Why is Estate Planning Important?

Suzanna De Baca -- Expert Business Source, 2/12/2008 7:45:00 AM

At the beginning of an engagement with a new financial planning or investment management client, I go through an interview process with each individual or couple.  I ask detailed questions in order to collect important information about their financial situation and their goals, and in the course of the interview, I always ask if they have done any estate planning.  Often, clients look puzzled and inquire why estate planning is so important, especially when they’ve come to me for help with investments.

I usually respond by asking clients if having control of their assets during their lifetime is important.  Most say yes.  If that is the case, I question, don’t you want to have some control over what would happen to your assets if you are incapacitated or when you pass away?  Again, most say yes.  Simply put, that is why estate planning is so important:  it allows you a measure of control regarding the future disposition of your financial assets.

Estate planning is a critical element in an individual’s overall financial life; I’m not an attorney, so I work closely with legal practitioners in this arena to make sure that clients coordinate their wills, powers of attorney, and utilize appropriate techniques to help efficiently transfer their estate in a way that helps them to achieve their goals.  I tell clients that it doesn’t make sense to spend all this time creating a financial plan and growing wealth only to have legal complications later with the management or transfer of assets.

Three basic questions:

There are several basic questions to ask when considering an estate plan:  Who do you want to inherit your assets?  Who do you want to act as guardian for your minor children (if relevant)?  Who do you want making medical decisions for you if you're incapacitated?  Who do you want handling your financial affairs if you're incapacitated?
 
An estate plan, in its simplest form, is your last will and testament.  In these documents, in addition to making provisions for the guardianship of your minor children, you determine what you want to happen to your assets after your death.  If you die without a will, this is referred to as being “intestate.”  If you are intestate, the courts will decide what happens to your assets (not to mention your children).

What do I want to happen to my assets?

Many individuals have strong feelings about what they would like to have happen with their homes, vehicles, property, jewelry or valuables, as well as with their liquid assets such as securities in taxable accounts or retirement plans.  If you have a desire to leave specific assets to certain individuals or charitable organizations, it is critical to express these wishes in a will rather than simply conveying the message verbally to loved ones.  While your loved ones may carry out your wishes, sometimes confusion, family conflicts, or misunderstandings occur; a will allows you to express these wishes in a way that is legally binding.  

Who do I want to make health care or financial decisions for me?

In a bit more complicated form, an estate plan also includes provisions for what you would like to occur in the event you are incapacitated and unable to handle your affairs.  Durable powers of attorney for health or financial matters allow you to name a representative who you trust to act in your place if you are unable to make decisions on your own.  You can stipulate your desires regarding medical measures that you do or do not wish to be taken, as well as any details about your care.  For financial matters, you can give a person the legal ability to manage your assets, access your records, pay bills, or otherwise handle your monetary affairs.

Federal estate tax and transferring assets

Finally, more advanced estate planning allows you to put further conditions on how and when your assets will be distributed upon your death.  Depending on the size of your estate, your heirs may end up with a federal estate tax bill.  In 2008, the amount that you may leave to heirs free of federal estate tax is $2 million (this amount will increase to $3.5 million in 2009, at which time the amount may revert to pre-2001 levels or our federal estate tax laws may be revisited).   Certain techniques allow you to either reduce your estate or transfer assets to heirs or charitable organizations, thereby minimizing the amount of federal estate tax due your heirs. 
An estate attorney can help you examine your estate and determine which techniques or methods of reducing or transferring your estate might be helpful or appropriate to help you meet your goals.  Various types of trusts exist for different situations (too many and too complicated to address in this short column).  

In short, creating an estate plan is an important part of your overall financial planning.  A will, powers of attorney, and various estate planning techniques can help you to decide and legally state your wishes for the disposition of your financial assets.  Wouldn’t you rather be the one to make those important financial decisions?

Suzanna de Baca is President of Private Capital Solutions Group.  She is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 7 Hanover Square, New York, NY 10004, (888) 600-4667.  Securities products/services and advisory services are offered through PAS, a registered broker/dealer and investment advisor. Private Capital Solutions Group is not an affiliate or subsidiary of PAS.
PAS is a member FINRA, SIPC.
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice.