 Personal Finance PowerPoint Presentation. A state planning, prepare to get financially fit by practicing personal finance. Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from Investopedia Complete Guide to Estate Planning, which you can find online. Take a look at the references, resources, continue your research from there. This by Julia Kagan, updated April 30th, 2021. In prior presentations, we've been looking at retirement planning. Now we're moving to estate planning. First question of course is what is estate planning? Estate planning is the preparation of tasks that serve to manage an individual's asset based in the event of their incapacitation or death. So throughout life, we're going to be accumulating a certain amount of assets at the point of death. We would like half a plan in terms of how those assets will be allocated for a couple different reasons. One, they're our assets. We'd like to allocate them in accordance with our desires. And two, we would like to make it as easy as possible on our loved ones at the point of death. You can imagine if there's a significant amount of assets and there's no plan in terms of where those assets are and how to allocate those assets, that's going to cause a bit of chaos at the point of death. Also, if there's a significant amount of assets at that point in time, you could be subject to estate taxes. And if that's the case, then we of course want to plan to minimize the estate taxes so that our assets once again go where we want them to go, go somewhere where they're going to be used efficiently or well. And of course that excludes giving them to the government if possible. So we're going to try to minimize the estate taxes. The planning includes the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with help of an attorney experienced in estate law. And so obviously the larger our estate is, the more assets that we have to allocate at death, the more complex this can be if we're subject to estate taxes. Once again, more complexity arises as well. And then having a professional help you would be better and better as the income and amount of assets are going up and up in general. So understanding estate planning. Estate planning involves determining how an individual's assets will be preserved, managed and distributed after death. So after the point of death, there's going to be some bit of chaos no matter what you do because obviously you're managing all of this stuff. So at the point of death, someone else has to have some idea of what stuff there is and how that stuff should be allocated. So you want to have some kind of plan just from a logistical standpoint for that. It also takes into account the management of an individual's properties and financial obligations in the event that they become incapacitated. So if you become incapacitated, you might not be dead, but you're still not going to be able to manage the assets that you have and therefore you have a similar kind of situation from that standpoint. Assets that could make up an individual's state include houses, cars, stocks, artwork, life insurance, pensions and debt. So obviously a lot of stuff could be included in the estate planning counted as assets. Assets of course include financial assets, stocks, bonds, money in the bank account and so on, but also other assets such as the home and artwork and all that kind of stuff as well. Individuals have various reasons for planning an estate such as preserving family wealth, providing for a surviving spouse and children, funding children's or grand children's education and leaving their legacy behind to a charitable cause. So obviously you generally want to give your money to the people that you think are going to be able to use it best, that's typically the family and of course if it's between giving it to a charity would be great and if it's between giving it to charity or giving it to the government choose a good charity. So the most basic step in estate planning involves writing a will so other major estate planning tasks include the following. So clearly a will is going to be part of the process then we have limiting estate taxes by setting up a trust account and the names of beneficiaries. Now remember that this will be more impactful if the estate is fairly high a lot of assets in the estate because then you're more likely to be subject to the estate taxes which means you might have to or need more complex estate planning to try to minimize the amount of estate taxes. If you're under a certain threshold possibly that might not be as necessary so keep that in mind in terms of the dollar value of the estate and how much you need to do in order to manage the estate after death. Establishing a guardian for living dependents so living dependents may need a guardian because they're dependents naming an executor of the estate to oversee the terms of the will. So the will basically outlining your will what you want to do after your point in death someone has to execute that because you'll be dead so you need someone to execute so you want to have someone that you can trust that's going to execute what you want and try to do it as best they can creating or updating beneficiaries on plans such as life insurance, IRS and 401k plans so now you've got to have these assets these financial assets now adjusting for the beneficiaries setting up funeral arrangements obviously that might be part you might be able to do that before you die which again could make it easier at the point of death so that people aren't scrambling around you could kind of have everything set up and just say okay it's done you know here's how here's just go through the steps and then take all the money and do whatever you're going to do from here on establishing annual gifting to qualify charitable and nonprofit organizations to reduce taxable estate so once again if you have a fairly large assets then one way to reduce them might be to give charitable donations which is probably worth doing because again if you pick good charities they're probably more efficiently using their money than the government unfortunately so setting up a durable power of attorney a POA to direct other assets investment so in order for someone else to act on your behalf you've got to give them a power of attorney similar to like if you're in some kind of legal situation you're going to court and you want them to make decisions on your behalf you've got to give them the authority