Estate Planning in Personal Finance

The goal of personal finance is to accumulate wealth and then disseminate it at the right time in order to meet specified goals. Most investors try to accomplish all their goals within their lifetime. However, sometimes their goals may be leftover post their death or when they have become medically unfit. Similarly, there may be money left over after a person dies. Since the money belongs to the investor, it is imperative that it be spent according to the wishes of the investor post their death or when they are medically unfit to make those decisions themselves.

Personal financial planning provides the tools required to ensure that the hard-earned money of the investor is spent in accordance with their wishes even if they are not medically capable of making such decisions. These tools are called estate planning. In this article, we will understand what estate planning is and how it helps in completing the unfinished tasks of personal finance.

  1. Estate Planning is Not Only for the Rich: The first and most important thing to remember is that estate planning is not only limited to people who are ultra-rich and have millions of dollars in assets. This is the misconception that is prevalent all across the world. This is the reason that most people pass away without any estate plan. This is also the reason that there are courts all over the world that are trying to mediate between bickering families in order to ensure that each gets their fair share.

    The bottom line is that estate planning is not only for the rich but even for middle-class people who may have assets such as a house, their retirement accounts, etc. which will be distributed amongst their descendants after their death.

  2. Being Prepared for an Unfortunate Event: Another common myth is that estate planning only needs to be done when a person becomes very old. However, this is also not the complete truth.

    Many people die an early death because of various unfortunate circumstances. Alternatively, they may also face conditions in which they may become medically unfit to make decisions. In such situations, it is important to have an estate plan in force. Obtaining the correct type of insurances before such an adverse event takes place is also a part of estate planning.

  3. Establishing Your Directives: Many financial planners will help their clients establish their directives. This means that they will ask their clients how they would like to spend their money in case something did happen to them. There are many estate planning tools that can help in this regard:

    1. Letter of Intent: A letter of intent explains the financial plan or objectives which were being followed by the investor. This helps the court to make smooth decisions in accordance with the intention of the investor if they were to die or become incapacitated.

    2. Living Trusts: Living trusts are legal entities that are created for a specific purpose such as raising children. As long as the beneficiary is alive, they can take care of the trust themselves. However, if they are no longer alive or become incapacitated, then the money in the trust passed on to a trustee who can make decisions on their behalf. If the time elapses and nothing happens to the investor, then they can simply withdraw money from the trust and close it off. Alternatively, they can give it to the beneficiary as well.

    3. Power of Attorneys: There are various types of power of attorneys that can be used in succession planning. A simple power of attorney allows another individual to make all financial decisions on behalf of a person if they die or become incapacitated.

      Similarly, there is a limited power of attorney which allows the other person to only make decisions about certain financial assets. Similarly, there is a medical power of attorney which allows another person to make decisions about euthanasia and keeping the health care needs of the investor, in the event that they become incapacitated.

  4. Deciding on the Beneficiaries: Finally, it is important to clearly list out the beneficiaries and how the assets must be divided between them. It is possible that the valuation of the assets changes from the period of drawing the plan to the period of execution. Hence, the investor can specify a percentage that they want to give to each beneficiary.

    In case, the assets that they have are indivisible, then they may be liquidated with the acceptance of both parties or after a time period lapses. In some cases, a trust may be set up, the assets may be invested in a certain way and only the earnings from the assets may be given to the beneficiaries.

  5. Avoiding the Taxes: The last and most important step is to avoid paying taxes on the transfer of wealth. Gift, as well as estate taxes, can take away a huge chunk of the wealth during transfer. This is the reason why it is important to engage the services of a professional while planning the estate so that the maximum amount of money can reach the intended beneficiaries.

The bottom line is that estate planning is an integral part of overall financial planning. It might be inconvenient or even difficult to think about situations in which the estate plan may have to be executed. However, good investors give priority to this plan as it helps make them prepared for every situation.

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