What is Estate Planning?
Estate planning is a process that allows someone to manage their assets while they are still alive in order to ensure their affairs are taken care of according to their wishes once they have passed away. Responsible estate planning can benefit a person’s family and anyone else that potentially relies on the estate, such as a charity or employee. Helping family understand what estate planning means can support their engagement in the process.
Key Elements of an Estate
So what’s an estate? An individual’s estate is made up of everything they own, minus their liabilities. An estate can constitute various different types of assets and typically includes things like property, land, cash, securities, vehicles, companies, art and furniture. Every estate will be different and it is important to cover every angle when looking to document someone’s possessions.
Why Estate Planning is Important
The process gives financial security to your family and other beneficiaries. It allows them to have advance knowledge of how they will benefit from an estate before an individual passes away. This type of financial security can help families avoid conflict and significantly reduce stress. Sensible estate planning can help minimise taxes, which are typically either levied on a beneficiary or the estate itself upon someone’s death. Estate planning can also help the individual passing on the assets achieve peace of mind and enjoy the twilight years of their life.
The Seven Essential Steps in the Estate Planning Process
Step 1 – Assess Your Assets
The first step in the estate planning process is to document your assets. The best starting point is to conduct a comprehensive review of what you own. This picture will look different for each individual, but will likely include assets such as property, bank accounts, securities, vehicles, business interests and valuable items such as jewellery or art.
Step 2 – Determine Your Liabilities
An individual’s estate will contain assets, but a person may also owe certain things to third parties. These are known as liabilities. Liabilities detract from the value of an estate so need to be documented clearly and ideally a plan prepared to meet them. In some cases, liabilities may be minor, but in others they could be significant and come as a shock to beneficiaries if they are not properly recorded.
Step 3 – Identify Your Beneficiaries
A key aspect of estate planning is identifying your beneficiaries. Simply put, it is the process of designating who will receive the assets contained within your estate once you pass away. Family members are the obvious choice for many people, but assets may also be left to friends, neighbours and employees. Philanthropy could play a large part in someone’s estate plan with charities or other good causes featuring on the list of recipients. Making sure the beneficiary list is clear is a good way of heading off any disputes.
Step 4 – Choose an Executor
The executor is legally responsible for carrying out your final wishes by overseeing the process of distributing your estate after your death. The directions for your estate will be set down in a Will and followed by an executor. An executor can be a beneficiary or a professional such as a solicitor or an accountant. There can be more than one executor for an estate. The executor has a legal obligation to carry out their duties, but it is still important to choose someone trustworthy and competent.
Step 5 – Establish Key Legal Documents
You should make sure you have certain key legal documents in order when conducting your estate planning. The most important documents are a Will, Power of Attorney and any Trust documents you may require. A Will outlines your wishes regarding the fate of your assets after your death. A Power of Attorney is a document that designates someone to make decisions for you if you become incapable of doing so yourself. A trust is a legal arrangement for managing assets between three parties. The main parties to a trust are the settlor, who provides the assets, the trustee, who holds and manages the assets, and the beneficiary, who benefits from the trust.
Step 6 – Plan for Tax Efficiency
A significant advantage of effective estate planning is it can lead to your assets being passed on with greater tax efficiency. Strategic planning that employs the use of vehicles such as trusts and ensures charitable contributions can help preserve more of your wealth for your beneficiaries. It is always sensible to talk to an adviser about the nuances of inheritance tax.
Step 7 – Review and Update Regularly
The final and perhaps one of the most important steps in the estate planning process is ensuring you regularly review your plans. It is all well and good devising a plan but circumstances change and you must ensure your plans reflect that. Any major changes in your situation could warrant a rethink, but it is particularly useful to revisit estate planning when there is a marriage or a new beneficiary to consider.
When to Start Estate Planning
It is never too early to start estate planning. The sooner you get a handle on your assets, the sooner you can plan for the smooth transfer of your wealth. Recruiting a wealth manager and other key advisers is a sensible route for high-net-worth individuals (HNWIs) because a professional view will be valuable with a complex set of assets.
Why not get in touch?
Estate planning is an important process for anyone with assets and it will ensure that your wishes are honoured once you have passed away. Individuals have different priorities and it is important to make sure yours are reflected in a thoughtful and detailed estate plan. If you would like to discuss estate planning, feel free to reach out and talk to one of our experienced advisers.
