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Course: Financial Literacy > Unit 6
Lesson 9: Estate planning and legal instrumentsWhat is estate planning and why is it important?
Estate planning is making a plan for what happens to your belongings, like money and property, after you die. Without a plan, there can be confusion and problems for those left behind.
What is estate planning?
Estate planning is the process of arranging and managing your money, property, and other belongings for the future. Estate planning is important in case something happens to you, like getting sick or passing away. While it may seem like something only older or wealthier people need to consider, it's actually important for everyone, including young adults.
Why is estate planning important?
Estate planning might seem like a grown-up, or end-of-life topic, but it's essential to understand it - even at a young age. Not only will you need to create a plan for your own belongings one day, but you might also be a part of someone else's estate plan, like a beneficiary. Being a beneficiary means that your family member or friend has chosen you to receive something special from their plan, such as money or a treasured item.
By learning about estate planning now, you'll be better prepared to make smart choices when the time comes for you to make a plan or receive a gift from someone else's plan. Plus, it's always good to be the one who knows what's going on and can help others understand too.
The goals of estate planning
There are many different goals that estate planning can help you achieve. Here are some of the main ones:
- Taking care of loved ones: One of the most important parts of estate planning is making sure your family and friends will be okay if something happens to you. This might involve setting aside money for your children's education, providing for your spouse, or making sure your pets are cared for.
- Deciding who gets your belongings: Estate planning helps you decide who will receive your belongings, money, and property if you pass away. This can be important if you want certain people to have specific things, or if you want to make sure your possessions are divided fairly among your family and friends.
- Choosing someone to make decisions for you: If you become unable to make decisions for yourself, estate planning allows you to pick someone you trust to handle your affairs. This person might be responsible for paying your bills, making medical decisions, or managing your business.
- Expressing your wishes: Estate planning gives you the opportunity to make your wishes known, whether that's your preference for medical treatment, your funeral arrangements, or your wishes for how your belongings are divided.
What does estate planning look like?
Imagine that Naira, a young woman with a growing career and a young daughter, creates an estate plan. She designates her sister to take care of her daughter and sets up a to provide for her daughter's education and living expenses. She also names her best friend as the person who will make sure to carry out her wishes and her brother as a person who will make medical decisions if she is unable to.
When Naira unexpectedly passes away, her family and friends are devastated but know exactly what to do. Her daughter is being taken care of by her loving aunt, her assets are distributed according to her wishes, and her healthcare and funeral preferences are honored.
What happens if there is no estate plan?
Suppose Naira never made an estate plan. When she dies, her family is not only mourning her death but also uncertain about her wishes. Her family is left guessing about her healthcare and funeral preferences. Figuring out who will look after her daughter becomes complicated, and they must endure a long legal process and wait for a judge to decide. Before her assets can be divided, they must undergo , which is both costly and time-consuming.
Family starts to disagree on who should get Naira's house, or if the house should be sold and the money divided among family members. As a result, family members are not talking to each other and a divide between the family is created. All of this leads to estrangement between loved ones during a time when they should be supporting each other.
Why you should start thinking about estate planning
Even though you might not have a lot of assets or dependents right now, it's still valuable to start thinking about estate planning. Estate planning could be as simple as deciding who will take care of your pet if anything happens to you. Or, it could be understanding your role in someone else's plan.
As you get older, your life will change – you might get married or divorced, have children, or buy property, and at that point it is important to have an estate plan. By considering your estate plan early, you can make sure you're prepared for the future and that your loved ones are protected.
So, start thinking about your own estate plan now, and remember to update it as your life changes. You'll be taking an important step toward protecting your loved ones, your legacy, and your wishes.
Want to join the conversation?
"As a result, family members being not talking to each other and a divide between the family is created."
Is it just me or is this sentence in the part about, 'What happens if there is no estate plan?', not correct?(6 votes)
To be honest, that sentence seems like a very specific situation. Just letting everyone know that just because you don't make an estate plan, doesn't mean that your family will split up and get mad at each other. Though it could happen, it's very unlikely. I know you didn't write that sentence, but I just wanted to let people know.(0 votes)
What is the best age to start having estate planning?(0 votes)
You should have some parts of what is usually considered estate planning in place as soon as you are an adult - assigning medical power of attorny, financial POA, general POA, etc. Even if you don't have a lot of money, it is a good idea to name beneficiaries on things like bank accounts, IRAs, retirement accounts, pretty much anything financial. This includes employer sponsored programs. You can always change beneficiaries as your life situation changes. If you die intestate (no will) the state you live in will decide how your assets are divided. If you don't like the way that would happen then you need a will to express your wishes. And again, it can always be changed as your situation changes.(5 votes)
When it says 'All of this leads to estrangement between loved ones during a time when they should be supporting each other.', that's kind of a slippery slope. I don't think that (most of the time) just because someone doesn't know who will take care of their stuff, will cause a divide.(0 votes)
Dear King,
Let's try to imagine a situation.
Mary and Joe DeLorean had 4 adult children. One was in the Army. Another was a successful photographer. The third was a drug addict, and the fourth had 4 children of her own.
Mary and Joe owned a house, had savings and had life insurance. But they never made a will or did any estate planning. One day, while crossing the street, they were struck by a truck and died.
The trucker's insurance paid a lot of money, which was used for the funeral.
The children were left to divide up the value of the house, the savings and the life insurance payout.
But they couldn't agree.
One child said that the addict had absorbed his share of the estate already by having Mary and Joe pay for several visits to rehab. One said that the son in the army was already provided for, so didn't need anything. The one with four children felt that, since she had the only grandchildren, she should get a bigger share.
Everyone was sad that their parents had died, but because they were fighting about the money, nobody could comfort anyone else.
The end of the story is: If you are Mary and Joe, you should make Estate Plans so as to protect your children from each other, and allow them to mourn and comfort each other.(1 vote)
What is the best age to start having estate planning?(0 votes)- When you have enough assets so that people will argue about them when you die, it may be time to do some estate planning. Many non-profit organizations will help you to do that, if you give them a part. In fact, some will take your money now and invest it, and pay you an assured amount for the rest of your life, but keep all that's left when you die.(1 vote)