What is estate planning? — A guide

24 May, 2024 - 00:05 0 Views
What is estate planning? — A guide

eBusiness Weekly

Estate planning is an often overlooked topic during the financial planning process. Discussing estate planning with others can be uncomfortable and easily avoided, yet this is an important part of financial planning. Every adult with at least a modest net worth or who is in the process of building one should have a solid estate plan.

The pandemic and inflation that followed has prompted more people to realise the need to have an estate plan in place, for their own security and well-being, as well as for their potential beneficiaries. Read on to learn what estate planning is about, so you can start to determine how it may apply to you.

What is estate planning?

Estate planning includes a “last will and testament” as well as key elements, such as power of attorney, trusts and medical directives (also known as a living will).

This process enables a family to ensure their investments and other assets will be protected during disability or illness, and properly distributed after their death while taxes and probate are minimised or avoided.

Key components of estate planning

There are five key components to estate planning for the investor: last will and testament, trusts, power of attorney, medical directive and beneficiary designation.

If there are also under-aged children, then guardian designation is a sixth component that needs consideration so the custody of the children does not become a lengthy and costly court battle.

1. Last will and testament

A will is a legal document that ensures property, assets and investments are distributed according to an individual’s wishes.

If there is no will, the state decides how property is distributed and this can be a lengthy and costly process (known as probate) for the beneficiaries of the will. A will is also where a guardian designation is made.

2. Trusts

A trust is a legal agreement between two parties. The trustee is the individual or institution managing assets according to the directions of the trustor.

Trusts can be used to hold and manage assets should the trustor become incapacitated, and they can also be used to pass on the assets to beneficiaries without probate (a process used to prove the validity of a will).

Trusts can also be used to hold assets for minor children, to be passed on to them at a specific age. With careful planning, trusts can reduce estate and gift taxes.

3. Power of attorney

A power of attorney (POA) gives someone the legal right to act on behalf of the individual setting up the estate plan, in the event they become unable to act for themselves. The POA is able to make financial, legal and health related decisions on behalf of the individual.

4. Medical directive

A medical directive is how an individual can make sure they receive the medical treatment they wish should the need arise if they are unable to make decisions at that time.

The medical directive can be in the form of a document, or another person can be chosen to make these decisions, called a Healthcare Proxy.

5. Beneficiary designation

Beneficiary designations are not necessarily part of an estate plan, but it is a good time to make sure they are up to date.

Retirement plans and life insurance plans need to have a designated beneficiary since the assets from these can pass directly to the beneficiary outside of the will.

Benefits of estate planning

There are several key benefits to estate planning for every investor to consider. Beyond protection for the individual’s assets there is also care and provision for the next generation.

A solid estate plan will ensure that the estate transfer is as stress-free and cost efficient as possible.

1. Asset protection

This is an important benefit of estate planning. It does not matter if the assets are large or small, protecting them from being used up in court battles, lawyer fees and taxes is an important benefit of all carefully crafted estate plans.

2. Minimised tax liabilities

A well-structured estate plan will include measures like a trust that minimise the tax liabilities for the beneficiaries of the estate.

There are several ways to mitigate gift taxes and estate taxes when passing on assets and these would be covered in a solid estate plan.

3. Easier wealth transfer

An estate plan — not just a will — can be structured to avoid probate. A complete estate plan will have provisions in place to ensure that wealth and assets are transferred to the correct beneficiaries quickly, smoothly and without losing value to fees and lawyers.

4. Care for loved ones

An estate plan is the best way to be sure loved ones and heirs are provided for upon death, and a well-crafted estate plan also ensures less stress and conflict among caregivers and loved ones should the individual be unable to make decisions or care for him/herself due to illness.

The importance of professional guidance

There are many online tools that can help you set up an estate plan on your own, however, if an individual has several investments and other assets, and/or needs to set up a trust, or is not fully aware of all the estate related laws within their state, it is a good idea to hire a professional to have guidance throughout the process of developing and implementing an estate plan.

By hiring a professional, you can be sure that all the taxes, finances and legalities have been taken into consideration and the best possible scenario for the beneficiaries will be implemented.

Bottom line

Estate planning can seem daunting, but every wise investor will recognise the benefits to having an estate plan and the importance of passing on their assets and wealth with a minimum of headache and stress for their beneficiaries.

An estate plan is more than a will, and professional guidance may be necessary to be sure that all the bases are covered and a solid plan is crafted and implemented.

Once the estate plan is put in place, it should be reviewed regularly to ensure nothing needs to be updated. — Forbes.com

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