A lot of people associate the word "estate" with vast wealth—sprawling properties, various businesses, diamonds, and yachts. If you’re not rich, you might think estate planning is not for you. Actually, everyone has an estate. Everything you own is part of your estate: your house, car, money, jewelry, and other assets.
You’ve been working hard to save, invest, and build your wealth for a secure and comfortable life and to leave a legacy for your family. When the time comes, wouldn’t you like your legacy to be managed and distributed according to your wishes and in the most tax-efficient manner, eliminating any potential questions, misunderstandings, or misconceptions about your intentions? If yes, then read on.
What is estate planning?
Estate planning is the process of formalizing your intentions concerning your property, the people and causes you care for, and your own medical care decisions. Minimizing estate taxes is often the primary objective of an estate plan, but you might have specific wishes for how your affairs should be managed after your passing or if you become incapacitated.
Maybe you would like to maintain a certain quality of life for yourself and your heirs, or designate guardians for your children and ensure their financial needs are met, or keep your business within the blood /family line, or leave a tidy sum to your school or favorite charity. Merely verbalizing these wishes does not guarantee they will be followed. Estate planning ensures that those responsible for executing your wishes can do so effectively.
What are the benefits of having an estate plan?
Life is unpredictable and creating an estate plan is one of the most caring and considerate actions you can take for your loved ones. When you have dependents to consider, having an estate plan can provide peace of mind, harmony among the people you will leave behind, and help in:
- Avoiding a forced will or a probate for your heirs
In the Philippines, the law will determine the manner of distribution of assets if a person dies without a will. However, every last will and testament must go through probate proceedings to determine its due execution, to prevent fraud and ensure the correct transfer of ownership. Proper estate planning gives you additional tools and channels to dispose of your assets in accordance with your wishes, that will not be exclusively limited to the execution of a last will and testament, which would also help you avoid the lengthy, costly, and public probate process.
- Minimizing taxes
The estate tax rate in the Philippines is currently 6%. Moreover, local governments charge transfer taxes on real estate, which can be up to 0.50% in the provinces and up to 0.75% in the National Capital Region. These taxes are based on the property's value at the time of death and must be paid before the heirs can receive their inheritance. Even with the standard deductions, estate taxes can be a significant financial burden for heirs. Estate planning can reduce the estate's tax liability.
- Ensuring your wishes are followed
Estate planning puts you in control while you are here and able to. It ensures that who would get what and when, who would be raising your young children when something happens to you, and how you would be taken care of in unexpected end-of-life situations are in accordance with your intentions.
What are the documents needed?
An estate plan constitutes several documents. It is advisable to seek the help of an estate planning lawyer and perhaps a financial advisor to ensure that your estate plan is comprehensive and legally sound, especially since our laws on succession protect the “legitime”, or the fixed share required by law to be given to your compulsory heirs. Attempting to handle your own estate planning to save money now can lead to higher expenses for your family later and may result in unintended consequences. The essential documents include:
- Will
Your last will and testament specifies how your assets will be distributed and who will be responsible for managing your estate so long as your dispositions will not impair the legitime.
- Trusts
Trusts are legally binding arrangements that allow you to transfer assets to a trustee who manages them for the benefit of your beneficiaries. Unlike assets specified in a will, trust assets (living trust created during a person’s lifetime) no longer require probate. Instead, they are directly transferred to your beneficiaries as outlined in your trust.
Chinabank offers living trust arrangements. For Personal Management Trust, Chinabank acts as trustee to manage a portion of your estate for your own and/or your beneficiaries’ financial security. For Irrevocable Life Insurance Trust, Chinabank acts as trustee to manage and distribute the proceeds of your life insurance policy to your irrevocable beneficiary/ies in accordance with your wishes as embodied in the agreement. This arrangement is particularly beneficial when the intended beneficiaries of the life insurance policy are minors, individuals with physical or mental disabilities requiring lifelong care, or when parents believe the beneficiaries may not be capable of managing their own finances.
- Power of attorney
This grants someone the authority to make decisions on your behalf if you become unable to do so. This is particularly crucial if you are single as there is no spouse available to automatically assume this role. Without a designated power of attorney, the court will make decisions on your behalf. This could result in the appointment of someone you might not consider the best choice.
- Beneficiary designations
Certain assets, such as insurance policies, retirement accounts, and other financial accounts, permit you to name a beneficiary. When you pass away, these assets will be directly transferred to the designated beneficiary, bypassing the probate process.
- Healthcare directives
These include living wills and medical powers of attorney, which specify your medical treatment preferences for situations where you may be unable to make decisions yourself. They inform your family and health care professionals about the extent of treatment you desire if you become seriously ill, easing the decision-making burden during times of crisis or grief.
How do I go about it?
Here are the key steps in estate planning. It may seem overwhelming, but the benefits of estate planning are worth the time and effort it takes:
- Do an inventory of your assets
Create a comprehensive list of all your assets and ensure your financial records, titles, and insurance policies are stored in a secure location and that a trusted family member can easily locate them if something were to happen to you.
- Determine beneficiaries
Identify your beneficiaries, including your compulsory heirs, and decide who will inherit your assets and how much each one gets.
- Draft legal documents
Work with a lawyer to draft a will, trust, and other necessary documents.
- Choose a trustee or executor
A trustee is tasked with overseeing and managing a trust to ensure compliance with the trust agreement. An executor, on the other hand, is responsible for overseeing a deceased person's assets and distributing them according to the terms specified in the will. Both the trustee and executor can be an individual or a trust entity. It is crucial to choose someone trustworthy and capable of handling financial matters.
- Review and update
Estate planning is a continuous process rather than a single event. It's important to regularly review and update your plan as your family dynamics, financial situation, and applicable laws evolve throughout your life.
Create an estate plan now!
Estate planning is not only for the wealthy or older adults. By planning your estate while you are still in good health, you can ensure that you leave the legacy you desire and important decisions are made according to your wishes, helping your loved ones avoid unnecessary disagreements about your preferences. You can establish an estate plan now and modify it as needed later—this is the essence of effective estate planning.
