Plan For Tomorrow Through Proper Estate Planning Today by Zoe Lawford, Blossom Wealth Management
Every person spends a lot of time and puts in a lot of hard work in order to build a home and provide for their family. The aim is to make sure that loved ones have everything they need to thrive (and not just survive) in this stressful and expensive world, no matter what the future may bring. Estate planning can go a long way towards making this happen.
What is Estate Planning?
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Estate planning is an essential financial plan that everyone needs to undertake in order to safeguard their efforts. By means of estate planning, you can create provisions for your family to be well taken care of even when you are not around anymore.
An estate plan passes on the estate to elected beneficiaries, and incorporates all assets including wealth, property, cash and jewelry. It also offers the opportunity to pen down an agenda, a sort of declaration about how you want things done when you can no longer take care of them on your own.
Why is an Estate Plan Necessary?
Life can be exceedingly unpredictable, and more often than not, things don’t turn out the way you intend. Estate planning works as an exception to that rule. It’s a guaranteed fail-safe that comes to the rescue when life takes an unexpected turn!
Most importantly, it ensures financial security for the family in case of an unforeseen event such as the demise of an earning member. It also helps to put an end to unnecessary feuds that have the ability to break a family in existing weak moments, as it ensures that the estate is passed on to elected beneficiaries with utmost care and as per instruction.
Important Questions to Consider for Estate Planning
Estate planning can help put a lot of things into perspective, and answering a few basic questions makes the process of effective estate planning easier. Consider the following questions to make more informed decisions about estate distribution:
- How should the division of assets be carried out as per the number of beneficiaries, and how much should each beneficiary attain?
- Shall the wealth be divided equally or will it be handed down only as per need or favorability?
- Would the estate be passed on directly or through a trust so that it is monitored effectively? What would be the provisions of the trust? Who would be the trustee and how long would the trust hold?
- Will removing assets within the lifetime cause the estate and gift tax bill to reduce in value? Would the reduction in value not compete with the satisfaction of presenting the beneficiaries with their due?
- How will the distributions of valuables such as art, jewelry, etc., be dealt with?
- Will the distribution of the estate be discussed with the beneficiaries for their approval?
- Would contributing to a charity be something of interest?
How to Best Choose the Estate Beneficiaries
When it comes down to the distribution of assets, it’s essential to make an account of everything that will eventually be distributed, from property and wealth to treasured antiques, jewelry and even investments.
- Choosing beneficiaries can be a daunting and time consuming task and needs to be dealt with in a manner that benefits everyone in need and well in advance. It’s important to consider aspects such as who in the family may need financial security the most, who would like to claim specific items that hold emotional value above all else, etc.
- Choosing to distribute everything equally may simply benefit the richer beneficiaries and leave the poorer ones bitter. It is imperative to understand the needs of family members in order to best contribute to the wellbeing in trying times, and avoid unnecessary family feuds too.
- The best way to go about distribution is in collaboration with the entire family, namely the chosen beneficiaries. It’s also important to note that certain intended beneficiaries could react to such discussions in a negative manner, which could be highly emotional and stressful.
- Choosing to discuss such intimate dealings should only be done with stronger and mature members in order to make the best possible decisions. Healthy family relationships are the foundation of a happy family, and estate planning is nothing but a planned way to make sure that loved ones are taken care of no matter what.
Why is Professional Assistance (Financial Planner/Lawyer) Necessary?
The decision regarding the estate and how best to distribute it amongst the chosen beneficiaries for their future financial security, all the while minimizing debt and taxes is an art that only financial planners, wealth management experts and family office advisors can tackle effectively.
- Together with lawyers, they can help put a concrete plan into action, which supports the need for estate planning in a manner that is organized, efficient, ethical and competent. Financial planners can help maximize wealth too, besides helping to avoid escalating debt and taxes.
- Estate planning with professional assistance can provision for incapacitation and reduce the financial pressure on the family, besides assisting in making necessary provisions in terms of guardians for minors, avoiding probate, etc.
- Since after the demise of a person, their estate is meant to be lawfully distributed, professionals can help individuals chart out estate planning instructions that provide for loved ones as per their wishes, and not as per the state’s verdict.
- Professionals can assist individuals with even smaller estate to minimize taxes, in order to leave behind an inheritance, as well as a solid financial plan with well thought out investments in life insurance and other vehicles for retirement.
What are the Various Tools Used in Effective Estate Planning?
In the estate planning process, the first step involves making an account of the dispositions, total net worth, various properties, and basically all the other details of owned assets. This offers a clear picture as to what will be handed down, minus accumulated debt and taxes, and the funds can then be invested for enhancement or simply saved as per liking in order to provide for the family when the time comes.
