Estate Tax Laws

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460R-1

ESTATE PLANNING

AG 460 - R

UNIT OBJECTIVE

After completion of this unit, students should be able to describe estate planning, including problems
caused by lack of estate planning, steps involved and factors to consider. Students should also be able to
discuss reasons for having a will and the components of a will. This knowledge will be demonstrated by
completion of a unit test with a minimum of 85 percent accuracy.

SPECIFIC OBJECTIVES AND COMPETENCIES

After completion of this unit, the student should be able to:

1. Match terms associated with estate planning to their correct definitions.

2. Define estate planning.

3. Discuss five problems caused by lack of estate planning.

4. Discuss three steps involved in estate planning.

5. List five factors to consider in estate planning.

6. Define real property and personal property.

7. List four factors influencing choice of ownership type.

8. Describe sole ownership and its effects on estate planning.

9. Describe life estates and remainders and their effects on estate planning.

10. Describe tenancy in common and its effects on estate planning.

11. Describe joint tenancy and its effects on estate planning.

12. Describe tenancy by entirety and its effects on estate planning.

13. Select true statements concerning community property.

14. List five ways to transfer legal ownership of property.

15. Select true statements concerning tax laws related to estate planning.

16. List four reasons for having a will.

17. Discuss four components of a will.
460R-2

ESTATE PLANNING

AG 460 - R

SUGGESTED ACTIVITIES

I. Suggested activities for instructor

A. Order materials to supplement unit.

1. Filmstrips, slideshows, etc.

a. Money Smart #13--Your Will and Estate, Program #447; 25
minutes; covers what should be included in a will, factors to
consider in choosing executors and guardians, the role of a trust
fund, and necessary updates and revisions; available from
Agricultural Communications Center, 10 Ag Science Bldg.,
University of Idaho, Moscow, Idaho 83843-4196, (208-885-6436).

B. Make transparencies and necessary copies of materials.

C. Provide students with objectives and discuss.

D. Provide students with information sheets and discuss.

E. Obtain background information on estate planning.

F. Invite an attorney to speak to the class about estate planning and tax laws
concerning estate planning.

G. Divide the students into groups and have them develop a simple estate plan for
an imaginary farmer.

H. Review and give test.

I. Reteach and retest if necessary.

II. Instructional materials

A. Objective sheet

B. Suggested activities

C. Information sheet

D. Transparency masters

1. TM 1--Objectives for Developing an Estate Plan

2. TM 2--Types of Property Ownership

3. TM 3--Community Property States
460R-3

4. TM 4--Transferring Property Ownership

5. TM 5--Components of a Will

E. Test

F. Answers to test

III. Unit references

A. Ashcroft, John D. and Ashcroft, Janet E., College Law for Business, South-
Western Publishing Co., Cincinnati, Ohio, 1981.

B. Farm Management Guide - Seventeenth Edition, Doane Information Services,
St. Louis, Missouri, 1989.

C. Harl, Neil E., Farm Estate and Business Planning, Century Communications
Inc., Niles, Illinois, 1988.

D. Kagele, Jerry L., Notes from Estate Planning Seminar at 1990 Spokane Ag
Expo/Pacific Northwest Farm Forum, Spokane, Washington, 1990.

E. Steward, Jim and Jobes, Raleigh, Farm and Ranch Business Management,
Deere and Company, Moline, Illinois, 1987.

F. Wood, Greg, Ag Executive Business Manager, Doane Information Services, St.
Louis, Missouri, 1988.
460R-4

ESTATE PLANNING

AG 460 - R

INFORMATION SHEET

I. Terms and definitions

A. Executor--Person named in a will as the one to administer the estate

B. Estate--The total value of a person's property, both real and personal

C. Will--An instrument prepared in the form prescribed by law, which provides for
the disposition of a person's property to take affect after death

D. Intestate--One who dies without having made a valid will

E. Administrator--Person appointed by a court to settle the affairs of an intestate

F. Probate--The procedure or process of establishing the validity of a will and
administering or settling an estate

G. Trust--A transfer of property by one person to another with the understanding or
declaration that such property be held for the benefit of another

H. Testate--The condition of leaving a will upon death

I. Testator--A person who makes a will

J. Codicil--A separate writing that modifies a will. Except for the part modified,
the original will remains the same

K. Assets--All types of property which can be made available for the payment of
debts

L. Beneficiary--A person or institution who derives benefit from the creation of a
trust, proceeds of an insurance policy or property designated by a will

M. Decedent--A deceased person

N. Guardian--A person legally empowered and charged with the duty of taking care
of another who is incapable of taking care of himself because of age, intellect or
health

O. Conservator--A person legally empowered and charged with the duty of
managing the property of another who is incapable of managing his own
property because of age, intellect or health

P. Inherit--To receive property from a deceased person

Q. Trust--The legal relationship created by virtue of one party holding legal title to
property for the benefit of another
460R-5

