Estate Planning

What Is Estate Planning?

Estate planning refers to the arrangement to manage and transfer an individual's assets after his death to heirs. It is an organized method to transfer wealth to the next generation.

The planning process considers the individuals' needs and goals, which differ from person to person. One of its primary purposes is to avoid misunderstandings regarding estate distribution and legacy management. In addition, the effective tax planning resultant of the procedure increases the estate's value.

• Estate planning definition portrays it as the process of selecting how to protect, administer, and distribute an individual's property after death.
• It lowers taxes and eliminates unnecessary legal fees by utilizing various tools and techniques like transferring assets to a living trust and altering beneficiary designations.
• It is concerned with tangible assets. In contrast, legacy planning is primarily concerned with intangible assets and takes a more comprehensive view of the estate, financial well-being, and legacy a person intends to leave behind.

Estate Planning Explained

Estate planning is deciding how to preserve, manage, and distribute an individual's property after death. It is necessary and useful for everyone, regardless of whether their assets are valuable. In addition, it is critical for those with a loved one or family members whose financial security and convenience are primary concerns.

The planning process involves more than just distributing assets; it is important to lay out clear directives and name a representative who can make decisions for the person regarding their care, finances, and healthcare. The process creates a will, insurance policies, trusts, or other estate management and transfer plans using legal instruments. An effective estate plan considers a wealth transfer strategy to reduce the taxes an individual is entitled to pay.

Checklist

Some of the important elements of the estate planning checklist throwing insight into the estate planning basics are as follows: 

• Financial Power of Attorney: If an individual cannot manage their finances due to illness, a permanent financial power of attorney permits someone else to do so. The designated agent can represent someone in legal and financial matters, as specified in the instrument. It entails accessing and controlling the person's assets and paying payments and taxes on their behalf.
• Will: A will is another essential estate planning document specifying how an individual's possessions will be transferred to another person after death. The court can select an administrator to carry out the will and oversee the division of assets once the individual passes away.
• Letter of Intent: A letter of intent is a personalized attachment to the legal estate planning paperwork that gives heirs and the personal representative specific information about a decedent's desires concerning the property. The letter of intent will specify exactly how one would like things to be managed and outline what needs to be taken care of in the person's absence.
• Medical Power of Attorney: It is also known as a healthcare power of attorney and is a legal document that confers the authority to make crucial decisions concerning a person's medical treatment. These decisions could relate to several aspects of treatment, including medication, surgery, and others. The healthcare agent or proxy is designated in a power of attorney (POA) to make these decisions.
• Designation of the Guardianship: Crucial goals are served by the designation of guardianship. It assigns a guardian for estate and minors in the event of an individual's incapacity. 

Example

Let us look at an example to understand the concept better: 

New York residents Mr. X and Mrs. Y got married recently. In his first marriage, which ended when his first wife passed away, Mr. X had two kids. Mrs.Y also has a daughter who has just graduated from high school. Even though Mr. X was still employed, he intended to retire soon.

However, Mr. X died unexpectedly and essentially intestate. His wife, Mrs.Y, acquired the entire estate of Mr. X, including the proceeds of an ordinary life insurance policy, and became the sole owner of their home. If Mr. X had done the estate planning, both his children would have been liable for his estate proceeds, such as home, insurance policies, etc. 

Importance

Estate planning can help manage the challenging process of managing the funds following the person's death. The plans for handling a person's assets are found in their will, trust, and other documents. A well-defined plan can minimize disagreements or disputes over specific properties or assets.

The following are a few benefits: 

• It enables people to assign assets to particular recipients. It implies that a person has control over who receives what and when. If someone has minor children, this can be very useful because a person can decide how and when they will receive their inheritance.
• The ability to avoid estate litigation is another advantage. Estate litigation may be necessary if the estate is not properly planned. It can be time-consuming and costly, depleting the estate's assets.
• It reduces taxes and unnecessary legal fees by transferring assets to a living trust, updating beneficiary designations, or aligning their assets with the estate plan.

Estate Planning vs Will vs Legacy Planning

• A will is a legal document specifying how an individual's possessions should be transferred after death. At the same time, estate planning involves legal documents, including will and powers of attorney.
• The process of drafting legal agreements to safeguard wealth distribution is known as estate planning. In contrast, legacy planning enables estate planning documents to have a personal meaning and involves the application of more advanced tools to accommodate different and complex objectives.
• Legacy planning is a more comprehensive approach to estate planning and an opportunity to assign a meaningful value to wealth created during one's lifetime. Furthermore, they both complement each other;
• Estate planning focuses on tangible assets, whereas legacy planning focuses on intangible assets with a more holistic perspective of the estate, financial well-being, and the legacy a person wishes to leave behind.
• It entails more than simply writing a will. For example, a complete estate plan would consider the estate's liquidity and the impact of estate duty and other estate charges on an individual's estate. While legacy planning also handles the surviving spouse's maintenance and ensures that the children's and any possible dependants' support and other requirements are met.

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to What is Estate Planning. We explain its checklist, an example, its importance, and comparison with will and legacy planning. You can also go through our recommended articles on corporate finance –

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