To ensure that our financial legacies are handled appropriately, it is essential to grasp the basics of estate planning. This series seeks not just to offer you piecemeal financial information, but a broad roadmap to the diverse labyrinth of personal finance from a Christian perspective.

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Everyone is destined to die once, and then to face judgment.

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When we breathe our last and meet our Maker, we leave behind the financial assets and liabilities we have accumulated over the course of our lives. That forms our estate.

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The Importance of Estate Planning

Estate planning is important because the estate we leave behind has to be properly disposed of. Outstanding debts have to be repaid, and the residual assets have to be properly appropriated or distributed.

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Even though the succession and inheritance laws in the society you live in provide a default arrangement concerning how your estate will be distributed, there are several advantages of having a proper estate plan in place.

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Distribution of Assets According to Your Intent

The foremost purpose of estate planning is that your assets will be distributed according to the way you intend it. Without proper documents in place, intestacy laws will mandate a default distribution of assets when you are no longer around.

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For example, if you are survived by your spouse and children, intestacy laws may dictate that your spouse receives half the assets, with the remaining half distributed equally among your children. But what you want may be for your spouse to receive everything, with the assets distributed to your children only after your spouse passes away.

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Then there are common disaster clauses which can throw a wrench into the entire arrangement. Intestacy laws take into account who are the most likely recipients individuals would designate. Those same individuals are the same people you are most likely to travel with, dine with, and therefore die with.

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If you perish within the same disaster as your beneficiaries, the distribution can go terribly awry. For example, if a man perishes with his younger wife in the same car accident, his wife’s parents may receive 75% of the estate while his parents receive only 25%. This when it seems fair that both sets of parents should receive half the estate.

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A proper estate plan makes clear who the estate should go to, and avoids unnecessary tussles among family members and business partners.

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Guardianship

While guardianship may not be the first thing that comes to mind, it is perhaps the most important. Depending on the laws applicable in your jurisdiction, custody of children may be assigned to uncles, aunts of grandparents if both parents pass away.

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But the default may not necessarily work in your situation. Your parents may be infirm and unable to care for your children properly. Your siblings may be undergoing family turbulence and not be able to offer an acceptable environment for your children.

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By nominating the guardians, you can select the best person who is both willing and able to nurture your children in your absence.

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Financial Optimisation

Estates are subject to inheritance taxes and estate duties whose details depend on the laws applicable in your society. Because of the methods of calculation, certain distribution configurations may be more tax efficient than others.

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Indivisible assets such as your house have to be liquidated before the proceeds can be distributed. These attract various transaction costs. If you have a sizable estate, it may be more financially efficient to allocate these assets to individual beneficiaries than to have them liquidated for distribution in cash. In this way, you can save substantial amounts of legal and administrative costs.

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Time Savings

The processes involved in testacy versus intestacy are different, with intestacy typically being a longer process.

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In a time of distress, it will be intolerable for your dependant beneficiaries to have to wait for months on end before they can access the proceeds of your estate. They need the money to pay for their daily expenses, school fees and to settle the home loan. Elderly parents and disabled children need the money to pay for medical treatment and specialised care.

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Putting in place an estate plan makes the process smoother for them while they mourn and adjust to your demise.

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Funeral Arrangements According to Your Intent

Some believe that funerals should be grand in order to convey respect and piety towards the deceased; others believe that funerals should be modest so that the money can go towards benefitting the living. Instead of leaving it to the discretion of those arranging for your funeral, you may wish to decide beforehand.

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More importantly, if there is a question over your faith or the manner in which your body is to be returned to the earth, whether through cremation or burial, you should specify these before your passing so that there will be no tussle over such sensitive matters.

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How to Put in Place an Estate Plan

Because of the legal complexities involved, it may be advisable to engage an estate planning attorney, who will walk you through the process using an estate planning checklist, worksheet or questionnaire. The attorney can also help you compile the necessary estate planning documents.