II. Estate planning--A branch of law that is used to arrange a person's property. It takes into
account the laws of wills, taxes, insurance, property and trusts and carries out a person's
wishes for the disposition of property at death

III. Problems caused by lack of estate planning

A. Ill feelings and bitterness among heirs

B. Uncertainty of eventual owners

C. Unequitable treatment of children

D. State-appointed guardian for minor children if both parents die

E. A farm being sold or split into small, uneconomical units

F. Surviving spouse with young children not being able to adequately provide for
family

G. High estate and/or inheritance taxes

H. High probate costs (including attorney fees, executor fees and various filing and
notice fees)

IV. Steps involved in estate planning

A. Making of a will

B. Examination of how property is owned or held

C. Review of family insurance program (including policy partnership and
beneficiary designations)

D. Consideration of the advisability of gifts during life to save income or death
taxes and to benefit the recipients

E. Possible disposition of property by sale during life including sale for cash,
installment sale, a private annuity or a part gift-part sale transaction

F. A review of the organization of the family business

V. Factors to consider in estate planning (Transparency 1)

A. Objectives for developing an estate plan

1. Keep a farm in the family

2. Treat all children equitably

3. Help child (or children) start farming

4. Reduce state and federal estate taxes, income taxes and gift taxes

5. To inform heirs what to expect so that they can make plans accordingly
460R-6

6. Other

B. The portion of the estate that is required by the surviving spouse to provide a
sufficient income

C. Plans that will work regardless of who dies first

D. Provisions that should be made in case the surviving spouse should remarry

E. Necessity of good attorney to review estate plan, to advise and to draw up and
execute legal documents

VI. General kinds of property

A. Real property--Includes land and permanent improvements such as houses on
the land

B. Personal property--Includes moveable items such as livestock, machinery,
household goods, bank accounts, bonds, stocks, etc.

VII. Factors influencing choice of ownership type

A. Preferences as to sole ownership or co-ownership

B. Desired disposition of property at death

C. Estate and inheritance tax effects

D. Gift tax implications

E. Differences in estate settlement costs

VIII. Types of property ownerships and effects on estate planning (Transparency 2)

A. Sole ownership (fee simple)

1. Ownership is in one name

2. Normally the simplest ownership during life

3. Gives holder most complete ownership possible--owner has
unrestricted right to sell, mortgage or dispose of real estate

4. Effects on estate planning

a. At death, property passes under a will or according to state
law if there is no will

b. Federal estate and state inheritance taxes generally reach total
value of property

B. Life estates and remainders

1. Used to carve up ownership of assets into limited interests
460R-7

2. Entitles a person (life tenant) to receive income from or use a property
for their life only. When the life tenant dies, the property goes back to
the original owner or designated owner (remainder)

Example: A farm can be left to a spouse (life tenant) for his/her
life with property passing to children (remainders) at
life tenant's death

3. Granted life estate

a. Life tenant did not previously own any of the property

b. Generally not subject to federal estate tax in estate of life
tenant

c. Used in "generation-skipping"

Example: A grandparent might leave a farm to a child
for life with remainder interest to a
grandchild. Property would be taxed in
grandparent's estate and not again until the
death of the grandchild (for federal estate
tax purposes)

4. Retained life estate

a. Life tenant previously owned some interest in property

b. Entire value of property is usually taxable

C. Co-ownership

1. Undivided ownership of property by two or more persons

2. Tenancy in common

a. Provides for owners with undivided interests with no rights of
survivorship, but with rights to convey, mortgage and
otherwise care for as is available through sole ownership

b. At the death of a tenant in common, that individual's
undivided interest passes to that individual's heirs under state
law or under the person's will

c. Only the deceased tenant in common is taxed in the estate

3. Joint tenancy

a. Provides for owners with undivided interests and with rights
of survivorship (property cannot be conveyed by will). Does
provide for conveying or mortgaging that owner's interest in
the property. If conveyed outside of the joint tenancy, the
joint tenancy is broken

b. When one joint tenant dies, the survivor immediately becomes
the full owner
460R-8

c. After death of first joint tenant, surviving tenant can usually
continue to write checks on a jointly owned bank account and
obtain control of jointly owned motor vehicles

d. Upon death of a joint tenant, federal tax law rules that the full
amount of he joint tenancy property is subjected to death tax
except to the extent that the surviving joint tenant can prove
that he or she provided part or all of the money when the
property was acquired or the mortgage paid off

4. Tenancy by entirety

a. Provides for owners with undivided interests and with rights
of survivorship, but does not allow for conveyance without
consent of the other party involved in the tenancy by entirety

b. Shares many of the features of joint tenancy--except that it
can't be severed by the action of one of the co-owners

IX. Community property (Transparency 3)

A. All property acquired during marriage (except that acquired by gift or
inheritance) becomes community property and is owned essentially half by each

B. Community property states

1. Idaho

2. Arizona

3. California

4. Louisiana

5. Nevada

6. New Mexico

7. Texas

8. Washington

9. Wisconsin

C. If all of a couple's assets were acquired during marriage, the estates would be
expected to be approximately equal in size

D. For federal estate tax purposes, generally all of a decedent's separate property
and one-half of the community property owned by the decedent and spouse at
death are subject to tax
460R-9

X. Ways to transfer legal ownership of property (Transparency 4)

A. Wills

B. Laws of descent

C. Contracts

(Note: A legal contract is necessary to sell property.)
D. Gifts

(Note: Land may be given away by a deed that is correctly signed,
acknowledged and delivered, usually with the help of an attorney.)

