How Estate Planning Works

When planning their finances, the checklist for most individuals would include the following - saving up for a house, their kids’ education and marriage, periodic vacations, a car, and provisioning for medical expenses.

Planning for one’s golden years was often taken for granted with the assumption that children would take care of their needs in their old age. While there is now increasing awareness around planning for one’s retirement, an area which still remains largely ignored is estate planning.

So, what is estate planning and why is it important?

Estate Planning refers to that section of financial planning which decides how the assets or wealth of an individual must be distributed systematically after their death.

This process involves planning wealth distribution in a manner where taxation can be minimised and assets are distributed to the designated heirs. It can be done either through a will or setting up a trust, and is especially critical for those individuals who have multiple heirs and a large estate to be distributed.

While estate planning does involve various fees and charges, the downside of not planning for one’s estate is that the decisions made on your behalf may not be the best for your family or what you may have desired.

How should you plan your estate?  

Planning an estate can be done on your own, with the help of a financial planner or by taking into confidence a trusted advisor. Here’s a five-step process which is broadly followed by financial planners, and can be modified according to who is planning the estate -

a) Getting to know the client
This step involves building a relationship with the client to understand their background and family setup, and why and how they wish to proceed with their estate planning.    

b) Establishing value of estate
A simple will which bequests everything to a single person may need not establish the value of the estate, but in most cases, there is more than a single beneficiary. In such instances, the value of different assets is recognised to arrive at a cumulative value, which is then used to plan the estate.  
        
c) Chalking out costs
Planning for one’s estate is not an inexpensive affair because it needs to take into account several other costs that one needs to incur. These include medical expenses, fees to be paid to the executor, attorney, accountant etc. There are also taxes and other administrative costs that one must consider.

d) Make a plan for transfer
There are several aspects to planning an estate - these include tax planning, budgeting for expenses, and generating further income from capital. The manner in which assets are to be divided or transferred will depend on these goals, which will help in choosing the asset classes and securities which must be considered.  

e) Periodic reviews
Once estate planning for an individual is completed, it must be ensured that the investments are reviewed periodically to ensure that its performance is in line with its stated objectives.  

Now that we have established the process for planning an estate, let us acquaint ourselves with a few terms which will be useful in this process -  

a) Beneficiary
The person who is set to receive the benefit or bequest from the estate 
  
b) Heir
An individual who is entitled to a distribution of property or an asset in the absence of a will. A beneficiary and a heir are not synonymous, although they may refer to the same person in some instances

c) Testate
The person who leaves behind proper documentation of how their estate will be distributed after their death is said to die testate

d) Intestate
A will status of intestate means that you don’t have a valid will. It means that the person has not left behind any documentation of how their estate needs to be distributed after their death. In such an instance, the legal system decides how the estate will be distributed

e) Partial Intestate
A partial intestate means that a part of the estate is not covered by a will

f) Executor
The person who has been named in the will, and appointed by the court to carry out the terms of the will, and administer the decedent's estate.

g) Administrator
The individual or corporate fiduciary who has been appointed by the court to manage an estate in the absence of an executor.

h) Probate
The review of a will by the court to determine whether it is valid and authentic. It also refers to the general administering of a deceased person’s will or the estate of a deceased person who does not have a will.  

In India, the Hindu Succession Act 1956 deals with the matters of succession for a person who has died intestate and is a Hindu by religion. The Indian Succession Act 1925, meanwhile, deals with succession issues for non-Hindus who have died intestate and applies to Indian-origin Christians, Jews, Parsis and individuals who are married under the Special Marriage Act.