7 Essential Estate Planning Tips

Planning

7 Essential Estate Planning Tips

To ensure your wealth is protected and passed on to your loved ones in the most effective way, it is imperative to create an estate plan.

Published on 27 November 2017

Many people don’t give too much thought to the manner in which their wealth will be distributed when they are no longer there. Estate planning – which involves the transfer of your cash, real estate, and other assets after you die – is a slightly morbid subject. While it is probably an issue that is present at the back of your mind, deciding who gets which part of your wealth can be an uncomfortable topic to think about.

The reluctance to make a will or to update it whenever there is an important change in your status can land your intended beneficiaries in big trouble. In fact, estate planning doesn’t only address the distribution of a person’s wealth after that individual’s demise. It can also lay down the instructions for the manner in which an incapacitated person will be cared for and how that individual’s finances will be handled.

Here are 7 essential estate planning tips that you should keep in mind:

01.

Don’t forget to make a will

Although this could seem to be a very basic step, there are a surprisingly large number of people who die intestate – that’s the legal term for not making a will before you pass away. The list includes painter Pablo Picasso, who left behind an estate that included 45,000 of his works, five homes, and other assets. It took US$30 million in expenses and six years to settle his estate.

Even American business magnate Howard Hughes didn’t make a will. When he died there were 600 claimants to his fortune. The final settlement was made after a prolonged courtroom battle.

If you don’t make a will, the law that is applicable in your country will determine how your assets will be divided. The majority of people would not want this to happen, as the law of the land does not take into account your personal wishes and requirements.

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Intestate – that’s the legal term for not making a will before you pass away.

02.

Change your will when your status changes

A will is invalidated when a person gets married. The only exception could be if the will that you have made before your marriage states your intention to marry.

Dividing your estate can get complicated if you marry a second time and you have children from your earlier marriage. Your will should provide details of the assets that you want to provide to all your intended beneficiaries.

If your will is out of date, your loved ones may have to go through a lot of trouble to get their rightful share. It is also possible that they may get nothing at all. It is a good idea to revisit your will and update it as your circumstances change.

03.

A letter of instruction can simplify matters for your heirs

A will is a formal document and the legalese that it contains may not always be very clear to a reader. It may also not contain all the practical information that your heirs need. For example, you may want to pass on information about where your assets are located, your passwords and PIN numbers, and other important details.

Some of the details that you may want your heirs to receive are:

  • Names and contact numbers of your bankers, financial advisor, and your lawyer.
  • The places where you have stored your important documents.
  • The location of the keys to your locker or safety deposit box.

Particulars of this type could be provided in a “letter of instruction.” Remember that this is not a legal document. It’s more of a “cheat sheet” that will simplify matters for your heirs when you are not there.

04.

Create a trust

When a person receives a large amount of unearned money, there is a tendency to overspend. That is exactly what could happen to the cash and assets that you leave behind. The probability of your wealth being frittered away is higher if the recipient is young and immature.

One way to avoid this is to create a trust. You can specify how the money will be disbursed and the specific purposes for which it can be used. Taking this step could give you peace of mind and also prove to be of great help to your heirs in the long term.

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Specify how the money will be disbursed and the specific purposes for which it can be used.

05.

Make a succession plan for your business

“Shirtsleeves to shirtsleeves in three generations,” “Rice paddies to rice paddies in three generations,” “The father buys, the son builds, the grandchild sells, and his son begs.” The first is an American proverb, the second is from Japan, and the third is from Scotland. In fact, most cultures have an aphorism that says that a family’s wealth usually does not last more than three generations.

If you own a family business, you must have a succession plan in place. Who will own and manage your company after you retire or die? Are your children interested in running the firm or would they rather sell their stake?

Many business owners are deeply attached to the company that they have established and built. If your heirs do not want to get involved in the affairs of the firm, you may consider selling it to an employee or disposing of your stake in some other way. In any case, this is a matter that deserves a great amount thought and planning.

06.

Include a “Titanic” clause in your will

Isidor Straus was the owner of Macy’s, one of the most successful department stores in the US. He and his wife, Ida, perished on the Titanic. After their death, the inclusion of a “Titanic clause” became more common in wills. What if your intended beneficiary also dies? Who is the next in line to receive your assets?

It is important to mention a contingent beneficiary in your will. This will ensure that your wealth finds its way into the correct hands if the heirs that you have named in your will are not alive.

07.

Hold discussions with your beneficiaries

The manner in which you divide your assets could lead to misunderstandings and discord. It could also result in litigation if any of the parties feel that they have been unfairly dealt with or have not received what they feel they are entitled to.

Your will may say that one child will receive a cash payment while another’s share would be held in a trust. While you may have very good reasons for doing this, you should take out the time to explain your strategy. A frank discussion may prevent family infighting or worse.

If you think that speaking to your family members is too uncomfortable, consider putting down your rationale in a letter and sharing this with them.

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A frank discussion may prevent family infighting or worse.

The bottom line

It is essential to spend time on making an estate plan. The exercise takes relatively little effort, and can provide immense benefits to your heirs and prevent conflicts and disagreements from arising among your family members in the future.

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