Estate planning distributes the real and personal property to an individual's heirs. Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death or incapacitation. An Estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.
Wills and trusts are common ways in which individuals dispose of their wealth. Power of Attorney, Gifts, Partition, Succession are other ways.
Financial Planning is the process of meeting individual life goals through the proper management of one's finances. Life goals can include buying a house, saving for your child's higher education, planning for retirement or distribution of assets among beneficiaries.
Estate planning is part of financial planning by which an individual can arrange the transfer of assets in anticipation of death or incapacitation. An estate plan aims to preserve maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.
Objectives of Estate Planning
1. Transfer of assets to beneficiaries: Almost all individuals want there accumulated wealth should go to their beneficiaries. The beneficiaries may be a family member, a friend or even other people in the society. The basic objective of Estate Planning is that all this accumulated wealth should be transferred to the beneficiaries
2. Paying least amount of taxes:
Planning should be done such that Maximum amount should go to the beneficiaries with minimum amount of tax deduction.
3. Planning for Incapacity:
There should be plan if there is incapacity to avoid court guardianship and legal battles creating unnecessary waste if time and money. This can be done through tools like Power of Attorney.
4. Orderly Business Succession:
If someone owns a business, his will should provide for management of succession plan, including who should be given management and operating powers of the company.
5. Who Shall Receive and When ?
Properly executed Will should mention all beneficiaries and who should get what and in what proportion. Also if there is a minor then there should be a trust formed to look afters his share till he gets major and can handle on his own.
6. Selecting Executor, Trustee, and Guardian:
An Executor is a clients personal representative after his death and responsible for functions such as
a) administering the estate and distributing the assets to clients beneficiaries
b) paying estate expenses and outstanding debts
c) ensuring that all life insurance and retirement plan benefits are received
d) Filing or hiring a person to file all necessary tax returns and paying the appropriate central and state taxes from estate funds. When those duties are complete, this responsibility ends.
Trustee is required if the clients will creates trusts to accomplish more long-term goals, such as providing for minor children or giving to a charity or educational institutions. Trustee is responsible for the managing the trusts assets and ensuring that the beneficiaries are provided for in accordance with the provisions of the Trust.
Guardian: is appointed to act as a surrogate parent for the clients children, ensuring that it is in the best interests of children.
Risk associated with failing to plan for Estate Transfers
- Clients property transfer wishes go unfulfilled.
- Transfer taxes are excessive
- Transfer costs are excessive
- The clients family is not provided for financially in a proper manner
- Insufficient liquidity to cover clients debts, taxes and cost at death
- Time consuming and expensive Probate.
1. Establish the client/planner relationship:
The financial planner should clearly explain or document the services to be provided to the client and define both his and the clients responsibilities. The client and the Financial planner should decide on how long the relationship should last and how is the compensation and How the the decisions will be made.
2. Gather Clients Information: Financial planner should gather all the information from the client including the cash flow , expenses, income, future long term expenses, long term goals. clients intentions and expectations.
3. Determine the clients Financial Status:
The financial planner should analyze clients information to assess his current situation and the total worth of his estate to determine what he must do to meet clients goals like analyzing assets , liabilities and cash flow, insurance coverage , investments, tax strategies etc.
4. Develop a comprehensive plan to transfers consistent with all information and objectives: The planner should address clients objectives like transfer to beneficiaries with least amount of taxes.
5. Implement the Estate Plan: There should be an agreement between the client and the planner how should the plan be implemented.
6. Review the Estate plan periodically: The client and planner should also agree on who should monitor the progress of the plan. If the planner is in charge of the process. he should report to the client periodically to review the situation and adjust recommendations, if needed as the clients life changes.