What is Estate Planning?
The term estate planning pretty much defines itself. It means planning your estate. But it isn’t entirely that simple. You have to understand what an “estate” is in the first place, why you need to plan it, and how to go about planning it.
An estate basically refers to everything you own that you want to pass on to your heirs. The common misconception is that estate planning refers only to the arrangements you make with regards the real estate you own. Your real properties are only part of the whole package. For all intents and purposes, your estate means everything you own. These include your car, clothes, jewelry, books, furniture, investments (stocks, bonds, and mutual funds), cash (in the bank, in your piggy bank, and those you have stashed in a secret drawer or elsewhere), life insurance, retirement investments in your IRA, Roth IRA, or 401(k), and your multibillion dollar business empire, among others.
Most of these things that you leave to your spouse, children, or other beneficiaries you may have in mind are usually something of value. That is, they are worth something because they carry a positive balance. However, together with these valuable things, are the ones that carry with them negative value. Your credit card debts, unpaid taxes, outstanding mortgage, and other obligations you may have to other individuals are also part of your estate.
Thus, you get the total value of your estate at present when you subtract all the negative balances from all your positive balances. Unless you really have a huge pile of debt, your estate will still be worth something. But this is not the total value of your estate.
You also have to figure into the equation the amounts that you will still receive in the future. These are your accounts receivable or the future monies that you expect to collect from different sources. In this category belong loans you made to people and their expected time of repayment, insurance payments, and the like. These future financial sources are still part of your estate and can still be passed on to your heirs.
To be able to carry out estate planning successfully, you must comply with certain legal elements. You will need a will, a power of attorney, and a living will or healthcare proxy. A will is a document that declares who gets your assets, belongings, and property—in other words, your estate—when you die. This will allow you to name a guardian to your children as well.
A power of attorney, meanwhile, is a legal document that gives your agent the authority to make decisions about your financial affairs in case you are incapacitated to do so. You can give a power of attorney to someone you trust, like a relative, close friend, or honest professional you have already worked with for a long time.
A living will or healthcare proxy is another legal document that outlines the medical care you want in case you get sick and become incapable of communicating how you want things done. With a living will, you still decide how you want to be taken care of in the event of a life-threatening sickness. You can outline your wishes here (whether you want to be attached to a life-prolonging medical device, for example). Without a living will, that decision is left to the hands of family members who might end up fighting because of differing opinions.
As you can see, estate planning is not something that should be taken lightly, with all the legalities involved. It should also be done the moment you have assets that you want to leave to your loved ones. It should also be reviewed periodically in case there are changes to your current status.
Why should you Plan your Estate?
The question now is: Why should you engage in estate planning? After all, when you die, you won’t be able to take these with you, right? Technically, this is true. But when you’re working to acquire all these things, you already know that no matter how many billions you have stashed away, you won’t be able to take these with you in the afterlife. Yet you work hard anyway—with the intention not only of leaving your mark in this world but of leaving something to the people that matter to you.
But can’t you just leave it to them without a plan? Unfortunately, the world we live in has made living and dying a complicated business and to just pass on or as it is legally called “to die intestate” without a will and other documents will be making it hard for your heirs. Here are the reasons why you should plan your estate:
You want to make sure that your loved ones get provided for. If you are the one who is providing for your family, how sure are you that your loved ones are going to survive? You want to be certain that they are amply provided for even when you are not around anymore. Without a will, you let the courts determine who gets what and how much. Most of the time, your heirs will not be getting a lot if your estate goes through a lengthy probate process since the fees can be quite hefty. This brings us to the next reason.
You want to minimize death taxes. It’s unfortunate that taxes have to hound us even to the great beyond but that is a fact of living and dying. Part of estate planning is making sure that you don’t pay the tax man more than you really have to. You can transfer ownership to your spouse, give to charity, or spend it for tuition and medical bills to lower what you have to pay for in Federal estate taxes.
You want to make sure that your beneficiaries receive your estate as soon as possible. Without your express directives, it is going to take a long time before your estate gets settled—sometimes even years. When you plan ahead of time, you are doing your part in ensuring that your estate gets transferred to your heirs as speedily as possible.
You prevent bickering and fighting among your loved ones. Even if you don’t have much to give your loved ones, what they stand to receive can be a source of conflict if you don’t make your wishes known through a will before you die. This is even truer if you have a lot to give away. Such scenarios can be prevented with thoughtful planning on your part.
You want to ensure that your business interests are protected. Whether you have a small flower shop, a farm, or a huge business empire, not having a plan in place about them in case you die can disrupt operations—enough to close it.
How do you go about Estate Planning?
Now that the “what” and “why” parts have already been dealt with, let’s look at the “how.” It’s not actually a very complicated process for as long as you are intent on getting it done. Don’t assume that you don’t need it now because you’re young and you have your whole life ahead of you. Death can come upon us unexpectedly, so it’s best to be prepared.
The first step in planning your estate is to define exactly what you want to achieve with your estate planning. Like everything else, planning what happens to your estate starts with goals. Do you want to ensure that your spouse and your children have enough money to live on for life? What about your former spouse? How much do you want to give him or her, if at all? Do you want to avoid paying estate taxes as much as possible? Do you still want to continue giving to your favorite cause even after you die?
How you will handle will depend to a large extent on the goals you want to achieve. So take the time to outline these so you know exactly how you will allocate your estate.
Next, decide whether you want to do it yourself or need the help of an estate planning professional. You can find estate planning software and instructions on how to use them online and if you don’t own much, these will probably do. However, it is always a good idea to consult a lawyer to ensure that your document is binding and you have not missed out on anything.
Third, determine where you are in your estate planning as of the moment. If you have not created a will then you should start collecting the information you need to be able to create one. For instance, you might want to make an inventory of your assets (e.g. real property, business interests, insurances, etc.) so you can determine what to give to whom. Who do you want to be the guardian of your underage children when you die suddenly? If you don’t have a living will, you might consider how you want to be managed in case you suffer a heart attack and won’t be able to decide for yourself. No matter how morbid it may sound, you will save your loved ones a lot of trouble if you stipulate ahead of time that you want or do not want to be resuscitated when that time comes.
Fourth, go ahead and do it. Once you have all the information you need, draft it immediately—whether it’s a will, a living will, or a trust. The earlier you get it done, the more peace of mind you will have.
Finally, review it regularly or whenever there is anything in your life that has changed. This is especially true if you have just gotten married or have ended your marriage. You should also update your will whenever you have added a new business to your existing ones. Estate planning is dynamic so you can’t just take care of it now and forget about it later.
By following these steps, you will be able to rest easy knowing that you have all your financial affairs in order.