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If you wish to do-it-yourself, the following is a step-by-step process you can adopt:

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Step 1: Assemble an Inventory of Financially Significant Assets and Liabilities

Start by compiling a list of financially significant assets, both movable and immovable. This should include everything you own that is of significant value – money in your bank accounts, your house, car, insurance policies, investments, retirement assets, jewellery, collectibles, businesses, rights and licences.

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Then compile a list of liabilities. This should include everything you owe – the mortgage you undertook and the debts you owe.

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This overview will allow you to compute the cash value equivalent you have available for distribution in the event you pass on.

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Step 2: Determine Your Beneficiaries

Make a list of your intended beneficiaries. This may include your spouse, children, parents, siblings, friends, church and charities.

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Assess their capability for handling the assets you intend to bequeath to them. For example, if you intend for one of your children to succeed your business, it will be wise to take into account their abilities to take the business forward.

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Then assign them the various components of your distributable estate, in the appropriate percentages as you intend.

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Step 3: Decide the Method of Transfer

Estate transfers can occur before or after your passing. The laws applicable in your jurisdiction will determine the combination of methods you have to adopt to execute your intended distribution. The following are methods you can adopt:

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Joint Ownership

When an asset, such as your house, is jointly owned, ownership will pass to the surviving joint owners upon your passing. Joint leases will be similarly treated, although the details will defer depending on whether it is a joint tenancy or tenancy-in-common.

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Gift

While you are still alive, you can give your assets away. The title of ownership transfers to the recipient, allowing him to benefit from appropriating the asset earlier.

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Trust

Your assets can be placed in a trust under the management of an appointed trustee, who will manage the assets in the trust fund according to the instructions you put in place as the settlor.

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There are different types of trusts: inter vivos or living trusts, testamentary trusts, revocable trusts, and irrevocable trusts. The regulations applicable differ depending on the type of trust you set up.

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Last Will and Testament

This is a written document where you specify your intended beneficiaries, guardianship and funeral arrangements.

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Upon your passing, your appointed executor will present your will to the court to obtain probate, and your trustees will execute your will.

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Nomination

Certain assets, such as pay-outs from life insurance policies, can be distributed by means of nomination. This represents an affordable legal means of distributing these assets where this feature is available.

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Living Wills and Power of Attorney

While estate planning typically focuses on estate disposal after death, it is possible for an individual to lose his capacity to manage his estate before death. This occurs when an individual becomes incapable of exercising rational judgment due to terminal illness, loss of consciousness, diminished mental soundness, or severe physical incapacity.

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Even as you continue to survive, you need someone to look into your welfare and to make decisions concerning your estate. To do so, the following are methods you can adopt:

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Living Will

If you wish to decide on critical issues instead of leaving it to the discretion of your loved ones, a living will allows you to specify your decisions beforehand. This includes whether to employ extraordinary life-sustaining treatments in order to prolong your life, such as resuscitating you if you are brain dead.

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This is also known as an advance medical directive.

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Lasting Power of Attorney

A lasting power of attorney confers your appointed donees the right to make legal decisions on your behalf. These powers are typically segmented into two broad areas – decisions concerning your personal welfare and medical care, and decisions regarding your property and personal affairs.

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Review Your Estate Plan Regularly

After you have put in place your estate plan, make it a point to review your plan regularly. This is especially important when there are significant changes to your life circumstances. For example, you may start a new business after your initial estate plan was crafted. Or you may be blessed with such substantial abundance that your original list of assets becomes obsolete.

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Learn More

This website contains many articles that are useful in deepening your financial knowledge. Once you have grasped the basics of estate planning, read more on:  

In order to leave a meaningful estate to our beneficiaries, we must manage our finances well while we are living. The Financial Machine is a proprietary personal financial model built on Christian principles. Focused on equipping individuals to handle the practicalities of personal finance, it is simple but powerful.  To learn more, attend our Workshop, visit our Facebook page or obtain a copy of The Financial Machine (to be released in June 2020).