How estate planning can protect your legacy and the finances of your heirs
Estate planning is not as common to our culture as it is to others. Many Filipinos think that it applies only to people with vast amounts of wealth. But it doesn’t — anyone who wants to preserve their properties as they are passed on to their heirs without causing unnecessary financial burden needs a good estate plan. Here’s what you should know.
What is estate planning?
Estate planning, often done with the help of a lawyer, is a comprehensive process of organizing your personal and financial affairs to ensure your assets are distributed according to your wishes after your death, while also aiming to minimize taxes and legal complications. This process involves various legal, financial, and logistical arrangements to manage and protect your estate or the entirety of what you own, including real estate, bank accounts, investments, insurance policies, and personal possessions.
Its key components include:
- Wills - Legal documents that outline your wishes regarding the distribution of your assets and the care of any minor children.
- Trusts - Arrangements where you grant a third party, known as a trustee, the authority to hold and manage assets on behalf of your beneficiaries, which can help bypass probate, reduce estate taxes, and potentially protect assets from creditors.
- Healthcare directives - Documents that specify your wishes for medical care if you become unable to make decisions for yourself, including treatment preferences and end-of-life care.
- Power of attorney (POA) - Legal authorization for someone to act on your behalf in financial matters or health care decisions if you are incapacitated.
- Beneficiary designations - Instructions on accounts like life insurance policies, retirement accounts, and some bank accounts that allow you to designate who will receive the assets upon your death, bypassing the will.
- Estate tax planning - Strategies to minimize the taxes your estate may owe upon your death, ensuring that a larger portion of your assets goes to your beneficiaries rather than to tax obligations.
To be clear, an estate tax is not a property tax. Rather, it’s a tax imposed on “the privilege of transmitting property upon the death of the owner,” according to the Bureau of Internal Revenue. In the Philippines, beginning January 1, 2018, via Republic Act No. 10963, the estate tax is 6% based of the value of your net estate at the time of death. It’s a significant amount for your heirs to manage, especially if most of your assets are non-liquid such as real estate.
Estate tax planning allows you to legally structure your financial affairs in a way that reduces the amount of estate tax your heirs might have to pay upon your passing. Here are strategies to reduce estate tax:
- Establishing trusts - Trusts can be designed to hold assets on behalf of your beneficiaries, potentially lowering the taxable value of your estate.
- Gifting your assets - By strategically gifting assets during your lifetime, you can reduce the size of your estate and the corresponding estate tax liability. However, it's essential to understand the rules and limits around gifting to ensure that this strategy is executed effectively and in alignment with your overall legacy planning goals.
- Investing in life insurance - Life insurance can be a powerful tool in legacy financial planning. Not only does it provide financial security for your beneficiaries, but it can also be structured to help cover estate taxes, ensuring that your heirs receive the full benefit of your legacy without having to liquidate assets to pay taxes.
- Keeping up with legislation - Tax laws are ever-changing, and staying informed is critical to effective estate tax planning. Regularly reviewing your legacy planning strategies with a financial advisor specializing in estate planning can help you work through these changes and adjust your plan accordingly.
A good estate plan ensures that your loved ones can make the most out of the legacy you pass on. Learn more about legacy planning strategies as you enjoy the fruits of your hard work:
