Estate Planning: The Conversation You Have Been Putting Off for So Long

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Estate Planning is a topic that you probably don’t want to think about, let alone speak about. It involves admitting your own helplessness, fallibility, and mortality.

Life can be quite a beautiful experience and the thought of leaving the privilege of having a “tomorrow” to look forward to can be heart-wrenching. Not being able to watch your loved ones grow, mature and achieve their dreams has to be devastating just to think about. Luckily, you clicked this link, so you have already taken your first step toward sorting out your estate planning.

Perhaps you clicked this link because you have no clue what estate planning is all about, but you want to know more. So let us start there.

What is Estate Planning?

Estate Planning is securing your wishes in the event that you die, or are no longer able to make decisions about crucial matters regarding your life due to health.

A good Estate Plan would see to it that your loved ones are taken care of in any such event. More than this, sound Estate Planning makes sure that your loved ones benefit in the way that you would have liked them to in the event of your demise.

Who Really Stands to Gain First When You Die?

This is easier said than done though. Because what many people don’t realize is that your beneficiaries form only one of four overall groups of recipients that “wait in line” for your money after you have died. When you die, in general, your estate gets wound up and during this phase, the following entities comprise the recipients I speak of:

• Creditors,
• Your Executor (everybody will have an executor),
• Tax (state and/or federal),
• Your Loved Ones

Outside of proper Estate Planning, it will generally be in this order, although the law could vary in your state or country, or your situation.

In general, the principles are the same everywhere in the world, but proper Estate Planning involves a trip to your attorney, so the granular technicalities are not something to be too concerned about at this stage. I am just here to give you a high-level view of what it’s all about, speak more to the financial implications and help you wrap your head around what you need to do to create a solid estate plan. This will add value to your trip to your attorney once you have all your duck in a row.

What Happens if You Don’t Have an Estate Plan?

To start off, I should probably introduce the term “intestate” to this lesson.

Dying “intestate” basically is dying without having a will in place.

If you are reading this and your background is like mine, you have probably heard of a case where someone dies, and all sorts of family emerges and lays claims on the estate of the deceased. When a client of mine lost his father, a wealthy businessman, his uncles and stepmother LEGALLY came and SUCCESSFULLY walked away with the lion’s share of his father’s estate; he and his siblings were able to get by, but were left with very little of their father’s estate.

Dying Intestate is Not the Same As Dying Without an Estate Plan

This being said, dying intestate is not the same as dying without having an estate plan.

You can have a will in place without having a decent estate plan in place, while having a proper estate plan in place generally involves having a proper will in place. You need to have both.

While a proper will makes it clear in no uncertain terms what your wishes would have been upon your death. An estate plan arranges your estate in a way that directives of your will may be carried out without any hindrance.

Think of your Will as the automobile that carries out the directives of your heart’s wishes, and your Estate Plan the clear road that you lay out for your automobile ahead of time.

Should, upon your death, your automobile set off on a path that has not been cleared, your automobile may sustain heavy damage on its way to the destination you have directed it to, or not even get there at all. This is why you need an estate plan.

Pitfalls that your automobile could face may be:

• Money Owed to Creditors
•  Owed to Business Partners
• Executors Fees You May Not Have Provided for
• Taxes You May Not Have Provided For
• Children, Ex-Spouses, or a Current Spouse That May Have a Legal Claim

Now that you know what an estate plan is, let us see how you can go about creating a solid one.

Do You Have Any Assets?

One of the first things that you should think about would be your assets. For some people, this may be a quick exercise, and for others, this may not be as quick. If you need to write down a list, do so.

Your list should include the following information about your assets:

• Type of Asset and Where it Can Be Located
• The Market Value of the Asset
• How Much You Purchased the Asset for
• How Much You Still Owe on the Asset
• How You Own The Asset (in your own name, or through a trust or business)
• State Whether You Would Like to Sell or Bequeath (leave to a beneficiary) the Asset

What About Your Liabilities?

The most obvious liabilities that you have would be money owed to creditors at the time of your death:

• Mortgage
• Vehicle Hire Purchase
• Loans
• Credit Cards
• Overdraft
• Any other form of Credit

While these are the more obvious liabilities that would fall to your estate, there are more insidious liabilities that you have to cater for that come about as a result of your death.

• Estate Tax
• Transfer Tax
• Inheritance Tax
• Capital Gains Tax

Generally speaking, if you have a larger estate, your estate will attract larger tax liabilities. If you have a more meager estate, you may not have to worry about any of these. If you have a larger estate you may have to cater for all of these.

You will have to make funding available for these liabilities in your estate. My opinion would be that you make means for these costs to be defrayed in cash. The term for this would be, “creating liquidity” in your estate. Where liquidity has not been provided for in your estate, the executor may be forced to sell (liquidate) your assets to provide this liquidity. This is often done as a matter of urgency so an auction may be the only option, but this means your assets may not be sold at their market value.

The great news is that you can structure your estate in a way that it attracts less, or no taxes. This is generally achieved by having, firstly, a good Financial Planner to help to structures the financial side of your estate plan, and, secondly, a good Attorney to help you tighten up the legal aspects of your estate planning.

Are You Married?

If you are married, you will have to take this into consideration for your estate planning. More than having a spouse, you will need to take into account the type of marriage contract you have entered into.

