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Introduction to Estate Planning

An estate is the total of all personal and real property owned by an individual. Real property is real estate and personal property is everything else such as cars, household items, shares, units, and bank accounts.

Estate planning refers to the process by which an individual or his/her family arranges the transfer of assets to the legal heirs in the event of death or disability of the individual. It includes the distribution of the real and personal property of an individual to his/her heirs.

One of the goals of an individual will be to protect the needs of the loved ones during lifetime and after his death. This can be achieved by way of estate planning by distributing assets among his beneficiaries. An estate plan aims to preserve the maximum amount of wealth possible for beneficiaries and flexibility for the individual prior to his death.

Objectives of estate planning:

1. Asset transfer to beneficiaries: Every individual wishes that his/her accumulated wealth should reach the hands of the beneficiary of his/her choice. Beneficiary can be his/her children, parents, friends or any other person.

2. Tax-effective transfer: To ensure least tax deduction on such transfer of wealth

3. Planning incase of disabilities: It ensures smooth functioning of asset management within the family incase an individual gets disabled.

4. Time of distribution can be pre-decided: Individuals having minor children may wish to transfer the assets only after the children attain a certain age, to avoid misuse that may happen due to lack of maturity and discretion.

5. Business succession: Organized succession or winding up can be defined incase of an individual handling business

6. Selection of trustee or guardian or the executor: An individual needs to be appointed to carry out the functions like –
   • Distribution of assets to the beneficiaries as per the individual's wish
   • To pay testamentary and funeral expenses
   • Applying for a probate
   • Paying all the expenses and outstanding debts
   • Ensuring all the benefits due to the deceased, such as life insurance, pension, and other benefits are received
   • Arranging for filing of tax returns

A financial planner performs the following steps in estate planning -

• Relationship establishment
• Information gathering
• Determining the client's financial status
• Draw out a plan of transfer
• Implementing the plan
• Regular reviewing of the plan

Tools of estate planning:

There are various tools that a financial planner can adopt for getting an estate plan in place. Some tools are effective during the lifetime of an individual while some after his/her death.

The following figure shows the tools used for estate planning by transferring the assets to the beneficiary, with or without restrictions, during the lifetime of an individual –

The following figure shows the tools used for estate planning where the transfer of assets to the beneficiary becomes effective after the death of an individual –

Risks and drawbacks involved in estate planning:

• An individual's goals or wishes on how his assets are to be distributed may not be fulfilled
• Huge costs of transfer and taxes
• An individual's family may be in financial distress if the process id not properly planned
• There may be insufficient liquidity to meet client's debts an taxes
• Time consuming legal procedures