applying the planning process Chapter 17 Estate Planning Where Does This Fit in Your Comprehensive Financial Plan What is estate planning The process of developing a plan for what will happen to your wealth and your dependents when you die Protection Plan for death and incapacity Chapters 16 17 Build wealth Save and invest to meet short term and long term goals Chapters 11 15 Secure basic needs Liquidity consumer purchases and credit decisions insurance employee benefits Chapters 5 10 Establish a firm foundation Evaluate your finances acquire tools and skills set goals develop a budget Chapters 1 4 Key components Will Tell how to distribute your assets Living will or Durable power of attorney Gives your preferences for health care in the even you are incapacitated Letter of last instruction Common Elements of Wills Payment of debts and taxes Distribution of Assets Appointment of Executor or Guardian for minor children Appointment of Executor Your preferences for funeral arrangements Other useful information for your survivors Trusts 1 Passing Property Outside a Will Wealth transferred through a will must go through probate can take a long time Assets can be owned in different ways Joint tenancy with right of survivorship Estate and Gift Taxes Gifts and bequests are alternative methods of transferring property to others Gift and estate tax laws therefore work together Property transfers automatically to survivor Bypasses probate Tenancy in common Each owner can transfer his part separately Community property Gift taxes You and your spouse can each give up to 11 000 per person per year in 2005 without being subject to gift tax If you give more than that you must file gift tax form and the excess will be applied to reduce your estate tax exemption Lifetime limit on tax free gifts 1 million Revocable versus Irrevocable Trusts Revocable trust You retain the right to change the terms of the trust during your lifetime Bypasses probate but is included in taxable estate Trusts Two ways to reduce your taxable estate Give away the money Move money to legal vehicle that escapes taxation Purposes for using trusts in an estate plan Bypass probate Minimize estate taxes Ensure that estate achieves certain purposes such as providing income to dependents Living versus Testamentary Trusts Living trust Established while you are alive Testamentary trust Established through the operation of a will Irrevocable trust You can t change it once it is established This type bypasses probate and is not subject to estate taxes 2