneficiaries in an improper manner or at an incorrect time.
• Disabilities: Loss of income due to long term disability of a family wage earner may diminish the value of the estate.
Difference between probate estate and gross estate:
Probate estate consists of the real and personal property that can be transferred at death according to the terms of a will or in case of no valid will, under intestate law. Whereas, gross estate includes all the property- both probate and nonprobate- that might be subject to federal estate taxes at death. Life insurance, jointly held property with rights of survivorship, and property passing under certain employee benefit plans are examples of nonprobate assets that might be subject to federal estate taxes.

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Prepare a basic will for yourself, using the guidelines presented in the text; also prepare your brief letter of last instructions.
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The last will of James Gayle
Section 1 - Introductory Clause
I, Christ Gayle, of Virginia, do, hereby make my last will and revoke all wills and codicils made prior to this will.
Section 2 - Direction of Payments
Article 1: Payment of debts and expenses
I direct payment out of my estate of all just debts and the expenses of my last illness and funeral.
Section 3 - Disposition of Property
Article 2: Disposition of property
I give all my jewelry and photography equipment, as well as all other articles of personal and household use to my wife, Chris Gayle,
I donate the sum of $300,000 to Virginia Hospital.
I give equal shares of all the remainder of my estate, real and personal, wherever located, to my both children, Michael and Nicole, their heirs and assigns forever.
Section 4 - Appointment Clause
Article 3: Nomination of Executor and Guardian
I hereby nominate my beloved wife Chris Gayle, as the Executor of this will, but if she is unable or unwilling to serve then I nominate my brother, William Gayle. In the event both persons fail to act, then I nominate Southern Trust Bank of Atlanta, Georgia as Executor in the place of said persons.
If my wife does not survive me, I appoint my brother, William Gayle, Guardian of the person and property of my son, Michael, during his minority.
Section 5 - Tax Clause
Article 4: Payment of Taxes
I direct that there shall be paid out of my residuary estate all estate, inheritance, and similar taxes imposed by a government in respect to property includable in my estate for tax purposes, whether the property passes under this will or otherwise.
Section 6 - Simultaneous Death clause
Article 5: Simultaneous death
If my wife and I shall die under such circumstances that there is not sufficient evidence to determine the order of our deaths, then it shall be presumed that she survived me. My estate shall be administered and distributed in all respects in accordance with such assumption.
Section 7 - Execution and Attestation Clause
In witness thereof, I have affixed my signature to this, my last will and testament, which I have initialed, this 30 th day of July, 2013.
James Gayle
Section 8 - Witness Clause
Signed, sealed and published by James Gayle, the testator, as his last will, in the presence of us, who, at his request, and in the presence of each other, all being present at the same time, have written our name as witnesses.
Andreas Joachim , Palm Springs, Florida
Edward Thorpe , Reston, Virginia

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David and Cheryl Allen are in their mid-30s and have two children, ages 8 and 5. They have combined annual income of $95,000 and own a house in joint tenancy with a market value of $310,000, on which they have a mortgage of $250,000. David has $100,000 in group term life insurance and an individual universal life policy for $150,000. However, the Allens haven't prepared their wills. David plans to draw one up soon, but the couple thinks that Cheryl doesn't need one because the house is jointly owned. As their financial planner, explain why it's important for both David and Cheryl to draft wills as soon as possible.
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Briefly describe the steps involved in the estate planning process.
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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.
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Describe the basic clauses normally included in a will and the requirements regarding who may make a valid will.
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What is a will Why is it important Describe the consequences of dying intestate.