in a particular area to make those legal decisions and that's another kind of thing with the POA power of attorney writing a will so a will is a legal document created to provide instructions on how a individual's property and custody of minor children if any should be handled after death we might go into the will in a bit more detail later but here's just to recap the individual expresses their wishes through the document and names a trustee or executor that they trust to fulfill their stated intentions and then I'm going to have someone else execute those intentions because I'll be dead so hopefully pick someone good the will also indicates whether a trust should be created after death depending on the estate owner's intentions a trust can go into effect during their lifetime living trust or after their death a testamentary trust the authenticity of a will is determined through a legal process known as probate so you've probably heard these terms you got the will and then you got probate the legal process probate is the first step taken in administering the estate of a deceased person and distributing assets to the beneficiaries when an individual dies the custodian of the will must take the will to the probate process is a court supervised procedure in which the authenticity of the will left behind is proved to be valid and accepted as the trust last testament of the deceased so once again the probate process is a court supervised procedure in which the authenticity so clearly you got a will you got to make sure it's the proper will of the will left behind is proved to be valid and accepted as the true last testament the last word so this is the last one this is the one we're going by of the deceased obviously the person that died the court officially appoints the executor named in the will which in turn gives the executor the legal power to act on behalf of the deceased appointing the right executor so we're imagining the process at this point the person filled out a will that person has now died and now it has gone through probate and the court has now assigned the executor in accordance with the wishes of the deceased individual who made the will hopefully and now we have the executor so the legal personal representative or executor approved by the court is responsible for locating and overseeing all the assets of the deceased the executor has to estimate the value of the estate by using either the date of death value or the alternative valuation date as provided in the internal revenue code so one of the things they need to do is value the estate basically assets minus the liabilities net value of the estate that's going to be important if they're subject to estate taxes in particular and note if you're used to basically taxes in the United States you're used to an income tax typically we get taxed when we earn the money you might be saying hey this doesn't look like an income tax this looks like they're taxing the wealth the balance sheet and that's correct you might say hey the tax has already been applied but during when they earned the money now you're taxing them again on the balance sheet and that's kind of true right because they got taxed when they earned the money but now you're getting taxed on the estate taxes but that's the idea right so you're going to gather up the estate now it's going to be important to value the estate to pick a date of the valuation you have to pick the appropriate date in order to value it so that you can see how much the estate is worth as of a specific point in time that's what we do on a balance sheet side of things so obviously you can pick the stocks and bonds they're fairly easy to value because there's a market for them but things like a house are a little bit more difficult values, jewelry, more difficult because those things are like unique in nature and therefore harder to give a value without actually selling them on the market but that's what we need to do a list of assets that need to be assessed during probate includes retirement accounts, bank accounts, stocks and bonds real estate property, jewelry and any other items of value most assets that are subject to probate administration come under the supervision of the probate court and the place where the decedent lived at death the exception is real estate which must be probated in the county in which it is located so obviously real estate is going to be handled where the real estate is at so the executor also has to pay off any taxes and debt owed by the deceased from the estate handling the assets and liabilities of the estate so hopefully they have more assets than liabilities but they're still responsible the estate is now responsible for the liabilities, the executor of the estate is going to be taking those assets do what they need to do which might have to include some liquidation of things possibly like the home if necessary in order to pay the liabilities creditors usually have a limited amount of time from the date they were notified that test day towards death to make claims against the estate for money owed to them claims that are rejected by the executor can be taken to court where a probate judge will have the final say as to whether or not the claim is valid the executor is also responsible for filing the final personal income tax return on behalf of the deceased so it's likely the deceased is going to die mid-year somewhere so you got the final return that they're not going to have to be able to file you're going to have to file the final return after the inventory of the estate has been taken the value of assets calculated and taxes and debt paid off the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries so note how this works it's similar to a liquidation of a company you've got the estate, the estate is now valuing the assets and the liabilities they still have the liabilities that are going to be in place they've got to take care of what needs to happen file the file file the final tax return and pay off any of the liabilities necessary once done then you would think you would then liquidate to the rest of the beneficiaries in accordance with the wishes and the will from the deceased hopefully so planning for estate taxes so estate taxes are again they're typically on more well-off individuals typically so you got federal and state taxes applied to a state can considerably reduce its value before assets are distributed to beneficiaries death can