Besides choosing an experienced financial planner and a trustworthy lawyer to help put the estate plan into place, certain tools are necessary to make it concrete, and these include:
Wills are usually the first tool used to document the desired distribution of assets while naming beneficiaries. A will works as a legal document that details all the assets minus debt and taxes and requires the individual to decide who will look over the execution of the agenda mentioned in it.
The will can also contain all the estate holder’s wishes regarding who will look after minors, etc. It is the most basic tool that becomes necessary on demise, as without one the government gets the privilege of deciding what is to be done with the estate on the demise of an individual, which could mean that the family may receive less than they deserve.
A trust acts as a legal agreement where a nominated trustee holds and supervises proceedings in regards with the assets, acting as a nominal owner for the beneficiaries. A trust is less vulnerable in comparison to wills when it comes to legal challenges. One of the main reasons a trust is formed is to avoid probate, as it lives on even after the demise of the one who formed it.
Besides that, holding an estate in trust helps to oversee distribution of estate to the chosen beneficiaries with ease.
- A family trust allows a smooth transfer of assets to the trust so the beneficiaries can easily attain their share of wealth and other assets.
- A living trust acts a lot like a will and states the desired distribution of assets amongst beneficiaries and can be both revocable and irrevocable.
- A revocable trust ensures an option by which the beneficiaries can be changed even after it is formed, whereas an irrevocable trust does not allow any amendments after being formed.
- Power of Attorney
A power of attorney or a letter of attorney works as a lifetime document for estate planning. It is a written authorization that allows another to represent or act on the behave of the person issuing it when it comes to private, legal, financial or even business related matters.
It offers protection if the issuer becomes either ill or incapacitated, basically in a position to not manage his/her own affairs. The person allowing authorization by designating a representative such as a family member or friend by issuing the power of attorney to another becomes the guarantor.
Once a representative is given the power of attorney, they can then proceed to make important decisions such as bill payments and decisions that require attention.
- Ownership of Assets
What asset belong to whom and in what capacity can have a significant effect on the estate, since in a family different assets can be owned by different individuals either singularly or jointly. In case of a jointly held account or property, it automatically passes on to the joint owner upon the demise on one individual.
Even though jointly held accounts and property work for most couples, it is not always the best solution when it comes to certain unfortunate situations. A major example of this is a marriage ends in divorce, and situations like this could lead to unnecessary complications at the time of estate planning.
Also, if property is separately owned, it makes for good tax saving options when passed on to a trust in the form of various tax exemptions, besides avoiding the debt of another through a jointly held account or property.
Insurance is a key aspect in effective estate planning. It helps to serves numerous purposes, right from protecting the estate from possible lawsuits and unmanageable losses, to protecting the family financially in case of the estate holder’s demise.
Insurance can easily be passed on to elected family members or chosen charities, as well as paying accumulated debt or taxes. Life insurance can also be used to provide equitable shares in family-run businesses to beneficiaries. It’s important to remember when purchasing life insurance that even though the death benefit is not taxable, estate tax will probably still apply.
The best way to deal with this is to invest in an irrevocable life insurance trust, in which case the owner is the insured but the policy belongs to the trust. Hence, it is not included in the insured’s estate, which helps to evade taxes.
- Tax Free Strategies (Gift/Kind)
Estate tax can be daunting as it escalates year on year, but certain strategies can be implemented to avoid estate tax. Tax-free gifting is one such strategy that can help evade tax on a gift worth $13,000 to each beneficiary chosen, which applies every year, and a couple together could provide a gift of a total of $26,000 a year.
This also applies for paying off medical or tutorial bills for nieces or grandchildren, and as long as the amount is paid directly to the institution in question, the amount is treated as a tax-free gift/kind.
- Drafted Letter with Detailed Instructions
Through estate planning one can leave behind a legacy, not just in terms of wealth and other assets, but also with a chance to put down on paper their wishes and other important information that needs to be passed on to family members.
The letter could entail requirements regarding how the funeral should be conducted, an obituary, personal instructions regarding conduct such as education, the location of key and important documents, details of insurance or other information that only the family should have access to, etc.
The Importance of Reviewing Your Estate Plan Periodically
It becomes exceedingly necessary to review the estate plan every now and then, for matters can then be discussed and the details manipulated as required, before it is too late. Unexpected gains or losses and other circumstances that cause major change could also be a reason to revisit set plans and alter them for a better tomorrow.
About the author:
Zoe Lawford studied marketing management and currently works as an online marketing associate for Blossom Wealth Management. She has been involved in a lot of research in the areas of wealth and investment planning and likes to share her experiences on various platforms. Email her at Zoe@blossomwm.com or visit Blossom Wealth Management if you’d like to learn about wealth management.