What Is Estate Planning?
by Mashum Mollah Real Estate 18 June 2020
Throughout your life, it’s important to protect your assets. Asset protection is so important, in fact, that it’s a fundamental lens through which financial planners will look in order to guide any of your decisions. When you look at getting an aggressive stock portfolio, for example, it will be defined as “high-risk” because financial planners know it exposes your wealth to a number of dangers; the trick is weighing those dangers against potential benefits. Home insurance is one way you can leave your assets protected; it’s very likely you’ll pay more to the insurance company than they’ll payout to you in claims during your lifetime. Nonetheless, you’ll buy home insurance because losing your home would be financially devastating.
Estate planning works a lot like other branches of financial planning insofar as risk management and asset protection are its cornerstones. The major difference between estate planning and its cousins is that you’re protecting assets that you may never use. Your estate is, after all, something that you can never access.
You Live Until You Die
There are two components to estate planning. The first is ensuring you have enough money to sustain your lifestyle when you retire; the second is ensuring the beneficiaries of your estate receive the amount of wealth you want them to. This is a somewhat delicate balance – with good financial planning, you’re almost certain to have more money when you retire than you’ll be able to use over the course of your life. This is especially true when you factor in assets like your home.
All of your assets will fall on a spectrum from very liquid (cash) to very illiquid (your home). Liquid assets give you a high degree of flexibility, which makes them useful for daily expenses and lifestyle maintenance. Illiquid assets, conversely, are excellent for estate planning – you keep them in their illiquid form, and after you die, those assets can be liquidated and distributed among the beneficiaries of your estate.
You may have noticed that levels of wealth have not been discussed so far. There’s a misconception that estate planning is an activity reserved for the rich, but nothing could be further from the truth. In many ways, it’s more important to an estate plan when you have less wealth, as any risks you take can have a more profound impact on your lifestyle and estate. Estate planning is for everyone.
Considerations When Estate Planning
Once you’ve secured enough wealth to maintain your lifestyle during retirement, you’ll begin looking at how to protect your estate. Taxes are one of the most important potential estate liabilities; the more your estate gets taxed, the less money recipients of the estate will receive.
There are a number of ways through which you can reduce your tax liability. One interesting route is to take out life insurance, the benefits of which are rarely taxable (as long as you set up the policy properly). Life insurance can come with a number of built-in contingencies and rules. For example, you might set up a policy that transfers to another beneficiary should the primary beneficiary pass away.
Another important cornerstone of estate planning is conflict resolution. It’s important to have conversations with estate beneficiaries about what they might expect to receive. You won’t be able to have these conversations when the estate is being distributed, after all. These conversations can be tense, but they certainly don’t have to be. By having discussions about your intentions early, you can learn things about your friends and family. You might, for example, have a special commemorative piece intended for one family member, only to learn another family member wants it more. You can adjust your estate plans accordingly.
Estate planning is a multifaceted discipline – that means you may need a whole team of professionals to help you with your estate. This team might include attorneys, financial planners, social workers, faith leaders, and any number of other skilled individuals. Exactly who you will need will depend heavily on both your personal and financial situation.
As previously discussed, estate planning is, in part, a branch of financial planning, which means risk management is still important. You can make moves to protect your estate, and you can make decisions to grow your estate. Generally, the more growth-oriented you are, the more risk you’re going to expose your estate to.
Another important element of estate planning is determining who you’re going to give your wealth to, and how they’ll receive it. You can give to friends, family, charities, or a host of other entities. You might give them lump sums of cash, or you might put the principle into a trust to be paid out over time. Trusts can be an excellent method of growing your wealth and using interest from those trusts can enable you to grant money to a charity over the course of decades.