Chapter 1
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Introduction to Estate Planning
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any people are of the opinion that Estate Planning is an unpleasant and morbid subject. They are put it off because they are “too busy,” or because they think they don’t own enough assets to plan for, or because they don’t like to think about death. There is no doubt that Estate Planning can raise some difficult emotional issues. Unfortunately, ignoring these issues now may cost your family thousands or even millions of rupees later, as well as cause considerable anguish. Proper Estate Planning can give one tremendous peace of mind. How much do you own? It seems like a simple question, but often it is not. When most people think of what they own — their estate — they think about possessions such as their house, car, computer or jewellery. These are all part of their estate, but don’t forget all of the other assets, such as the funds in your retirement plan or provident fund, the shares in stock market, certificate, or the life insurance policy that was taken out four years ago. In addition to identifying the client’s assets in the estate, the financial planner must also identify and understand the amount or percentage of each asset that is owned, and the way in which the property is titled. The laws of each state in which these properties reside and the religion that he belongs to may affect ownership of the assets. Therefore, identifying every asset — what it is, where it is, and its worth — is crucial to the planning process. As a financial planner, you must have a basic understanding of how much is owned, and the different ways property can be transferred. Only then can you begin to address the client’s estate planning needs. The starting point of a successful estate plan, as with any area of financial planning, is to identify and define the client’s goals. Who will receive the assets, and when? How will the assets best be dispersed? These are just a few of the many questions that this course will address. What is Estate Planning? An estate is the total property, owned by an individual prior to distribution through a Trust or Will, for example real estate cars, household items, and bank accounts. Estate planning distributes the real estate and other personal property to an individual’s heirs.
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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. Other tools are Power of Attorney, Gifts, Partition, Succession (When the Will is not made) etc. Trusts, unlike wills, have the benefit of avoiding probate, a lengthy and costly legal process that oversees the transfer of assets.
Financial Planning and Estate Planning 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. It is a strategy or a plan for how individuals can meet goals, given their current situation and their future plans. Estate Planning is a part of Financial Planning. Through Estate Planning, an individual can aspire to meet some goals of Financial Planning like distribution of assets among beneficiaries. It is the process by which an individual or a 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. On the other hand, Financial Planning aims at the management of an individual’s plans to meet his life goals.
Objectives of Estate Planning 1. Transfer of assets to beneficiaries: Almost all individuals want that their accumulated wealth should go to their beneficiaries. The beneficiary 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 without the hassle of probation and tax deduction. 2. Paying least amount of taxes: When someone wants to distribute his/her wealth, his/her basic objective is that the maximum amount should go to the beneficiary with the minimum of tax deduction. 3. Planning for Incapacity: The primary objectives of Estate Planning are geared towards planning for incapacity. This helps in avoidance of the court controlled guardianship system and its incumbent costs in time and money while keeping control of the estate within the family by estate planning tools like Power of Attorney etc. 4. Orderly Business Succession: If someone owns a business, his Will should provide for a management succession plan, including who should operate the company in the short term. The Will should also provide for a buy/sell arrangement with existing shareholders or outside interests and should refer to an existing Buy-Sell Agreement, if one exists. If no Buy-Sell Agreement exists, consider drafting one so that his wishes regarding the disposition of his business at the time of his death can be followed. 5. Who Shall Receive and When? A properly prepared and executed Will designates beneficiaries of client’s estate and considers alternate beneficiaries in the event the primary beneficiaries
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predecease the client. Often, certain personal things such as jewellery or artwork are designated to pass to certain people. Additionally, parents often desire to have assets pass to their minor children in Trust, with the principal to be disbursed upon the beneficiary reaching a particular age to protect against youthful indiscretions. 6. Selecting Executor, Trustee, and Guardian: An Executor is a client’s personal representative after his death, and is responsible for such functions as: (a) administering the estate and distributing the assets to client’s beneficiaries; (b) paying estate expenses and outstanding debts; (c) ensuring that all life insurance and retirement plan benefits are received; and (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. A Trustee is required if the client’s Will creates Trusts to accomplish more long-term goals, such as providing for minor children or giving to a charity or educational institutions. A client’s Trustee is responsible for managing the Trust’s assets and ensuring that the beneficiaries are provided for in accordance with the provisions of the Trust. Finally, a Guardian is appointed to act as a surrogate parent for the client’s children, ensuring that the children’s best interests are served. Risk associated with failing to plan for Estate transfers
Client’s property transfer wishes go unfulfilled. Transfer taxes are excessive. Transfer costs are excessive. The client’s family is not provided for financially in a proper manner. Insufficient liquidity to cover client’s debts, taxes & costs at death. Time consuming and expensive Probate.
Basic steps of the Estate Planning Process 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 client’s responsibilities. The planner should clarify payment arrangements i.e. how he will be paid and by whom. The client and the planner should agree on how long the professional relationship should last and how decisions will be made 2. Gather client’s information: The financial planner should ask for information about the client’s financial statement. The client and the planner should mutually define client’s personal and charitable goals, understand his time frame for results and discuss, if relevant, how the client feels about risk. He should clearly understand the client’s intentions and values. The financial planner should gather all the necessary documents before giving the client the advice he needs. In a nutshell, he should obtain the following information: i. Financial statement ii. Transfer of objectives: Family & Charitable iii.Intentions & Values
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3. Determine the client’s financial status: The financial planner should analyze client’s information to assess his current situation and the total worth of his estate to determine what he must do to meet client’s goals. Depending on what services the client has requested, this may include analyzing assets, liabilities and cash flow, current insurance coverage, investments or tax strategies. 4. Develop a comprehensive plan of transfers consistent with all information and objectives: The financial planner should offer estate-planning recommendations that address client’s objectives like transfer of assets to beneficiaries with the least amount of taxes. The planner should go over the recommendations with the client to help him understand them so that the client can make informed decisions. The planner should also listen to client concerns and revise the recommendations as appropriate. 5. Implement the Estate Plan: The client and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as client’s “coach,” coordinating the whole process with the client’s and other professionals such as attorneys or lawyers 6. Review the Estate Plan periodically: The client and the planner should agree on who will monitor the client’s progress towards his goals. If the planner is in charge of the process, he should report to the client periodically to review the situation and adjust the recommendations, if needed, as the client’s life changes. Means of Estate Planning Wills and Trusts are common means by which individuals perform their Estate Planning. Other means are Power of Attorney, gifts, partition, succession (when the Will is not made) etc. The Transfer of Property and Mutation are certain tools which help in the execution of these tasks. In the next chapter, we will explain the above mentioned approaches vehicles and their efficacy in executing an Estate Plan.
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