Principles of Estate Planning

DLSU RVR COB Financial Management Department

What is Estate Planning ?
The process of developing a plan to administer and
distribute ones assets after death in a manner
consistent with ones wishes and the needs of its
heirs while at the same time minimizing taxes
During ones lifetime one (1)accumulates,
(2)preserves, (3)distributes wealth upon death
Estate Planning requires
knowledge of wills
trusts
taxes & various administrative costs
Estate planning goes beyond financial issues &
includes plans to manage affairs in case one
becomes disabled, thus will include a statement of
your personal wishes for medical care should you
become unable to make them clear yourself
Major objective is to minimize tax exposure to
increase the amount ultimately passed on to the
heirs
Insurance & retirement planning
Objectives
- to provide for family during death
- achieve a comfortable standard of living during
retirement
Potential Problems of Estate Planning
Taxes & estate administrative expenses higher than
necessary
Insufficient cash; not enough assets that are quickly
& inexpensively convertible to cash to meet tax
demands & other costs
Beneficiaries receive the wrong assets or the proper
assets in the wrong manner at the wrong time
Capital is insufficient or not readily convertible to
income producing status
High medical costs; capital insufficient or not readily
convertible to income producing status; difficulty in
reducing living standards
Excessive taxes, inflation, improper investment
planning
Special problems : a family member with serious
illness; children of prior marriage; beneficiaries who
have extraordinary medical or financial needs;
beneficiaries who cannot agree on how to handle
various estate matters, business problems,
opportunities
Who needs Estate Planning ?
Two Main Areas of Estate Planning

People Planning
anticipating psychological & financial needs of loved
ones
providing enough income or capital to ensure
continuation of their way of life
Keeping mothers cameo brooch in the family
Preserving the business that Lolo started
Planning for minors, intellectually gifted children, the
emotionally, mentally, physically handicapped
Spouses who cannot or dont want to handle money,
securities or the business
Asset Planning
To stabilize & maximize its assets and income producing
values
To avoid problems lawyers fees, taxes

Why does an Estate Break Up?
Death related costs medical bills, funeral
expenses, lawyer fees, appraisers, accountants,
administrative costs, federal estate taxes, state
death taxes, unpaid bills mortgages, business
loans, installment contracts, unpaid income taxes,
property taxes
Inflation failure to rearrange, reappraise an estate
plan to counter the effects of inflation can impair the
ability of assets to provide
Lack of liquidity insufficient cash to cover death
costs & other estate obligations
Improper use of vehicles for transfer spendthrift
spouses or minors may be left large sums of money
outright in the form of life insurance, through joint
ownership of a savings account or as beneficiaries of
an employee fringe benefit
Disabilities Prolonged & expensive disability of a
family wage earner is called Living Death.
What is your Estate?
Probate estate consists of real & personal property
owned that can be transferred at death
Gross estate is a larger amount of property &
includes all property probate & non probate, that
might be subject to federal estate tax at death
Non-probate : life insurance, jointly held property,
property passing under certain employee benefit
plan
Estate Planning Process
1. Assess your family situation & set estate planning
goals
2. Gather comprehensive & accurate data
3. List all assets and determine the value of your
estate
4. Designate beneficiaries of your estates assets
5. Estimate estate transfer costs
6. Formulate & implement plan
7. Review the plan periodically & revise as necessary
Data
Personal data
Property classification, title, indebtedness,
marketable securities
Life insurance, agents names & addresses
Medical insurance company, policy numbers
benefits
Business interest names, address, ownership,
names of account
Employee benefits Group insurance plans
Family income Income of client, spouse
Other data : retirement plan, retirement age,
potential sources of retirement income, required
amount, expected sources of income
Listing of liabilities, creditors, amounts
Authorization : Life insurance, executor
Will a written and legally enforceable document
expressing how a persons property should be
distributed on his death
Intestacy the situation that exists when a person
dies without a valid will
Distribution of Intestate
Who are the survivors?
Spouse & children of legal spouse
Grandchildren
Children not of the spouse or illegitimate children
If no spouse, no children, parents become heirs

