Our loved ones and the financial impact of our demise should be the primary consideration for estate planning. 

This article is to explain the reasons why estate planning is so important!

It seems like many people devote more time to planning a vacation (pre-Covid-19), what car to buy, or even where to eat dinner than they do decide who will inherit their assets after they’re gone.

Sure, estate planning isn’t as fun to think about as booking a trip or checking out restaurant reviews. But without it, you cannot choose who gets everything you worked so hard on.

Estate planning isn’t only for the rich. Without a plan, there could be a long-lasting impact on your loved ones, even if you don’t have a pricey home, large pension, or valuable art to pass on.

I am still trying to convince you that estate planning is necessary.

Consider why you should have an estate plan to avoid potentially devastating consequences for your heirs.

Prevents Wealth from Going to Unintended Beneficiaries

Suppose estate planning was once considered something that only high-net worthviduals needed. In that case, that’s changed: Many families need to plan for when something happens to a family’s breadwinner (or breadwinners).

After all, you don’t have to be super-rich to do well in the stock market or real estate, which produce assets you’ll want to pass on to your heirs. Even if you’re only leaving a second home behind, if you don’t decide who receives the property when you pass away, you won’t have any control over what happens to the property.

That’s because the main component of estate planning is designating heirs for your assets, whether a summer house or a stock portfolio. Without an estate plan, the courts will often decide who gets your help, a process that can take years and get ugly.

After all, a court doesn’t know which sibling has been responsible and which one shouldn’t have free access to cash. Nor will the courts automatically rule that the surviving spouse gets everything. And what if your spouse has immediate bills to consider, such as a mortgage payment or school fees?

With a blended family, establishing how your designated heirs receive without third-party interference, such as the ex-spouse or in-laws, is essential.

What if you are a guarantor or guardian to someone in the family? Who should this be? Our demise can affect third parties.

Protects Families with Young Children

Nobody thinks of dying young, but if you’re the parent of small children, you must prepare for the unthinkable. This is where the Will portion of an estate plan comes in. Ensure that your children are taken care of in a manner you approve, and you’ll want to name their guardians if both parents die before they turn 18.

Without such a Will, the courts will again step in. And this time, it’s not to determine who gets a piece of real estate or artwork. It’s who will raise your children and where they will live.

Also, how do you intend your children to receive your assets? If your children are minors when both parents pass away, the estate must go into Trust until the children are old enough (18) to receive – who would you like as your Trustee? You can choose rather than leave it to the bureaucrats to decide.

Suppose you are wealthy and want to avoid ALL of your estate distributed to your teenage children in ONE. In that case, you need to consider distributing sensibly over time and when the children are mature enough to inherit.

Spares Heirs A Big Tax Bite

If you live in Hong Kong, there are one or two taxes to worry about when you die, mainly to do with the property. When your heirs receive property or land, the title has to be changed, which incurs a stamp duty, and the property or land revenue may incur extra income tax, but there are no others.

However, this may not be the case if you own assets overseas. Some countries will charge death duties on your global estate, such as Inheritance Tax (US & UK, for example). In contrast, others will levy transfer taxes (Australia) or perhaps capital gains taxes (Canada.) With modern reporting mechanisms, Governments can tax estates easier since we have to tell them what we own.

Estate planning is all about protecting your loved ones, which means, in part, giving them protection from the taxman. Some (legitimate) structures can create an escape from some or all of these taxes that could inflict on your loved ones.

Essential to estate planning is transferring assets to heirs to create a minor tax burden. Even with just a little estate planning, couples can reduce much or even all of their capital gains, transfer taxes, and death taxes – inheritance tax in some countries, which can get very pricey.

There are also ways to reduce the income tax beneficiaries might have to pay in some countries. But without a plan, the amount your heirs could owe the relevant taxman could be quite a lot.

Eliminates Family Messes When You’re Gone

We’ve all heard those horror stories that when someone with money dies, the war between family members begins. One sibling may think they deserve more than another, or one may feel she should be in charge of the finances even though she’s notorious for racking up debt.

Or perhaps an ex-partner believes they are entitled to some of your estates to continue looking after your children. Such squabbling can get ugly and end up in court, with family members pitted against each other.

It’s yet another reason why an estate plan is necessary. This will enable you to choose who controls your finances and assets if you become mentally incapacitated or after you die. It will go a long way towards quelling any family strife and ensuring that your assets are cared for in the way you intend them to be.

Ensures Business Protection

If your income is solely payable through your business, how does this continue without you? How do your loved ones receive value? Can the company continue without you? Who should remain in charge? Are creditors involved?

A business can quickly die with you if you are the company’s sole shareholder or critical person. If your family has lived off the income, you achieved, this must be replaced, usually with insurance.

If you are a shareholder in a business, your shares will pass to your loved ones (usually your spouse) when you die, but how do they gain the value of your claims? There is no value in holding a limited company shares unless the company is willing to pay them back. Again, usually, insurance and the instructions/options for exchange sit within the Shareholders’ Agreement.

The Bottom Line

Simply put: if you want your assets and your loved ones protected when you no longer can do it, you will need an estate plan.

Without one, your heirs could face huge tax burdens. The wealthier we become, the more financial problems we leave behind when we die; unless we document who should inherit and how and when.

Please feel to get in contact with us at www.careysuen.com.