Basics of Estate Planning

So, what are the basics of estate planning?


Most people think estate planning is about rich people finding a way to avoid estate taxes when they pass away.



And, that's certainly part of it for some people (not most people though). The reality is that estate planning is not just for the rich. It is for everyone. It's for you and your family too.


There are many reasons that almost everyone needs a will; durable power of attorney; health care POA; and living will. Many would benefit from a living trust as well.


One of the basics of good estate planning is the requirement for a comprehensive view of your entire financial situation. Not just your tax situation.


Of course, there are many ways to "solve" your tax problem that would not be a good idea for you. For instance, you could simply give everything you own to charity. That would completely wipe out all of your tax liabilities. Of course, it also might leave you and your family destitute. Obviously, not good financial or estate planning.


That's an obvious mistake no one really would make. But, people commonly make other irrational financial decisions simply to avoid taxes.


Have you ever heard someone say something like: "my wife got a new job and now we're worse off because it pushed us into a higher tax bracket."


I've heard people say that many times. It's never true. They may be worse off for many reasons. Even financially. Maybe they had to buy a second car or buy new clothes or pay for childcare and, in the end, the extra income was offset by all the additional costs the job entailed.


Home tax

BUT, they are not paying more in additional taxes than their wife is making. Impossible. For that to be true, you'd have to be paying taxes at a rate above 100%. Anyway, we are off on a tax tangent. If that's where you want to go, check out Estate Planning and Taxes. To find out more about the use of trusts to potentially avoid estate taxes, read Credit Shelter Trusts.


So, what is estate planning about for you? The basics of estate planning are the creation, preservation, and utilization of your financial resources to maximize your goals. Yes, it really is all about you and what you want to do.


Which for most means that the goal of their estate planning is to provide the maximum support and security for their family during their lifetime and after their death.


Still, if you are creative, you can use your money to do the things you want to do and still provide for your family. You can improve your quality of life and at the same time leave a substantial estate to your heirs. The key to this is making wise investments in assets that appreciate (i.e. property you love; businesses you love, etc). So, you really can have your cake and eat it too.


That's the pleasant part of estate planning. The part that joins your desires with your responsibilities.


Unfortunately, there is a less pleasant matter to seriously consider. That is the eternal tension between the long-term and short-term objectives of estate planning.


Our short-term goals are to provide for the current needs of each member of the family.


At the same time, long-term goals have to also be considered and "resourced." If you become disabled, retire or die, how will your family be supported? And what other long-term goals do you want to achieve? Maybe you want to leave a substantial asset to a charitable cause when you die.


The tension between short and long term financial goals is unavoidable because virtually every dollar spent on current support and maintenance (your standard of living) is one less dollar that can be invested for long term goals. So, to a large extent, it is a "zero-sum" game. You've got to find the right balance based on your income, desires, and unique family needs.


To create an effective estate plan you have to find a way to mesh your short and long term goals together, so that neither is neglected. You have to plan and provide for both the present and the future.


In a vacuum that seems simple enough. But, in reality, it is not. The problem is that sacrifice is required in the short term in order to save and invest for the long term.


Unless you are already rich, you probably will need to constrain your standard of living in the short term in order to invest current income into accumulating capital. And capital is the key to wealth, see Estate Planning 101.


We have lots of information on this site about technical (and advanced) methods of estate planning. But, this page is about the big picture.


The first place to focus your efforts is in obtaining the appropriate level of the following assets. These are the five essential assets you need to obtain to appropriately provide for yourself and your family. They are a:


  1. Home
  2. Income
  3. Disability Insurance
  4. Savings Account
  5. Life Insurance


Home is the place you live. Income is usually obained by working a job. Disability insurance is needed to protect your earned income if you become unable to work due to illness or injury. The savings account is a reserve fund which can be immediately used if an emergency arises. Finally, life insurance will support those who depend on you if you should die.


If you don't already have the five things listed above, your immediate, basic estate planning goal should be to obtain these five essential assets.


However, the decisions you make in pursuing them will dramatically affect your long-term objectives.


Your income and your home will establish a standard of living. If that standard of living is too high, it will impede the building of your estate.


The type of home of you choose will put you into a certain neighborhood. You may feel the "need" to hire a lawn care company and a maid. You will feel a need to "keep up with the Jones'" next door. And, depending on what your "Jones'" are like – keeping up with them could suck out all the income that otherwise might go into acquiring estate building assets (or capital) and investments.


How many of us now feel we "need" FIOS TV and internet, (along with cell phones, blackberries, laptops, ipod's, etc) when our parents survived without the internet or even cable TV….


Woven into the fabric of this site is the central estate planning conflict between now vs later. How much can and should we sacrifice (in our standard of living) now in order to save and invest for our future?


It's easy to say: "Save Money". But, it's much harder in real life to do that. Do we sacrifice our kids piano lessons? How about the gym membership? Hmmm. Not so easy....


So, basic estate planning, at its core, is really the thoughtful, intelligent and difficult prioritizing of our resources so that we can most effectively achieve both short and long-term financial goals.


Simple procrastination is the #1 factor that leads to poor estate planning. Accumulating capital that produces income is the key to financial independence and a healthy estate. And, of course, it takes time to build up a big enough "nest egg."


Time is money -- at least when it comes to developing and implementing your estate plan. So, please don't delay any longer.


Now that you've read about the basics of estate planning, you should get into more specifics at Help with Estate Planning and Estate Planning 101.


For a quick estate planning check-up, read our Estate Planning Checklist.

Of course some people have unique estate planning issues. Here are some specific estate planning considerations for the elderly and disabled.


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--by Beth Heikkinen
Marquette, Michigan
I just want to thank you for this site. It answered my questions. I think many people that do research on the net take it for granted and when they find what they are looking for they forget "someone put time, money, etc into providing me with this information."

Thank you!


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