E. Combined sale and gift

F. Co-ownership

XI. Tax laws related to estate planning

A. Unified credit allows the first $600,000 of assets in an estate to be free from
federal estate tax

B. 100% marital deduction allows a person to leave any amount to a spouse free of
federal gift or estate tax

C. A person can give up to $10,000 as a gift to each of as many people as he/she
wishes without any federal gift tax

Example: A couple could potentially give $40,000 a year to each
married child to reduce the size of their estate (each parent
could give $10,000 each to their child and child's spouse)

XII. Reasons for having a will

A. Distributes your assets as you wish

B. Reduces the costs and time of settling your estate

C. Allows you to name your own executor (which can also save time and money)

D. Allows you to name a guardian for your minor children

E. Allows you to establish trust funds

F. Helps avoid internal conflict among family members

XIII. Components of a will (Transparency 5)

(Note: A husband and wife should each have separate wills.)

A. Property disposition
460R-10

B. Nomination of guardians for minor children to function if both parents should
die

C. Testamentary trust to manage the property of minor heirs

D. Designation of an executor to manage the estate during estate settlement

(Note: A will should be written with an attorney.)
460R-11

TM 1
460R-12

TM 2
460R-13

TM 3
460R-14

TM 4
460R-15

TM 5
460R-16

ESTATE PLANNING

AG 460 - R

UNIT TEST

Name _____________________________________ Score __________________________________

1. Match terms associated with estate planning to their correct definitions. Write the correct
numbers in the blanks provided.

_____a. One who dies without having made a valid will 1. Executor

_____b. Person or institution who derives benefit from the 2. Estate
creation of a trust, proceeds of an insurance policy or
property designated by a will 3. Will

_____c. A separate writing that modifies a will 4. Intestate

_____d. Total value of a person's property, both real and 5. Administrator
personal
6. Probate
_____e. To receive property from a deceased person
7. Trust
_____f. The legal relationship created by virtue of one
party holding legal title to property for the 8. Testate
benefit of another
9. Testator
_____g. A person legally empowered and charged with the duty
of managing the property of another who is incapable 10. Codicil
of managing his own property because of age, intellect
or health 11. Assets

_____h. An instrument, prepared in the form prescribed by 12. Beneficiary
law, which provides for the disposition of a person's
property to take affect after death 13. Decedent

_____i. The condition of leaving a will upon death 14. Guardian

_____j. A deceased person 15. Conservator

_____k. All types of property which can be made available for 16. Inherit
the payment of debts

_____l. Person named in a will as the one to administer the
estate

_____m. Person appointed by a court to settle the affairs of
an intestate

_____n. A person legally empowered and charged with the duty
of taking care of another who is incapable of taking
care of himself because of age, intellect or health
460R-17

_____o. A person who makes a will

_____p. The procedure or process of establishing the validity
of a will and administering or settling an estate

2. Define estate planning.

______________________________________________________________________________

3. Discuss five problems caused by lack of estate planning.

a. ____________________________________________________________________________

b. ____________________________________________________________________________

c. ____________________________________________________________________________

d. ____________________________________________________________________________

e. ____________________________________________________________________________

4. Discuss three steps involved in estate planning.

a. ____________________________________________________________________________

______________________________________________________________________________

b. ____________________________________________________________________________

______________________________________________________________________________

c. ____________________________________________________________________________

______________________________________________________________________________

5. List five factors to consider in estate planning.

a. ____________________________________________________________________________

______________________________________________________________________________

b. ____________________________________________________________________________

______________________________________________________________________________

c. ____________________________________________________________________________

______________________________________________________________________________
460R-18

d. ____________________________________________________________________________

______________________________________________________________________________

e. ____________________________________________________________________________

______________________________________________________________________________

6. Define real property and personal property.

Real property __________________________________________________________________

______________________________________________________________________________

Personal property _______________________________________________________________

______________________________________________________________________________

7. List four factors influencing choice of ownership type.

a. ____________________________________________________________________________

b. ____________________________________________________________________________

c. ____________________________________________________________________________

d. ____________________________________________________________________________

8. Describe sole ownership and its effects on estate planning.

______________________________________________________________________________

______________________________________________________________________________
460R-19