Sheetal and Pavan celebrated their 35th wedding anniversary last month, but something has been weighing on their mind. They looked back nostalgically at the life they had built over three decades. That transition from a newly married couple to a young family was challenging. Both of them juggled careers, family, home, and social responsibilities. They couldn’t imagine going through it again. Somehow, things had turned out better than they had imagined. They owned a nice three-bedroom apartment in the heart of the city. Sheetal and Pavan couldn’t have asked for nicer neighbours.

Two years back, their daughter Nisha had completed her Masters in the USA and settled down into a fantastic job. It felt like all of life’s responsibilities were behind them and their golden years stretched ahead. Yet, there was a niggling insecurity. Although they were in good health, as they aged they wondered how life would pan out, if one of them was left behind.

With age, it’s normal to think about health, financial independence, and mobility. When thoughts turn to worry, one needs to reevaluate options. For Sheetal and Pavan, they felt strong together but not individually. They didn’t want to burden Nisha in the future. Neither of them fancied living in the US permanently. As long as they had each other, they could manage. But what if life took a different turn?

What is Estate Planning?

To put it simply, an estate plan is a set of instructions for what should be done in case you are incapacitated or pass away. Estate planning predominantly focuses on how your assets (financial and otherwise) should be distributed. It also ensures that you receive the care you need in case you are not able to provide for yourself. By creating an estate plan you’re giving yourself the opportunity to make a lasting impact and leaving behind a legacy.

For a successful estate plan, consult a lawyer and a financial planner. A lawyer will ensure that your estate plan complies with the law and is enforced according to your intentions. A financial planner will help you identify your assets, consolidate them, and document them in a financial plan. Your financial plan will act as a record for your family to review.

Who Needs Estate Planning?

Estate planning never crossed Sheetal and Pavan’s minds when they were younger. Over the years, they had broached the topic once or twice without much seriousness. They took comfort in some of the assumptions:

      • My spouse will take care of everything
      • We have only one child, everything will go to her
      • Our family won’t fight over money
      • Our assets aren’t worth so much
      • We have nominees for all our investments

For these reasons, many families opt out of the estate planning process. When we think through these assumptions, we realise that there are some gaps. Losing a spouse can be traumatic. To expect your surviving spouse to shoulder the entire responsibility of consolidating your assets is unfair. Especially, if you could do something today to make it easier for them.

Although Sheetal and Pavan have only one daughter, without a Will or Trust in place – succession laws would apply, and Nisha wouldn’t be the only eligible beneficiary. It’s easier for your family to accept your instructions, than the instructions of someone who is acting on your behalf. A visit to family court shows us that the most innocuous things could lead to family disputes. It is never worth breaking relationships over ambiguities.

Until one sits down to plan their estate, they have no idea how much wealth they have accumulated. Every one of us has an estate. The money in our bank accounts, the cars we drive to work, the house that we live in, the furniture that we’re so used to, the investments we’ve made, the art we’ve collected over the years, the jewellery we’ve bought on special occasions, are all part of our assets. You may not notice your wealth, because you’re not used to viewing everything through a monetary lens. The trouble is, that at some point, someone else will view it that way. And it’s better that you assign values to things that you own.

Sheetal and Pavan avoided estate planning because they had assigned nominees for all their investments. Banks and financial institutions ask you to appoint nominees to limit their liability. The idea is that they transfer the money to your nominee upon proof of death. The nominee is only a custodian of the assets that they receive. They are not legal beneficiaries. Your Will supersedes any nominations.

When To Start Estate Planning?

Most people wait until they retire or for a specific before they consider estate planning. Sheetal and Pavan put off estate planning in their earlier years, but they needn’t have. You don’t need to cross a milestone or age category to get serious about estate planning. So, when should you start estate planning?

Here are a few good reasons to get an estate plan in place:

      1. A family member is dependent on you (could be a spouse, child, sibling, or parent)
      2. You have built assets/created wealth (includes financial savings, property, etc.)
      3. You want to provide for yourself in the event of incapacitation
      4. You’re worried about your health (physical/mental)
      5. There are disputes in your family

These events don’t have to happen after you retire. They could happen for you even in your twenties or thirties or they may not happen at all.

