Estate Planning 101

Once you have developed the determination to develop an effective estate plan and have established your estate planning objectives; what's next?

The next thing to do is evaluate your financial situation. What are your assets and liabilities? This is "Estate Planning 101." Before you can decide what to do with your assets, you obviously have to know what you have to work with.

And, it's not as simple as just listing your assets and their market value. That will tell you little. What you really need to know is how much income your assets will provide if you were to become disabled; retire or pass away. Those are the key events you have to plan and provide for.

Consider your life insurance, home, disability insurance, employer benefits, government benefits like social security, medicare, etc as well as your capital. Capital (for purposes of estate planning) includes such things as:

Planning of estate
  • Savings Accounts
  • Stocks
  • Bonds
  • Mutual Funds
  • Real Estate
  • Businesses
  • In short, any asset that increases in value or produces income.

It is complicated, but you need to think about and "run" the relevant numbers for each possible situation (death, disability or retirement).

Remember to also factor in estate administration costs, estate taxes and any other taxes on the potential income. These costs and taxes should be subtracted from the value of your potential estate to determine how much property and income will be left to your surviving family or heirs.

You may need the help of a financial planner. If so, get it. It will be well worth it in the long run.

In the end, you will likely determine that you are short of what you would like to have. You will find out that you need to obtain more capital.

Nothing is more central to development of an adequate estate than accumulation of capital. As discussed at Effective Estate Planning, accumulation of capital (referred to as principal in some contexts) is our essential challenge and holds the key to building up a nice estate.

Capital is the key to achieving financial freedom and financial independence.

Because the growth of capital is so important to your long-term estate, it should only be spent as a last resort. As capital (principle) is depleted, so is its income-producing capacity.

This depletion can quickly snowball if the income drops below what is needed for living expenses. You then pull out more and more capital (or principle) for living expenses. As capital gets smaller so does the income it produces. It can become a vicious circle. Your entire estate can quickly evaporate.

Of course, having said all that, capital should be used to invest in things that you judge will produce a higher return of income than the capital is currently returning. However, be careful here. A new plasma TV, for instance, is extremely unlikely to be a “good investment.”

Most of us need more capital than we realize, largely because we may have longer to live than we realize. You have to plan to live a long life (past life expectancies) -- in the lucky event that you do :) So, your investments and capital might well need to be around until you or your spouse reaches 100 years of age.

If you remember one thing from this page it should be this: Capital is King. Oh, and also don't forget that anyone can create capital -- even with a low cost investment. Jim Roberts has some great ideas about how to create a valuable business selling insurance or building an on-line business. Check out Better Than Insurance Jobs.

Now that you have mastered Estate Planning 101 and know what you have to work with, you probably want to read about some specific estate planning techniques at Effective Estate Planning.

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Marquette, Michigan
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