Understanding What Estate Planning Is and Why You Need It

22 November, 2024

You dedicate your lifetime to diligently acquiring wealth and assets, likely motivated by the desire to provide financial security to your loved ones. However, have you considered the fate of these possessions in the event of your unexpected passing? It's where the importance of estate planning becomes evident.

In this article, you will explore what estate planning is, the steps involved in it, and why you should include it in your priority list. Keep reading.

What is estate planning?

Before you delve into the concept of 'estate planning', you must understand the meaning of the term 'estate'. It simply means everything you possess - from your home, car, businesses, and bank balance to life insurance, investments, and personal belongings, such as jewellery, furniture, appliances, etc.

Estate planning typically refers to the process of creating a thorough strategy for the allocation of your possessions upon your death. It involves specifying who you want to receive your belongings after you pass away. It also involves setting preferences on whom you wish to manage your businesses and daily affairs if you are unable to manage them yourself for any reason.

Key aspects of estate planning

Understanding the tools and instruments that can help in estate planning is crucial. Below are the key aspects of estate planning in India you can consider:
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• Guardianship
  A guardianship articulates your desired outcomes and designates individuals to look after your children or any dependents you are responsible for after your death or in the event you become unable to care for them.
  
  

• Will
  A will is the cornerstone of any estate plan. It is a legal document that outlines how your assets and wealth should be distributed upon your death. Without a will, the state may dictate the distribution of your assets, which may not align with your wishes. Creating a clear and comprehensive will ensures that your loved ones are taken care of and that your assets are distributed according to your preferences.
  
  

• Trust
  A trust is a legal arrangement in which a trustee is appointed to hold and oversee assets on behalf of the beneficiary. You can use it to manage and distribute your assets over time, protect your assets from creditors, and fulfil the specific needs of beneficiaries. It can also help minimise estate taxes and avoid the probate process, ensuring a more efficient transfer of assets.
  
  

• Power of Attorney
  A power of attorney is a legal document that designates someone to manage your financial affairs if you are unavailable or unable to do so yourself. The appointed individual, known as the attorney-in-fact, can make decisions related to your finances, investments, and other matters outlined in the document.
  
  

• Nominee or beneficiary declaration
  Many assets, such as life insurance policies, retirement accounts, and bank accounts, allow you to specify nominees or beneficiaries. These nominees or beneficiaries are the designated individuals who will take over your assets upon your death.
  
  

• Healthcare directive
  A healthcare directive is also known as a living will or a medical power of attorney. It explicitly outlines specific medical actions that should be taken if you become incapacitated or are unable to make your own decisions regarding your health and medical treatment. 
  
  

Key steps involved in estate planning

These steps will help you get started towards your estate planning:

1. Evaluate your assets

In the first step, you need to create an inventory of all your assets and possessions. These must include your tangible as well as non-tangible assets.

2. Take note of outstanding debts

Next, you need to take note of your outstanding debts and establish how they should be paid after you pass away. You must define who will be responsible for paying those debts and what assets can be mortgaged or seized.

3. Formulate estate planning documents

Next, you can decide on the distribution of your assets upon your death and start formulating estate planning documents, such as a will, trust, power of attorney, etc., as per your wish. You can also take the help of a wealth manager or a financial counsellor.

4. Review your beneficiaries

Review beneficiaries in life insurance policies, bank accounts, etc. Ensure they are all updated and as per your wish. You can make changes if you want.

5. Keep reassessing

Keep revisiting your estate planning with changing life circumstances. Until you are alive, you make changes as many times as you wish.

Why consider estate planning?

Below are a few reasons to consider estate planning:

• Protects your loved ones
  By creating a comprehensive estate plan, you can specify how your assets should be distributed, ensuring your loved ones are taken care of according to your wishes.
  
  

• Minimises tax liabilities
  Without proper estate planning, your possessions could be subject to significant estate taxes, potentially reducing the inheritance left for your beneficiaries.
  
  

• Preserves family harmony
  Family disputes over inheritance often lead to long-lasting rifts. Estate planning provides an opportunity to communicate openly with family members about your intentions and decisions.
  
  

Do you need estate planning?

Although estate planning is not exclusive to anyone, it’s a must for those with significant assets - high net-worth individuals (HNIs), business owners, senior citizens, and retirees. It ensures their assets are distributed according to your wishes.

With HDFC Bank Wealth Management Services, you can tailor an estate plan to meet your precise needs and goals.

*Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Investments are subject to changes in tax laws. Please contact a professional consultant for an exact calculation of your liabilities.