Speak to your attorney about this.

Do you Have Children?

If you have children, these are some of the questions you need to start asking yourself:

• How many children do you have?
• Do you have children from a previous marriage?
• Are any of them are minors?
• For how much longer will they be minors?
• How many of your children are financially dependent?
• Do any of them have special needs?
• Have you thought about who you want to nominate to be a legal guardian to your children?
• How will you create a  financial provision for them after your death?

My guidance in general, if you have children that are minors, is to have your attorney draft a will for you that will invoke a Testamentary Trust for your children. A testamentary trust, is created by last will and TESTAMENT. This type of trust becomes active only upon your death.

These kind of trusts are far less of a hassle to manage and administer than a Living (inter vivos) Trust.

Leaving your bequests to a minor to be administered via a trust protects your bequests from your children, and from everybody else.

It is almost never a good idea to bequeath anything directly to a minor child. This is a discussion you can have with your attorney though.

What if You Are Single?

If you are single and you have any assets, dependents or special bequests, it may be a good idea to have an estate plan.

Get Appropriate Life Insurance

Now that you have a more detailed idea of what your assets and liabilities (balance sheet) look like, you now have a good idea of how much liquidity you need to provide for in your estate for creditors, executor’s fees and taxes.

You also know who you want your beneficiaries to be and who you want to benefit in cash and how much you would like them to benefit.

These two amounts, in general, would comprise the liquidity shortfall in your estate (although you would not want the cash amount you want to give to beneficiaries to fall to your estate, but instead directly to your beneficiaries, saving for minors).

This would be the amount that you would have to make available, in cash, to your estate upon your demise. Again, I will emphasize:

If you do not have enough liquidity in your estate, your executor will be forced to liquidate your estate. This will mean that your estate will not be distributed in exactly the way that you had wished or imagined.

Creating Liquidity in Your Estate

The easiest and cheapest way by far to create this necessary liquidity in your estate is to take out Life Insurance.

• In general, where you can, take out insurance that will settle your bond upon your demise; I would take out a separate policy to this end and cede this policy to the bank so that they don’t try to come after my estate. Once the bank has taken what is due to them, the residue of the funds from this policy would be paid out to your estate
• I would take out another policy that would settle the remainder of my liabilities; I would see to this by nominating, through the policy, that the beneficiary be my estate
• Then I would take out a policy with beneficiaries that are named directly in the same policy; these beneficiaries would usually not be minors and would be paid directly by the insurance company
• Lastly, I would have a policy the caters for minors that you would like to benefit upon your demise; to see to it that they benefit in the manner that you had hoped, you may want to nominate you last will and testament as the beneficiary to this policy; this may simply read, “In terms of my Will”

In general, my preference is to keep policies that I would like to cede to banks or lenders separate from my personal life insurance policies. This is because I like to keep my business separate from my personal life, but why this is a better alternative for me in this instance is because the cessionary (the bank or lender, in this case) would have a say on any change I may wish to make on the policy. This can be quite an unnecessary waste of time and nuisance.

Other than that, the latter three instances I mention can generally be achieved simultaneously through a single Life Policy. I, personally, would again keep these separate (and, yes, pay separate policy fees for each policy) but this is just my preference and by no means a principle.

Have a Will Drafted

Now that you have sorted out your Life Insurance, it makes much more sense to draft a will. Your will can now make reference to actual insured amounts and cite policy numbers.

This (your will), to use my previous analogy, does not just give your automobile a destination, but you can now rest assured that the road has been cleared for your automobile to reach your intended destination free from obstruction.

Draft a Living Will

While you get your last will and testament drafted, it may be a good idea to have your attorney draft a Living Will for you as well.

This kind of will expresses your wishes as they relate to your care in the event that you are not able to make decisions for yourself. These decisions may relate both to your medical care and your estate. This part of your estate plan a much more legal than it is financial, so I will leave this part to medical and legal professionals.

What is Probate?

Before you even begin this process, you need to have a familiarity and keen appreciation of the existence and possibility of probate.

Probate is the process of establishing the validating of your will. This is the reason I have kept emphasizing the importance of getting your will to be drafted by an attorney. You would be remiss to forgo this step. It would be a tragedy for your whole estate plan to come undone because the courts could not find that your will was valid.

In the Meantime, Get Back to Living Your Fullest Life

Although this may be hard to believe, Estate Planning is a heavy topic to discuss, even for me. This being said, I would be remiss not to share with you all that I know about Estate Planning. This installment was one such instance. As much as I started this blog to help you make money and live, sickness and death are a part of life as we know it, so I couldn’t truly have your best interests at heart without ever speaking of these.

While you sit with your Financial Planner and Attorney to start to finalize your estate plan, let us plan for your path towards Financial Freedom.

Check Out My Financial Freedom Series:

Here’s a quick overview of the series:

• 1: What Financial Freedom is NOT
• 2: Financial Freedom & Your Time
• 3: Financial Freedom & Your Money
• 4: Financial Freedom & Opportunity
• 5: Why Your Financial Advisor Can’t Help You Achieve Financial Freedom
• 6: The Importance of Credit on Your Path to Financial Freedom
• 7: Financial Freedom & Your Career