Updated: October 27, 2022
There’s a joke that life insurance agents often tell…
They say that if you attend a wake and you see that the spouse is sobbing quietly, then the departed loved one most probably had life insurance.
But if the spouse is loudly wailing in tears every night, then not only did the deceased had no life insurance, but most likely left a mountain of financial debt to the family.
Kidding aside, the death of a loved one is always hard, and certainly – the last thing that we want to give our family when we die is a financial problem on top of their grief.
Fortunately, there is what we call Estate Planning.
What is Estate Planning?
It is simply, planning for your death. It involves many tasks, all of which ensure that your passing does not put a financial strain on your family.
What are those tasks?
Estate planning has many elements. Lawyers, life insurance agents, financial planners, bank trust officers – each one will have their own list of tasks and requirements.
But for me, these are the most important things you must do:
- Avail a memorial plan, which includes arranging and paying for the expenses that will be incurred at your funeral
- Write a last will and testament, which clearly states how you want to distribute your assets to your family, friends, relatives, and yes, even your creditors
- Assign an executor of your will, which if possible, one who is NOT among your beneficiaries to avoid conflict of interest, thus it’s recommended to hire a trusted lawyer or an accountant for this
Why is it important to do Estate Planning?
There are three main reasons. First, to avoid strain in family relationships. You don’t want your spouse, children (both legitimate and illegitimate), and your other relatives fighting over who gets which, when you die.
Second, to lessen, if not eliminate, the financial implications of your death. You should know that all your assets become frozen when you die, and your family must pay the estate tax to be able to access your money and transfer ownership of your properties.
These assets include all your cash in banks, properties under your name, and all your stocks, mutual funds, and other paper investments.
And third, having an estate plan allows you to leave behind a good legacy to your family. By preparing for your death, you are helping them to move on comfortably with the life you have dreamed and designed for them.
What are the tools used in Estate Planning?
Much of this depends on what and how big your estate is.
But in every case, life insurance is often the best tool to utilize as it can readily pay the estate taxes.
Setting up a trust fund for your children is also a good consideration. An irrevocable trust is considered a gift and has tax exemptions up to a certain amount.
Some people “sell” or “donate” their properties to their heirs or future beneficiaries before they die. While this will be subject to capital gains or donor’s tax, in most instances, the amount is lesser than the estate tax.
However, do remember that there is one problem in prematurely giving your assets to your heirs – they might squander it like in the Parable of The Prodigal Son.
Such is the case of someone I know who “donated” her house to his son, who immediately sold it to pay his gambling debts. Now, she’s living in a rented apartment instead of her dream house. It’s a tragic story, but it happens more often than you think.
Lastly, you can also set up and transfer your assets to a family corporation. This is especially good if you’ve acquired a substantial amount of properties (and businesses). Not only is the transfer tax-free, but you continue to have control over your assets through the corporation.
Later on, the shares of stock may be sold to the intended beneficiaries, which will be subject to lesser tax compared to estate tax.
Preparing for our death is something that we, Filipinos, don’t like to talk about.
I know because I’ve had a hard time opening up the subject of estate planning to my parents, especially with my mother. There will be challenges, and you need to be patient but persistent.
Moreover, remember that there is no one-size-fits-all estate plan.
It should be customized according to your objectives and circumstances, by using a combination of the tools mentioned above and many more.
Lastly, it’s always best to consult a financial planner and a legal expert when it comes to these things because our laws, especially on taxes, change every so often.