Many of us avoid the subject of estate planning, mainly for two reasons:
1. We think we do not have that much estate to leave behind and…
2. We avoid the topic of death, much less plan for it.
But as we try to arm ourselves with more financial education here at OK Nga Rod, that is basically what we are going to talk about today.
The Importance of Real Estate Planning
Estate planning, in its most basic sense, simply means planning for your death so that anything of value that you own will be passed on to someone else, especially to your family.
In Filipino, estate means ari-arian which then becomes pamana for your family. Estate planning involves the accumulation, conservation and distribution of such pamana. No matter how small you think that is, as long as it has value, you have an estate.
Most of us hesitate talking about estate because it implies death of a family member or for fear that opening up such conversation is ominous.
But we need to approach the subject objectively because estate planning is in fact necessary.
Here are a few good reasons.
#1. Estate planning helps reduce the financial impact of one’s death to his or her family members, especially to those who depend on financial support
#2. Estate planning will eliminate confusion and help prevent disputes among heirs
#3. One’s effort at building wealth will not go to waste as the family members left behind will benefit and get on with their lives without too much financial stress.
Who are the People Involved in Estate Planning?
Typically, the people involved in estate planning include insurance agents, trust officers and most important, an estate lawyer who will execute your will.
What do I need to do to start an estate plan?
1. Write a will. Perhaps the most important thing to do is to write your last will and testament. A will establishes where and how you want to distribute your assets. It eliminates confusion among your heirs as to who gets which and how much. It’s also where you name the “guardians” for your young children. If you don’t have a will, a court will decide on how to distribute your assets, placing your heirs in a helpless situation.
Your will should also have an executor, preferably a third party lawyer or accountant, not a family member, to avoid bias and conflicting interest.
Getting a will is generally inexpensive, although it still depends on the size of your estate and complexity of your will.
2. Set up trusts. Trusts are fiduciary arrangements that complement your will. It enables a third party to hold assets on behalf of your beneficiaries. Like will, a trust controls and specifies how you distribute your wealth to your heirs. Trusts can either be revocable or irrevocable. With a revocable trust or a living trust, you have access to it when while you are still alive. You can change it anytime you want; with an irrevocable trust, on the other hand, your trust assets already belong to your trust entity once they’re transferred. Irrevocable trusts usually have tax benefits but they vary depending on your State laws.
3. Get a life insurance. Life insurance’s main purpose is to leave a certain amount for your beneficiaries or dependents in case of death. Your life insurance is part of your estate and may in fact be used to cover your estate taxes. Depending on your insurance coverage, a life insurance will be a good cushion for family members who used to depend on you financially. If you are the breadwinner, a life insurance will enable dependents to buy time and figure out how to generate income on their own.
4. Sell your assets. Some people prefer to sell their assets before they pass away and give away the proceeds to their heirs. This has its own advantages, especially when it comes to less taxes, but make sure you are leaving behind money to a financially responsible family member. Cash is easy to squander and might just leave them broke after a few years.
At this point, you might be wondering: What happens to a debt when a person dies? Will the family members left behind inherit unpaid balances, too?
The answer largely depends on the State. According to FTC, there is no single uniform set of laws and procedures for all States. But generally, it is safe to say that only those joint accounts with whom a family member co-signed will debt collection be legally possible. In other words, a wife or a child will generally not be held responsible for unpaid debts of a husband or father if the debt was not a joint account, or if the family member was only an authorized user of an account.
This does not mean, however, that there will never ever be a collection call – some collectors will still go after a decedent’s family members and attempt to collect. They don’t even bother to take the time to find out if you are responsible for the debt. If you receive such calls, don’t say anything that will get them more excited to collect. Instead, get a legal counsel to assist you on your situation.
However, if a decedent does have an estate, those assets will be used to pay off the balances and collection calls should stop. The executor will be the one who will determine which balances will be paid first and so on.
These are just some of the basic things involved in estate planning. If you’re thinking of laying down an estate plan, it is best to consult a legal expert to help you navigate the legal process. It will also help maximize what you leave behind by properly dealing with estate and inheritance taxes.
No one normally gets excited about estate planning that’s why it’s probably one of the most misunderstood topics in personal finance. But because we don’t approach it with objectivity, people tend to leave estate behind without proper distribution…or worse, damage relationships among family members. So if you have an estate, now is the best time to plan for it.