Estate Planning And Why Do You Need To Think Of It

In the first part of her latest series, Samyuktha Vibhu, a Certified Financial Planner (CFP) at ithought Advisory gives you basic knowledge on estate planning.

Sheetal and Pavan celebrated their 35th wedding anniversary last month, but something was weighing on their minds. They looked back nostalgically at the life they had built over three decades. That transition from a newly married couple to a young family was challenging with career, family, home, and social responsibilities. But, things had turned out better than they had imagined. They owned a lovely three-bedroom apartment in the heart of the city. Their daughter Nisha had completed her Masters in the USA and had a fantastic job. It felt like all of life’s responsibilities were behind them and their golden years stretched ahead. Yet, there was a niggling insecurity. Although they were in good health, they wondered how life would pan out as they aged, especially if one of them was left behind.

With age, it’s normal to think about health, financial independence, and mobility. Sheetal and Pavan felt strong together but not individually. They didn’t want to burden Nisha in the future. Neither of them fancied living with her in the USA permanently. If life took a different turn, they needed to have an Estate Plan put in place.

What is Estate Planning?

An estate plan is a set of instructions to be utilized after death. Estate planning predominantly focuses on the distribution of assets – financial and otherwise. It also ensures that you receive the care you need if you cannot provide for yourself. By creating an estate plan, you’re allowing yourself to make a lasting impact and leaving behind a legacy.

For a successful estate plan, consult a lawyer and a financial planner. A lawyer ensures that your estate plan is legally compliant and enforced according to your intentions. A financial planner identifies your assets, consolidate them, and documents them in a financial plan. The financial plan is a record for your family to review.

Who needs an estate plan?

Estate planning never crossed Sheetal and Pavan’s minds when they were younger. They took comfort in some of the assumptions: My spouse will take care of everything we have only one child, and everything will go to her or family won’t fight over money or assets aren’t worth so much we have nominees for all our investments

For these reasons, many families opt out of the estate planning process. When we think through these assumptions, we realize that there are some gaps. Losing a spouse can be traumatic. To expect your surviving spouse to shoulder the entire responsibility of consolidating your assets is unfair. Without a Will or Trust in place – succession laws would apply even for a single child, and Nisha wouldn’t be the only eligible beneficiary. A visit to family court shows us that the most innocuous things could lead to family disputes, and it is never worth breaking relationships over ambiguities.

Every one of us has an estate. The money in our bank accounts, the cars we drive to work, the house that we live in, the furniture that we’re so used to, the investments we’ve made, the art we’ve collected over the years, the jewelry we’ve bought on special occasions, are all part of our assets. You may not notice your wealth because you’re not used to viewing everything through a monetary lens but at some point, someone else will view it that way. So it’s better that you assign values to things that you own.

Sheetal and Pavan avoided estate planning because they had assigned nominees for all their investments. But a nominee is only a custodian of the assets that they receive and not a legal beneficiary. Therefore, your Will supersedes any nominations.

Possible Consequences Of Not Having An Estate Plan

Family Disputes

When there’s no estate plan in place, your estate will be divided on the basis of succession laws. Succession laws are not tailored to your family structure. For instance, succession laws may identify beneficiaries to whom you never intended to pass on your wealth but they may have a legal right to your inheritance and stake a claim. For instance, in certain circumstances, your siblings may also be legal heirs when your intent might be to pass your wealth on to your children or spouse. These could lead to lengthy and costly legal disputes. More importantly, families are never able to rebuild these ties once they’ve fought over money. With a clear intent to distribute your assets you can leave behind a legacy that your family can enjoy peacefully.

Wealth Misallocation

Succession laws don’t just determine who gets your money, but how much each person gets. If you have more than one child and believe that one of them should receive more financial support, the law won’t recognize this. It is up to your children to balance the misallocation. This kind of experience can stir up negative emotions like entitlement, resentment, and disappointment amongst your children. This could stress ties for years and generations to come. Further, the law will not recognize any causes that you are passionate about as beneficiaries.

Forgotten Wealth

In many families, the breadwinner doesn’t disclose all their financial transactions to their immediate family leaving them oblivious to their inheritance in case of sudden death. Financial planning focuses on documenting your assets and preparing an easily accessible record of your wealth for you and your family. Through the process of planning, you would also map your assets to specific goals.

Importance of Estate Planning

Estate planning helps provide clarity on what investments you’ve made, why you’ve made them, and what purpose they will serve in the years to come. When you begin consolidating your assets, you ensure that they are productively deployed. Through this process, you could also rebalance your asset allocation. With age, you may want to increase liquidity in your estate allowing you easy access to your wealth in your lifetime – for daily expenses, donating to causes of your choice, or spending on your lifestyle and aspirations. Secondly, it makes the transition of wealth easier as it is easier to divide liquid and financial assets than physical assets.

The primary purpose of estate planning is to pass on an inheritance. Estate planning ensures this transfer is smooth and free of conflicts. You have the potential to change the lives of your loved ones with a comprehensive and well-thought-out estate plan.

Another invaluable intangible benefit of estate planning is peace of mind. This is exactly why Sheetal and Pavan wanted to start estate planning. They wanted to ensure that their needs were taken care of through their lifetimes, conflicts with their broader family were avoided and Nisha received her inheritance in a hassle-free manner.

Is it necessary to review your estate plan?

  Sheetal and Pavan sat down with their financial planner and lawyer to set up their estate plan. While they breathed a sigh of relief, they wondered whether they’d have to revisit this in the future. There is enough merit in reviewing your estate plan every few years. Life is fluid, and you will want to factor those changes into your estate plan. Here are a few situations in which you should review your estate plan:

Changes in family structure – you should update your estate plan to reflect any changes in your family. This includes the birth of a grandchild or the loss of a loved one. If you miss updating your estate plan, there could be confusion or a misallocation of wealth.    Changes in asset holdings – it is important that your estate plan captures your most current asset base. Remember to record any transactions where you dispose of or acquire assets. Failing to capture this, could result in disputes.Relative importance of causes and people – as you travel through your golden years of retirement, your relationships with your family members and society will change. You may find a cause or a charity that you want to support. Or you may want to thank a near and dear family member. Your estate plan is a great way to show how you feel.There are four tools you can use to plan your estate – gift deeds, joint ownership, writing a Will, and setting up a Trust. Next time, we’ll cover how Sheetal and Pavan used these tools to create a sense of emotional wellbeing for themselves.