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

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 that you worked so hard for.

Estate planning isn’t only for the rich. Without a plan in place, 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.

Not convinced that estate planning is necessary.

Consider these reasons why you should have an estate plan, in order to avoid potentially devastating consequences for your heirs.

Prevents Wealth from Going to Unintended Beneficiaries

If estate planning was once considered something that only high net worth individuals needed, that’s changed: Nowadays 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, both of which produce assets that 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 as to what happens to the property.

That’s because the main component of estate planning is designating heirs for your assets, whether it’s a summer house or a stock portfolio. Without an estate plan, the courts will often decide who gets your assets, a process that can take years and can 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, it is important to establish how your designated heirs receive without third party interference such as the ex-spouse or in-laws.

What if you are a guarantor or guardian to someone in the family yourself such as an aging parent? How do your responsibilities pass onto the next person? Who should this be? Our demise can have a significant effect on third parties that we look after.

Protects Families with Young Children

Nobody thinks of dying young, but if you’re the parent of small children, you need to prepare for the unthinkable. This is where the Will portion of an estate plan comes in. In order to ensure that your children are taken care of, in a manner that you approve of, you’ll want to name their guardians in the event when both parents die before the children 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 would 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.

If you are wealthy and do not want ALL of your estate distributed to your teenage children in ONE go then you need to consider the options of 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 then there are one or two taxes to worry about when you die, mainly to do with 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, if you own assets overseas, this may not be the case. Some countries will charge death duties on your global estate such as Inheritance Tax (US & UK for example) whereas others will levy transfer taxes (Australia) or perhaps capital gains taxes (Canada.) With modern reporting mechanisms, Governments can tax estates easier due to the fact that we are having 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. There are (legitimate) structures that can be created to escape some or all of these taxes that could be inflicted on your loved ones.

Essential to estate planning is transferring assets to heirs with an eye toward creating the smallest tax burden for them as possible. Even with just a little bit of 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 that 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 warring between family members begins. One sibling may think he or she deserves more than another, or one sibling may think that 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 estate 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, and it will go a long way towards quelling any family strife and ensuring that your assets are handled in the way that you intend them to be.

Ensures Business Protection

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

A business can easily die with you if you are the sole shareholder or key person in the company. If your family has lived off the income you achieved then this must be replaced, usually with insurance.

If you are a shareholder in a business, then your shares will pass to your loved ones (usually spouse) when you die but how does he/she gain the value of your shares? There is no value in holding a limited company shares unless the company is willing to pay for 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 and the courts could designate how your assets are divided, or even who gets your children.

The wealthier we become, the more financial problems we leave behind when we die unless we document who should inherit, as well as how and when.