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What is estate planning?
Here are a couple of text-book definitions:
"Estate planning is the act of preparing for the transfer of a person's wealth and assets after his or her death. Assets, life insurance, pensions, real estate, cars, personal belongings, and debts are all part of one's estate."
"Estate planning is the collection of preparation tasks that serve to manage an individual's asset base in the event of their incapacitation or death, including the bequest of assets to heirs and the settlement of estate taxes"
Think about it - every time you advice your client to make investments in joint names or to add a nominee for all bank deposits and mutual fund holdings, aren't you doing a bit of estate planning? Aren't you offering this advice for smooth transfer of assets after the lifetime of the owner? What you are doing is however limited to transactions you execute in financial assets that you intermediate on. What you now need to do is to broaden the scope to offer more holistic estate planning services, encompassing all the assets as well as liabilities, on the basis of a broad understanding of the legal framework covering transmission of wealth. You don't need to be a legal expert, but you should certainly make yourself aware of some of the common issues that need to be tackled in estate planning.
Estate planning is not only for ultra HNI families
There is a myth that estate planning means setting up complex trust structures and therefore, this is a service that is meant only for ultra HNIs. Regardless of where an individual falls in the financial spectrum, it is a wise idea to consider some form of estate planning. Why? Just open the newspapers or visit any of the overcrowded court rooms; crimes that occur due to arguments over who are the intended beneficiaries and long protracted legal battles over property disputes occur in every strata of society.
Even when there are no ugly family disputes, it would be easy for grieving spouse and family members to miss claiming benefits because they were unaware that they were entitled to receive. An estate plan ensures the family can easily ascertain what assets the individual has left for them.
It is also important to know that without an estate plan, the assets will be divided according to the law. With complicated family structures, it could mean that some members are not provided for if they don't fall into the rules for the Hindu succession act for example. If individuals have an intention to donate some part of their estate to charitable causes after their lifetime, then an estate plan will ensure that this is executed. With the care of a disabled family member or a minor child, having an estate plan creates some peace of mind that there are contingency measures in case of unforeseen events.
Every family that has wealth which needs to be passed on to the next generation, can benefit from estate planning advice. For some, it may be one ancestral property that needs to be passed on in an efficient manner to multiple heirs. For others, it may be a combination of inherited wealth as well as self created wealth - and the two may have very different sets of beneficiaries. Some may have most of their wealth in a family business - which needs to be carefully thought through in terms of finding solutions that enable the business to continue to be run by the best people yet owned by beneficiaries who may or may not be the same. Some may need complex solutions, others may need simple ones. But, almost all mass affluent families need sound advice on estate planning to avoid disputes at a later stage that often arise among beneficiaries. This becomes all the more relevant if the beneficiaries your client has in mind are not the same as the laws would normally recognize, in the absence of a will. Your job as an advisor is not only to help your client protect his assets during his lifetime, but also beyond.
What you need to know about estate planning
This knowledge series is not aimed at making you a legal expert on inheritance laws. But, it will give you a broad framework to understand the critical aspects that you must know to enable you to guide your clients to plan their estates carefully, and will help you understand where you need a lawyer's help and where perhaps you don't.
Here's what you can look forward to in this knowledge series over the next few Saturdays at Saturday School:
Forms of estate planning: While a will is the first option that many think of when it comes to estate planning, there are also several others. Transferring wealth to family members during the lifetime is another method. Joint ownership where spouses own equally ensures that the surviving spouse automatically inherits. Revocable trust is where a living trust is created and assets are transferred to trust. So there are several options for an estate plan. It is up to the individual to consider their family dynamics to see what is suitable. As an advisor, you should be able to guide your client towards the optimum option for him.
Common mistakes in estate planning: Many families make significant blunders due to lack of familiarity with succession laws in the country. Many don't understand what the role of a nominee is and is not. While many investors now understand the importance of creating a will, not many are aware of how to avoid simple blunders that can negate the entire effort. As an advisor, you should be able to help your client avoid at least the basic errors that many inadvertently make.
Trusts and wills: These are the two most commonly used forms of estate planning. As an advisor, you should know when to use trusts and when not to, and the role of wills and trusts in estate planning.
Getting started with trusts: If you conclude that a trust structure is appropriate for your client, you need to know how to get started, what you can accomplish yourself, where you need outside expertise, and an overview of the process to enable you to ensure that it is being set up the right way.
Business succession planning: When a lot of the family's wealth is in a family business, you need to go much beyond wills - you need to get the family to think through and implement a sensible business succession plan that ensures business continuity as well as transfer of beneficial interest in the manner desired. You need to understand the framework of what typically goes into business succession planning so that you can facilitate the right conversations in the family and you need to know when you should rope in a legal expert and when it may not be required.
NRI issues: Estate planning for NRIs adds a different dimension of complexity altogether. There are exchange control regulations to be familiar with, in addition to the laws of the land.
Estate duty: Finally, you need to be familiar with the current conversations around estate duty - which some think will stage a comeback into our country. You need to understand estate duties in key global markets to get a sense of why there is a growing thought in India to bring back estate duty. You need to understand how client wealth will be impacted should such a tax come back in India and what can be done to minimize its impact.
So, get ready to tune into Saturday School every Saturday over the next few weeks, as we take you step by step, through the different aspects of estate planning that you should become familiar with. Knowledge of estate planning will enable you to have much richer client conversations and will enable you to demonstrate tangible value add which goes far beyond portfolio performance reports.
Are you making full use of Saturday School's 360 degree knowledge resources?
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