Distribution by Law (U.S.)
50% to the legal spouse
50% remaining equally divided to the legitimate
children
If no children : 100% to the surviving/legal spouse
If no spouse, no children equally to parents
If still no parents the estate may be passed on to
the state for the benefit of the state school funds
Preparing the Will
Testator person directing the disposition of
property at his death
Preparation & drafting
two pages, about USD150
complex document, costing USD1,500
state objectives
consider income
gifts, estate tax laws
knowledge of corporate, trust, real estate, securities laws
may be ineffective, misinterpret wish of the dying
Proper preparation includes 3 items
A Plan for distribution according to wishes of the
dying, needs of the beneficiaries, tax laws
Consider changes in family circumstances that
might occur after its execution i.e. divorce, new
children, death
Must be concise and complete in describing the
testators desires

Common features of a Will
Introductory Clause
Direction of Payments
Disposition of Property
Appointment Clause
Tax Clause
Simultaneous Death Clause
Execution & Attestation Clause
Witness Clause
Requirements of a Will
Mental capacity : Person must be of sound mind to make
a valid will
Freedom of choice
Proper execution

Changes In Wills
Health or financial status of beneficiary changes
significantly
Births, deaths, marriages, divorces
Moving to a different state, changes in tax laws
An executor, trustee, guardian can no longer serve
Basic Concept of Succession (De Leon)
The Civil Code defines succession as a mode of
acquisition of property, rights, obligations of a person
transmitted through death to another by his will or by
law
Three elements are
Decedent the person whose property is transmitted through
succession, if there is a will he is also called Testator
Successor the person to whom the property or property rights will
pass
Inheritance or estate the subject matter of the succession
Kinds of Successor
Heir person called to the succession either by will
or by law, he succeeds from the moment of the
latters death
Devisee person to whom a gift of real property is
given by virtue of a will

What does an inheritance include?
- All property, rights, obligations of a person not
extinguished by death
- Heirs are not liable for the obligations of the
decedent beyond the value inherited
Kinds of Succession
Testamentary resulting from the designation of an
heir, made in a will executed in the form by law
Intestate that which takes place when a person
dies without a will or a void will or a will that lost its
validity or if no one succeeds under his will
Mixed effected partly by will and partly by
operation of law

Who else are involved?
Executor is a person or trust company named in the will
to carry out its provisions.

Administrator is a person or trust company appointed by the
Court to administer and distribute the estate of the decedent
If there is no will or if no executor is named in the will or
If the named executor does not act.
Definitions
Legitime testators property that cannot be disposed
because the law has reserved it for the compulsory heirs
Free portion the part of the inheritance in excess of the
legitime which the testator may dispose of freely
Compulsory heirs (forced heirs)
a. Legitimate children & descendants
b. If no children, legitimate parents
c. Surviving spouse
d. Acknowledged natural children & natural children by law
e. Illegitimate children
C,d,e their shares are taken from the free portion of the estate,
if there are legitimate children, legitimate parents are excluded
Legitime
Legitimate children of the estate divided equally
Surviving spouse of the estate
One legitimate child situation :
to the child
to the spouse
remaining is free portion
Legitime
No child situation
to the legitimate parents
to the spouse
free portion
Two or more legitimate children situation
to the children dividend equally
Spouse gets a share equal to the share of each child or descendant
The rest is the free portion
Order of Intestate Succession
Legitimate children & descendants
Legitimate parents excluded by legitimate children
Illegitimate children & descendants always inherit
The surviving spouse always inherit
Collateral relatives within the fifth degree
The State excluded by any above
Illustration
X died leaving an estate of P143,470, in his will he
provided that his properties be divided equally to
C legitimate child
W surviving wife
M legitimate mother
D daughter in law
N - nephew
Illustration
If the will is valid,
Legitime of C =
Legitime of W =
Free portion

Mother has no legitime because there is a child.
The distribution will be
c = = P71,735
W = = P35,867.50
Free portion = P 35,867.50
---------------------
Total 100%
Illustration Free Portion
Free Portion (1/4)
Mother 1/3 = P 11,955.83
Daughter in Law 1/3 = P 11,955.83
Nephew 1/3 = P 11,955.83
Total = P 35,867.50

If last will is Void.
M, D, N are NOT heirs. Estate will be distributed
only to Child, and Surviving Wife, equally or
P71,735 each.

Reference : Hector S. De Leon, Hector M. De Leon Jr. ,THE
LAW ON TRANSFER AND BUSINESS TAXATION 2009
Rex Bookstore Inc.
End of Presentation