Possible Consequences of Not Having An Estate Plan

Have you stopped to think about what happens if you don’t have an estate plan? The three biggest consequences of failing to plan your estate are family disputes, misallocation of wealth, and loss of wealth. The consequences are serious and the situation is entirely avoidable.

Family Disputes

When there’s no estate plan in place, your estate will be divided on the basis of succession laws. Succession laws are not tailored to your family structure. For instance, succession laws may identify beneficiaries that you never intended to pass on your wealth to. By law, they have a right to your inheritance and may stake a claim. For instance, in certain circumstances, your siblings may also be legal heirs. However, your intent might be to pass your wealth on to your children or spouse. These disputes can take a while to settle. They tend to be costly. And more importantly, families are never able to rebuild these ties once they’ve fought over money.

However, if your intent to distribute your assets is clear. You eliminate the risk of your family fighting beyond your time. What happens instead is that you leave behind a legacy that they can enjoy peacefully.

Wealth Misallocation

Succession laws don’t just determine who gets your money, but how much each person gets. If you more than one child and believe that one of them should receive more financial support, the law won’t recognize this. It is up to your children to balance the misallocation. This kind of experience can stir up negative emotions like entitlement, resentment, and disappointment amongst your children. This could stress ties for years and generations to come. Further, the law will not recognize any causes that you are passionate about as beneficiaries.

Forgotten Wealth

Through the process of estate planning, you set out to organise your affairs. When you comb through your financial affairs with a financial planner, you will collate all your assets. In many families, the breadwinner doesn’t disclose all their financial transactions to their immediate family. Without a record of where your wealth lies, your family may be oblivious to their inheritance. Financial planning focuses on documenting your assets and preparing an easily accessible record of your wealth for you and your family. Through the process of planning, you would also map your assets to specific goals.

Importance of Estate Planning

Estate planning gives you the opportunity to consolidate and collate all your assets. This could provide clarity on what investments you’ve made, why you’ve made them, and what purpose they will serve in the years to come. When you begin consolidating your assets, you ensure that they are productively deployed. Through this process, you could also rebalance your asset allocation. With age you may want to increase liquidity in your estate. Liquidity has a dual purpose. First, it allows you to easily access your wealth in your lifetime – this could mean providing for your day to day expenses, donating to causes of your choice, or spending on your lifestyle and aspirations. The second purpose is that it makes the transition of wealth easier. It is easier to neatly divide liquid and financial assets than physical assets.

The primary purpose of estate planning is to pass on an inheritance. Estate planning ensures this transfer is smooth and free of conflicts. You have the potential to change the lives of your loved ones with a comprehensive and well thought out estate plan. Your estate plan is the legacy that you leave behind.

Another invaluable intangible benefit of estate planning is peace of mind. This is exactly why Sheetal and Pavan wanted to start estate planning. They wanted to ensure that their needs were taken care of through their lifetimes. They wanted to avoid any conflicts with their broader family. And they wanted Nisha to receive her inheritance in a hassle-free manner.

Is it Necessary To Review My Estate Plan?

Sheetal and Pavan sat down with their financial planner and lawyer to set up their estate plan. While they breathed a sigh of relief, they wondered whether this was enough or if they’d have to revisit this in the future. There is enough merit in reviewing your estate plan every few years. Life is fluid and you will want to factor those changes into your estate plan.

Here are a few situations in which you should review your estate plan:

      • Changes in family structure – you should update your estate plan to reflect any changes in your family. This includes the birth of a grandchild or the loss of a loved one. If you miss updating your estate plan, there could be confusion or a misallocation of wealth. This ambiguity leaves room for disputes.
      • Changes in asset holdings – it is important that your estate plan captures your most current asset base. Remember to record any transactions where you dispose of or acquire assets. Failing to capture this, could result in disputes.
      • Relative importance of causes and people – as you travel through your golden years of retirement, your relationships with your family members and society will change. You may find a cause or a charity that you want to support. Or you may want to thank a near and dear family member. Your estate plan is a great way to show how you feel.

There are four tools you can use to plan your estate – gift deeds, joint ownership, writing a Will, and setting up a Trust. Next time, we’ll cover how Sheetal and Pavan used these tools to create a sense of emotional wellbeing for themselves.

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