An Introduction to Estate Planning
Estate planning. Those two words are known to create heart palpitations for many people. To help you, or someone you care about, through the confusion and frustration surrounding estate planning, I am going to provide a series of posts regarding estate planning . . . sort of an Estate Planning 101 for your benefit. If you ever have questions about what is presented here, please contact me.
Why is Estate Planning important?
Surveys indicate only 35-45% of Americans have a plan for their estate. Whatever their reason, it should be clear the cost of estate planning is minimal when compared with the cost of dying or becoming incapacitated without adequate planning.
I think it wise to view estate planning in terms of conservation – action taken to prevent erosion. Elvis Presley left a gross estate in excess of $10 million, yet his heirs realized only about $2.8 million. That represents erosion of about 73%!
Your first reaction may be dismissive because of the scale of the numbers, so consider Marilyn Monroe. When she passed she left behind a gross estate of just over $800,000 yet her heirs received only about $370,000. That’s about 55% erosion on an estate which is today considered average or below average, even after adjusted for inflation.
The common link between these two examples is that neither had adequate estate planning in place. The cost of being unprepared can be devastating to your children and other heirs.
As we begin to address conservation through estate planning, let’s focus briefly on the two most important starting points:
What is an estate?
It may seem obvious, but an estate is everything you own. It’s the value of your business, home, bank accounts, stocks, bonds, IRAs, 401(k)s, cars, furnishings … even the cash in your purse or wallet. It is everything and it is counted up after you pass and labeled bluntly as your gross estate. It is also very important to note your gross estate will include life insurance you own on your own life. That is included not as the cash value of a policy, but the amount of the proceeds. The difference can prove to be an important point later in this series when we discuss taxes.
What is meant by conservation?
Conservation, as mentioned earlier, is action taken to prevent erosion. Erosion is the difference between the gross estate and the proceeds that are actually received by the heirs.
Conservation of an estate is an ongoing process with two primary phases:
- The first phase is management of your estate during your lifetime. For most, this will mean utilizing the skills and expertise of a financial manager to help you throughout your career and into your retirement.
- The second phase of conservation is the transition of your estate when you pass away. The goal here is to establish, during your life, the means, terms and conditions of how your estate will be distributed when you die.
The first phase, managing your money to build an estate I will leave to you and your financial advisors. People work hard to accumulate funds for various reasons throughout their lives and most often, the final goal is to finance a comfortable retirement.
It is the second phase, the estate planning, which will be the focus of these blog posts now that you see the overall point – and importance of – estate planning. Taking it step by step will guide you through some of the confusion and alleviate some of the frustration. Again, as we proceed, if you have any questions, contact me for answers. I’d be happy to help.
Troy
Next up: Part 2 – The Three Key Benefits of Estate Planning.
Common sense applies: Just because I post this and you read it does not make me your attorney and does not make you my client. Every situation is unique and you should always consult an attorney when creating legal documents.