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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
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Robert Hancock, of Charlotte, North Carolina, was 65 when he retired in 2005. Alyssa, his wife of 40 years, passed away the next year. Her will left everything to Robert. Although Alyssa's estate was valued at $2,250,000, there was no estate tax due because of the 100 percent marital deduction. Their only child, Nathan, is married to Mary; they have four children, two in college and two in high school. In 2007, Robert made a gift of Apple stock worth $260,000 jointly to Nathan and Mary. Because of the two $13,000 annual exclusions and the unified credit, no gift taxes were due. When Robert died in 2012, his home was valued at $850,000, his vacation cabin on a lake was valued at $485,000, his investments in stocks and bonds at $1,890,000, and his pension funds at $645,000 (Nathan was named beneficiary). Robert also owned a life insurance policy that paid proceeds of $700,000 to Nathan. He left $60,000 to his church and $25,000 to his high school to start a scholarship fund in his wife's name. The rest of the estate was left to Nathan. Funeral costs were $15,000. Debts were $90,000 and miscellaneous expenses were $25,000. Attorney and accounting fees came to $36,000. Use Worksheet 15.2 to guide your calculations as you complete these exercises. Critical Thinking Questions 1. Compute the value of Robert's probate estate. 2. Compute the value of Robert's gross estate. 3. Determine the total allowable deductions. 4. Calculate the estate tax base , taking into account the gifts given to Nathan and Mary (remember that the annual exclusions "adjust" the taxable gifts). 5. Use Exhibit 15.7 to determine the tentative tax on estate tax base. 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. REFERENCES: img img img
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George Reed, 48 and a widower, and Debbie Moore, 44 and previously divorced, were married five years ago. There are children from their prior marriages, two children for George and one child for Debbie. The couple's estate is valued at $1.4 million, including a house valued at $475,000, a vacation home at the beach, investments, antique furniture that has been in Debbie's family for many years, and jewelry belonging to George'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.
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If you die without a valid will, the laws of your state will determine what happens to your property. That may be fine with people who have few assets, but it's not fine for people who care what happens to their property, and it's certainly not fine for people with dependents. In this project, you'll consider what your current will should contain and what changes you should make to your will based on your future circumstances. Look back through this chapter and review the common features of a will. Then write your own will, based on the sample clauses and examples of a representative will given in the text. List the property that you currently have, or expect to have in the near future, and name a beneficiary for each. Be sure to name your personal representative, and charge him or her with disposing of your estate according to your wishes. If you have children or expect to have children, or if you have other dependents such as an elderly parent or a disabled sibling, be sure to name a guardian and a backup guardian for them. Also prepare a letter of last instructions to convey any personal thoughts or instructions that you feel cannot be properly included in your will. Remember, this exercise should help you think about the orderly disposition of your estate, which is the final act in implementing your personal financial plans.
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In the late 1970s, Latafat Tilki, from Turkey, migrated to the United States, where he is now a citizen. A man of many talents and deep foresight, he has built a large fleet of oceangoing oil tankers during his stay in the United States. Now a wealthy man in his 60s, he resides in Aspen, Colorado, with his second wife, Karen, age 50. They have two sons, one in junior high and one a high-school freshman. For some time, Latafat has considered preparing a will to ensure that his estate will be properly distributed when he dies. A survey of his estate reveals the following: img The house and the Gold Mines International shares are held in joint tenancy with his wife, but all other property is in his name alone. He desires that there be a separate fund of $1 million for his sons' education and that the balance of his estate be divided as follows: 40 percent to his sons, 40 percent to his wife, and 20 percent given to other relatives, friends, and charitable institutions. He has scheduled an appointment for drafting his will with his attorney and close friend, Gary Ingram. Latafat would like to appoint Gary, who is 70 years old, and Latafat's 40-year-old cousin, Ceylan Sadik (a CPA), as coexecutors. If one of them predeceases Latafat, he'd like Second National Bank to serve as co-executor. Critical Thinking Questions 1. Does Latafat really need a will Explain why or why not. What would happen to his estate if he were to die without a will 2. Explain to Latafat the common features that need to be incorporated into a will. 3. Might the manner in which title is held thwart his estate planning desires What should be done to avoid problems 4. Is a living trust an appropriate part of his estate plan How would a living trust change the nature of Latafat's will 5. How does the age of his children complicate the estate plan What special provisions should he consider 6. What options are available to Latafat if he decides later to change or revoke the will Is it more difficult to change a living trust 7. What duties will Gary Ingram and Ceylan Sadik have to perform as co-executors of Latafat's estate If a trust is created, what should Latafat consider in his selection of a trustee or co-trustees Might Gary and Ceylan, serving together, be a good choice
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Your best friend has asked you to be executor of his estate. What qualifications do you need, and would you accept the responsibility
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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.
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Explain these terms: (a) intestacy , (b) testator , (c) codicil , (d) letter of last instructions.
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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.
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What is meant by the probate process Who is an executor , and what is the executor's role in estate settlement
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State the topics you would cover in your ethical will. Would you consider recording it digitally
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How can changes in the provisions of a will be made legally In what four ways can a will be revoked
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