Estate planning is an essential part of successful financial planning. Your 'estate' means everything you own, which are your assets, and everything you do not own, which are called liabilities.
Managing your estate with financial planning
Estate planning is an essential part of successful financial planning. Your 'estate' means everything you own, which are your assets, and everything you do not own, which are called liabilities.
Effective estate planning involves looking at how you intend to dispose of your assets after paying off your liabilities when you pass away. The more complex your finances, the more essential it is that you get expert advice on this specific topic.
These are the four main steps to estate planning:
1. Start by analysing your estate
The best place to start with estate planning is to establish how much you have or do not have.
A proper financial needs analysis will identify and put a value on:
- Your assets, such as properties
- Movable property, such as your furniture and car
- Life assurance policies, shares, trusts and any lump sum from a retirement fund
- Your liabilities: your debts and what you expect to pay out in future support of dependents
- Your tax commitments at death
2. Drawing up a will
If you die without a will, your assets (less your liabilities) are divided amongst your relatives according to a legal formula. However, this may not be the way you want them to be divided, so it’s always best to draw up a will.
You need to revise your will on an ongoing basis because your personal circumstances may change. For example, you may have a child, get divorced or accumulate more assets. These changes can severely impact your financial planning and must be incorporated into your will.
3. The liquidity of your estate
The liquidity of your estate simply means how much cash is available to settle liabilities and meet commitments to dependents.
An estate can take a year or even longer to be wrapped up. During this time you need to make sure that your dependents have sufficient funds to maintain their lifestyle. Ensuring that there doesn't have to be a fire sale of assets to raise money urgently to meet any liabilities, can save your family a lot of emotional and financial stress.
4. Taxation at death
Tax comes in two main forms when you pass away. These are Estate Duty, which is the tax on your assets less your liabilities, and Capital Gains Tax (CGT), which is the tax on any capital gain that you may make on an asset.
Death is considered to be a CGT event. In other words, at your death, all your assets are valued from the date of acquisition and again at the date of your death. Any gains are subject to tax, although there are certain exemptions. Liabilities are not taken into account for CGT purposes.
As you can see, estate planning can be quite a task and one which is quite difficult to manage effectively on your own. To ensure that it fits in with your overarching financial planning, you should get help from a Financial Services Provider (FSP), attorney or accountant.
At Hollard, our financial planning brokers can advise you on how best to structure your insurance to meet the unique needs of your estate planning. Contact us today to find out more.
