Question: I have heard financial planners talk about estate planning. But I get confused as others call it real estate planning. Can you break down estate planning for me in simple terms?—Posted on PFA’s “ask a friend, ask Efren” service at www.personalfinance.ph
Answer: Estate planning can include real estate. But before we talk about estate planning, let’s first define what estate is. And because of the intricacies in laws and regulations, we will limit the discussion to the estate of a citizen.
In life, we try to acquire assets. Such assets form part of a person’s estate. In particular, the estate of a citizen will include his real properties such as land and buildings, his personal properties like cars and paintings, and intangibles like investments.
But as we all know, people do not live forever. Upon their death, people’s assets are transferred to their heirs. In life’s balance sheet or SA=L+N (statement of assets, liabilities and net worth), some of the assets are acquired through borrowings. Therefore, only the net estate, after paying estate taxes, is passed on to the heirs.
It is not only debt that is deducted to determine the taxable net estate. There are allowed deductions such as—but certainly not limited to—the share of the surviving spouse, unpaid mortgages, funeral expenses, and medical expenses immediately prior to the death of the owner of the estate.
So what then is estate planning? It is the process by which people create, accumulate and grow their net estate, and distribute it on to their heirs in an equitable and tax-optimum way as provided by law. Distribution may be done while the owner of the estate is still alive or upon his death.
So if you will look at it, estate planning does not deal with just the computation of taxes. In fact, Stephen Pollan put it succinctly in the title of his book, “Die Broke.” He said that “you should die so broke that the last check you issue is to your undertaker, and even that check should bounce.”
Seriously, though, Stephen Pollan was telling people to die broke in order to live rich. He said that people should not worry about leaving a sizable estate to their heirs if that would mean breaking their backs just to provide such an inheritance.
Carlos T. Ocampo, the co-author of my book, “Pwede Na! The Complete Pinoy Guide to Retirement and Estate Planning,” echoes Stephen Pollan’s teaching.
Ocampo says that people have the “mistaken notion that estate planning is meant only for the heirs and dependents, to the exclusion of the estate owner himself.”
Is estate planning just for the rich and famous?
The answer is a categorical ‘no’ because estate taxes apply to net estates worth over P200,000.
And mind you, estate taxes must be paid within six months from the time of death of the estate owner.
Improper estate planning could result in late payment penalties ranging from 25 percent to 50 percent of the amount due, 20 percent interest a year and a compromise penalty. If the rich and famous do not want to be subject to the costs of improper estate planning, so should the ordinary individual.
Only in exceptional cases, the government can extend the period of payment if it can be proven that undue hardship will befall the taxpayer.
Is preparing a last will and testament enough for estate planning?
As mentioned earlier, estate planning encompasses a lot of activities. Once the plan is finalized, it is executed through many devices and instruments, the last will and testament being the most basic estate planning device.
A person who is at least 18 years of age and of sound mind can make a will. Such a will needs to be witnessed by those who are also at least 18 years of age, not blind, deaf or dumb, and able to read and write.
Wills can be notarial or holographic. There are many requirements for a notarial will. A holographic will is simply one that is entirely written, dated and signed by the testator or the will-maker himself.
There is really a lot more to learn about estate planning than what this short column can provide.
Fortunately in the Philippines, there are now books written by Filipinos for Filipinos who want to learn more about estate planning.
Try to get one that is updated with but not just focused on estate planning’s latest rules and regulations.
Now is the best time to address the estate of your nation, nation being your family.
Now if you want to learn more about the non-legal and non-tax sides to estate planning, please visit www.personalfinance.ph. For the legal and tax sides, you may want to attend one of the EnRich™ Estate Planning training runs.
(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or emailed to efren@personalfinance.ph. To learn more about the RFP program, attend a FREE orientation on July 17, 7 p.m. at the PSE Center. Email info@rfp.ph or text <name><e-mail><RFP> at 0917-3464126 to register.)