result in large liabilities for the family necessitating generational transfer strategies that can reduce, eliminate or postpone tax payments so this whole the whole death tax it's sad but kind of morbidly funny at the same time because obviously the government's going to say hey we want to tax you when you die we're going to tax all your assets when you die and you can just imagine what's going to happen that means that someone's going to try to give all their money away on their death bed right they're going to hold on to it they're going to hoard it just like they would because they're human beings then they're going to give it away on their death bed but then they're going to say well you can't do that you can't just give the money away on your death bed to your son or your daughter right before you die that's not fair right so now they're going to try to limit you being able to gift the taxes so now you've got this complicated structure that's going to be linked between gifts and estate taxes so that's why you have these gifting limits how much the gift you can give because people are trying to give gifts in order to eliminate the state taxes but obviously people don't want to give all their money away before they're dead because they want to use it you know and so it becomes this complicated thing where there's professionals that are professional estate planners that are trying to maximize people's ability to actually have use of the cash without it being taxed at their death so it's a really interesting area so during the estate planning process there are significant steps that individuals and married couples can take to reduce the impact of these taxes AB trusts married couples for example can set up an AB trust that divides into two after the death of the first spouse so first of all if you're married couple right for taxes you would think you were one entity but you were two entities before now you're one entity you're a married entity now but for estate taxes you still could be taxed you know individually so now the question is well is there a way that when one person dies that you could basically say that you're going to at least defer the taxes until the other person dies for example and try to take advantage of the exemptions from the estate taxes and the way you could do that is try to set up a trust and a trust is a separate legal entity right so now the trust technically owns the money but it's set up for a specific you know purpose so and then you've got we might dive into more of that in more detail in future presentation education funding strategies a grandfather may encourage his grandchildren to seek college or advanced degrees and thus transfer assets to an entity such as a 529 plan for the purpose of current or future education funding so it's another place you can put your money which is basically going to go to someone in the future but you're not gifting it to them at this point in time so you might be able to put more money there which would lower the amount of your state which can lower the amount you pay for estate taxes possibly that may be a much more tax efficient move than having those assets transfer after death to fund college when the beneficiaries are of college age the latter may trigger multiple tax events that can severely limit the amount of funding available to the kids so cutting the tax effects on charitable contributions another strategy an estate planner can take to minimize the estate's tax liability after death is by giving the charitable organizations well alive so you might say hey I'm not going to avoid any taxes but I'll tell you what if I'm... I'll give my money away before the government picks my pocket so you could try to pick charitable organizations to give them money too so the gifts reduce the financial size of the estate since they are excluded from the taxable estate thus lowering the estate tax bill so again you can't really gift all your money to a relative like your daughter for example or your son they try to limit that but you can give it basically to charities generally more often you can give a substantial amount and so on so that's another way you can lower the estate taxes as a result the individual has a lower effective cost of living which provides additional incentive to make those gifts and of course an individual may wish to make charitable contributions to a variety of causes estate planners can work with the donor in order to reduce taxable as a result of those contributions or formulate strategies that maximize the effect of those donations estate freezing this is another strategy that can be used to limit death taxes it involves an individual's locking in the current value and thus tax liability of the property will attributing the value of future growth to that capital property to another person any increase that occurs in the value of the assets in the future is transferred to the benefit of another such as a spouse child or grandchild so again this is another very kind of weird structure which you would like why in the world would you set up such a complicated thing it's just going to confuse people taxes that's why taxes so this method involves freezing the value of assets at its value on the date of transfer accordingly the amount of potential capital gain at death is also frozen allowing the estate planner to estimate their potential tax liability upon death and better plan for the payment of income taxes so we might go into some more of these in a little bit more depth in future presentations so using life insurance in estate planning life insurance serves as a source to pay death taxes and expenses fund business buy sell agreements and fund retirement plans if sufficient insurance proceeds are available and the policies are properly structured and income tax on the deemed disposition of assets allowing the death of an individual can be paid without resorting to the sale of assets proceeds from life insurance that are received by the beneficiaries upon death of the insured are generally income tax free estate planning is an ongoing process and should be started as soon as an individual has any measurable asset base as life progresses and goals shift the estate plan should shift in line with new goals lack of adequate estate planning can cause undue financial burdens to loved ones estate taxes can run as high as 40% so at the very least a will should be set up even if the taxable state is not large