Broker Check
The Role of Estate Planning in the Financial Planning Process

The Role of Estate Planning in the Financial Planning Process

April 06, 2023

While never a fun topic to discuss, estate planning is a critical part of financial planning, as it helps individuals ensure their assets are managed and distributed according to their wishes.  Estate planning is the process of arranging for the management and distribution of assets and financial affairs after passing or incapacitation.  The goal is to ensure that a persons' wishes are carried out accordingly, regarding healthcare, wealth transfer, business succession, tax planning, and charitable giving.

An Estate refers to the total assets owned by an individual, including real estate, personal property, investments, businesses, etc.  When a person dies, their estate may be subject to taxes, debts, and other fees that must be paid prior to distribution to their heirs and beneficiaries.  Everyone has an "estate," and any individual that wants a say in what happens to their assets after their passing should have an estate plan, regardless of their age or wealth.  An estate plan can also help minimize taxes and other expenses, provide for the care of minor children or dependents, or specify healthcare preferences in the case of incapacitation.

The Basics of an Estate Plan:

  1. Trusts - vehicle that designates management and distribution of assets.  These can protect loved ones, shield assets from taxes, and support individuals in carrying out their legacy.
  2. Last Will & Testament - legal document that specifies how and to whom assets are to be distributed upon death.
  3. Power of Attorney - legally binding document that designates an individual to make financial and legal decisions on an individual's behalf should they become incapacitated.  A living will, which is also known as an advanced health care directive, or medical POA formally outlines ones' wishes for medical care.
  4. Beneficiary designations - documents that specify who will receive your assets, like insurance policies and retirement accounts.  These designations override a will.

The lack of an estate plan can have a significant impact on your loved ones, as it can create uncertainty, stress, and financial burdens for those left behind.  Without an estate plan, loved ones may be unsure of what an individual's wishes would be.  This can create tension and disputes among family members, which can cause everlasting rifts and animosity.  Settling an estate without a plan can be a time-consuming and expensive process, putting a strain on loved ones' finances.  Without an updated estate plan, assets may be distributed to unintended beneficiaries, such as an ex-spouse, distant relatives, or even the state.

Estate planning is an imprtant piece of the overall financial situation, as it helps to ensure that assets end up in the right hands.  Creating an estate plan provides loved ones with clear direction and peace of mind, knowing they're doing right by someone they loved who has passed.

Baird does not offer tax or legal advice.