Estate Planning: An Introduction

One of the most integral part of personal finance management and financial planning is estate planning. It is something very important to know and hence we would like you to read it to the end.

What is Estate Planning?

Estate is everything that one owns viz. assets & owes viz. liabilities and responsibilities. Please do not confuse it with Real Estate and in this context, it is a completely different thing. Estate Planning is a process of arranging and planning a person’s succession and financial affairs. An Estate Plan incorporates a person’s wishes about his estate - this could be regarding his estate management, preservation, distribution and his estate legacy post life. The main thing though remains as to how your estate will devolve upon your loved ones post your demise.

Estate Planning is for whom?

There is never a right age or any particular level of financial wealth required to engage in estate planning. It is for all ages and for every person to wishes to ensure a smothe transfer of assets due to his/her incapacitation or demise. Thus, it is irrespective of age and portfolio size, for everyone including you and me.

Think of it as the other side of buying a life /term insurance. Why did we buy the life policy? An estate planning also has similar justification, similar logical reasoning.

Do you really need it?

Most of us as individuals place a lot of importance is wealth creation. However, we often neglet the need to ensure preservation and succession of wealth. That is often left to destiny and that should never be the case. In the last few decades, our societal fabric and landscape has gone huge change. We now see more nuclear families, less of huge joint families, more financial awareness and need for personal financial security. In such scenario, it is not difficult to visualise disputes and legal issues which can be a challenge for entire families. Proper estate planning will be an answer to this issue.

On the other hand, most of us also believe that nomination and joint ownership is a way of estate planning. You will be surprised to know that both, nomination and joint ownership of assets is ineffective and legally disputable. The succession laws of the land supercedes everything and at the end of the day, assets will have to be distributed as per laws and not as per nomination or joint ownership. They will be merely treated as recipients and custodians of assets on behalf of the legal heirs till transfer.

Methods of Estate Planning:

One can plan his estate in two ways (a) by writing a Will or (b) by creating a Trust.

A Trust involves transferring of one’s estate to a Trustee for the benefit of certain beneficiaries which may include the person creating the Trust who is called as the Settlor. A Trust provides for management of the estate during one’s lifetime and also provides for distribution and management of one’s wealth post demise in a planned manner over a period of time.

A Will is the simplest and the most traditional way of distribution of assets by a person. A Will is legal declaration of the intention by the one making it – the testator – with respect to property that he/she desires to be carried into effect after his death. A Will is likely to be more relevant and of interest for most of us.

Advantages of Estate Planning

1. Get property and assets to loved ones quickly: After the death of an individual, the legal formalities and transfers take time and the family generally has to wait a long time to get everything in order. With proper estate planning and a latest will in place, you can avoid this delay for your family and they can get everything in order quickly. This becomes even more important if you are the bread earner of the family. Your dependents in most cases are not even aware of your entire estate and also the various investments that you must have made. A detailed will helps them getting all the affairs in order.

2. Minimize expenses: A lot of money needs to be spent in lawyers' fees and legal expenses in case of absence of an estate plan. An even higher amount of money is spent in case there are family disputes. One can avoid this hassle by simply creating a will and ensuring that a proper estate plan is in place.

3. Reduce Tax burden: When a property is transferred without a will or through a court case, one has to pay capital gain tax. This tax is avoided when one inherits or receives the property via a will. Similarly, estate planning can help you avoid a lot of taxes. One example can be making a trust. If a trust is set in place in a proper manner, you and your family can avoid paying taxes.

4. Plan for incapacity: While most people are convinced that estate planning is for old age, that is not true. Life is unpredictable and anything can happen at anytime. It is possible that one becomes incapacitated because of some unfortunate accident or sudden medical condition which leaves them unable to manage their financial affairs. In estate planning, one can ensure for both financial and healthcare decisions in case of incapacity. This can help you and your family in difficult times.

5. Support your favourite cause: An individual can leave a fixed amount as donation or as charity to a cause he or she wishes. In often cases, where a proper will has not been made, these causes go unnoticed as the family is unaware of the deceased wishes.

6. Assign a legal guardian for your children: In unfortunate cases where both the parent pass away and the children are still minors, the court decides who the legal guardian to the kids will be. However, with estate planning, you can assign a legal guardian in case of any unfortunate incidents and make sure that your kids go into safe and kind hands.

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