Part I: What is it? Why do I need it?

Everyone has an estate, regardless of size: it is just the total of your assets and liabilities at death.  The purpose of estate planning is simply to help ensure that what happens to your estate at death is what you intended to happen – in the most cost-effective and tax-efficient way possible. 

This series is not meant for the very wealthy, but rather for the middle class investor, who may have thought that they had no need of any estate planning since their estate was under the $5 million federal estate tax exclusion amount.  In fact, most estate planning involves very basic issues and documents, not complex and expensive trusts.

It's also important to know that you already have an estate plan – if you haven't created one of your own, the state has one for you.  This is defined in the intestacy laws of every state, and is likely to be a far cry from what your wishes would have been.  Distribution of the estate will be governed by marital and family relationships, and if there are none, the property will revert to the state – again, probably not what you would have wanted.

Estate planning involves not just property, but also decisions involving matters such as guardianship of minor children, care of disabled relatives, charitable giving, health care – and, not least, taxes.  I once led a worksite seminar on estate planning, and when I asked the 30 or so people present, "How many of you have a will?", only a few hands were raised.  When I then asked "How many of you have minor children?", almost half the hands in the room shot up.  "So," I asked, "who will get your kids if you and your spouse both die?"  Despite the difficult discussions that can ensue when a husband and wife try to decide on a guardian, they are still preferable to having a court decide this.


Of course, transfer of property at death is a key component of estate planning. Given all of the costs and complications involved in dying, it is important that anyone with any substantial assets obtain the assistance of a Certified Financial Planner™ professional – as well as the help of an attorney and accountant.   However, everyone should have at least a basic estate plan, partly to make sure you have up-to-date basic legal documents: a will, living will, durable power of attorney, and health care proxy.  We will discuss these documents in a future column.


Estate planning is a key part of the financial planning process throughout life, and consists of three phases: estate accumulation, conservation and distribution.  Once you choose a Certified Financial Planner™ professional, estate planning should follow the same six steps as the financial planning process overall:


1. Establishing and defining the client-planner relationship.

You should understand the services you are being provided, and define each of your responsibilities. You should also understand fully how your planner will be paid and by whom, and agree on the structure and duration of your professional relationship.


2. Gathering data, including goals and needs.

This will include a review of existing financial plans, legal documents, insurance, investments and taxes, along with a discussion of your personal goals and specific objectives.


3. Analyzing and evaluating

Your Certified Financial Planner™ professional will review the collected data, and compare where you are now to where you should be with regard to your goals and needs.


4. Developing and presenting estate planning recommendations and/or alternatives.

Your planner will develop an estate plan, possibly in conjunction with other professionals, that will fully address client goals and provide for all three phases as necessary.


5. Implementing the estate planning recommendations.

You and your planner will need to  agree on how your recommendations will be carried out, preferably with him acting as quarterback for the planning team, coordinating the efforts of all involved.


6. Monitoring the financial planning recommendations.

Because your needs and situation will change, and laws change, the estate plan will need to be revisited on a periodic basis.  This could be part of your annual review with your Certified Financial Planner™ professional.


Next time we'll take a look at the basic estate planning documents, and explain why you need them.

Estate Planning Continued: Part I, Part II, Part III, Part IV, Part IV

FPA member Tim Sobolewski, CFP®, is President of The Financial Planning Center, Amherst, N.Y.


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