What does a comprehensive financial plan look like? (Part 2)

This is a 2 part series article and this is the second article. 

In the first part of this article, I introduced the concept of a comprehensive financial plan and introduced the first 2 of the 4 components of a comprehensive financial plan. We talked about financial planning and tax planning. In today’s article, I would like to talk about the other 2 components – Estate planning and Asset protection planning. Both of these are not typically items people pay attention to but as I mentioned in the first article, it is really important to consider these as well in a comprehensive financial plan. 

Estate Planning

So this is where things start to get a bit morbid. For the uninitiated, estate planning is basically planning for what will happen to your assets and who will manage it in the event of your death or incapacitation. Nobody likes talking about death but it is important to be practical and understand our mortality is certain and the better we plan this, the better it is going to be for our loved ones in terms of dealing with the finances. Now, estate planning is a bit broader than simply writing a will – I will explain that below. Let’s examine estate planning in detail by answering the below questions: 

1. What is an estate? The word estate conjures up an image of vast acres of land for most people! 🙂 An estate is simply all of the money, property and other assets that is owned by an individual upon his/her death. 
2. Why do I need an estate plan? At the time of writing this article in 2021, we are in the midst of a global pandemic and unfortunately, all of us have become acutely aware of our mortality. If you don’t have an estate plan, the government will decide for you where your assets should go and who to go to. Typically they will go to your close kith and kin. But if you want to have control over where and who your estate should go to, you need to define it with an estate plan. Estate planning also involves deciding guardianship for your minor children if you have any. Finally, upon the death of an individual, all estates typically go through what is called a probate process in the US – meaning, the courts will still need to determine the validity of the will if there is one, or if there is none, then determine who the estate should be distributed to. Through some methods of establishing trusts, you can ensure you avoid the probate process all together. I won’t go into that here as that is out of scope of this article. 
3. Who needs an estate plan? I am not Jeff Bezos – I don’t have an ‘estate’! So this is not really for me! Right? Not exactly. That’s what I used to think. Well, first off, if you have any amount of assets and/or you have minor children or other dependents, I would strongly encourage you to have an estate plan for the reasons I highlighted above. If you are single, and have hardly any money, then you don’t need an estate plan. 
4. What if I have assets that don’t need to go through probate? Do I still need an estate plan? This is getting a bit technical but important to understand. Certain types of assets don’t go through the probate process. These include bank accounts, retirement accounts, life insurance proceeds, assets inside a trust to name a few. All you need to do for these type of accounts is have beneficiaries named in the account. Assets like real estate, cars etc. will go through probate unless you have put them in some form of a trust. Now if some of these assets like real estate and cars are in a joint name with a survivor then depending on the state they also wont go into probate. So if all or most of your assets are in non-probate assets, you don’t need an extensive estate plan. But as I mentioned, you still need an estate plan if you have minor children. 
5. What does an estate plan include? Typically, an estate plan includes the following:
   1. A will (also called a last will and testament) 
   2. A financial power of attorney (giving someone else you trust to make decisions on where your money goes after your death), 
   3. A healthcare power of attorney (giving someone else you trust to make medical decisions on your behalf if you get incapacitated) 
   4. and if you decide, the establishment of a trust. 
   5. More importantly, an estate plan also involves getting yourself life insurance and also one thing that typically people don’t talk about or consider is disability insurance. Most folks who have regular W2 jobs get some basic life and disability insurance through their employers. But unless those benefits are really rich, more often than not, they are not sufficient and you will need to consider complementing that with separate policies or purchasing additional coverage through your employer’s insurance provider.
6. What about beneficiary designations in my accounts? – so technically this is not part of an estate plan but this is one of those things you should do irrespective of whether you have an estate plan or not. For the uninitiated, a beneficiary is the person your assets go to upon your death. Go through all your bank accounts, retirement accounts etc and ensure the beneficiaries are laid out accurately. If you do have an estate plan that names a trust, then you will need to accordingly put them on as a beneficiary. 

Asset protection planning

What on earth is this? Sounds like I am protecting some rare diamonds or minerals or something! 🙂 Asset protection planning is the last leg of financial planning. It is essentially protecting your assets from any external liabilities that may occur during the course of your life. Now, if you don’t have too many assets, then you don’t need to worry about this. But everyone who owns a car or a home in the US, or even rents a home uses some form of asset protection. Let me explain. 

There are 2 fundamental ways to protect your assets. Neither is bullet proof but they do the job for most parts:

1. Insurance – Insurance is probably the ultimate snooze fest when it comes to financial literacy – so if I lost you when I used the word ‘insurance’ please bear with me. This will be important for you. You can protect your assets with fundamentally 2 layers of insurance – 
   1. Insurance against property damage – Most people buy insurance by default because they are required to not because they proactively plan for it. Almost everyone who owns a car or a home will have property insurance that gives you some financial reimbursement in the event of property damage. So consider this a basic form of asset protection against damage. 
   2. Insurance against liability – Now, the next kind of protection you require is against liability, i.e. someone suing for some negligence on your part causing damage. If you injured someone while driving, typically a lot of these policies will also carry some level of liability insurance if that individual were to sue you. If you don’t have a lot of assets, then this is likely good enough. But if you do have considerable assets then read on because you are going to want to go a step further. Individuals in certain professions like doctors, attorneys carry very specific professional liability insurance so they are familiar with this. I am not an insurance expert so I am going to keep this high level. So there is something called umbrella liability insurance which sits on top of all the insurance you have – when you hit the maximum liability coverage on your existing insurance policies, the umbrella liability insurance kicks in to cover you for additional amounts. Umbrella liability insurance is actually relatively inexpensive in the US to get and adding a $1M of umbrella liability is around $150-$200 a year in premiums. Typically to get umbrella liability insurance, you will end up needing to keep all your property insurance through the same company and there will be some minimum insurance requirements you will need to meet. I know, I sound like an insurance salesman but I know I did not do justice talking about insurance here because there is so much out there and I didn’t even scratch the surface in this article 🙂
2. Protecting your assets within an entity – This is not for everyone and you don’t need to or can do this unless you own a business or investment assets like rental properties. This simply involves putting certain assets into an entity like a LLC (limited liability corporation) in the US that separates your personal assets from the assets contained within the LLC. Rental property owners or business owners can operate those assets under a separate entity. By doing this, most often you can protect your personal assets being claimed in lawsuits related to the business or rental properties. A lot of folks who own rental real estate often begin by asking the question – Do I need an LLC to invest? The answer to this is nuanced and I wont go into the details here. But essentially before you ask whether you need an LLC, the question you need to ask is a broader one around asset protection and liability. In many instances, you could sufficiently protect yourself with umbrella liability insurance and ensuring you maintain your properties appropriately by using licensed contractors etc. But a lot of people may also choose to put rental properties in an LLC to maintain anonymity. Of course, if you talk to the lawyers, they will strongly advice you to have your properties in an LLC or even multiple LLCs. I am not the expert on this subject and am actually attending a workshop to learn more about this.

My final word on this is – people rarely do proactive asset protection planning. If you have sizable assets (and sizeable can be relative – you don’t have to be Bill Gates and have billions), you should ask yourself if your assets are well protected. For most folks this does not need to go beyond some basic insurance coverage. This is the least fun part of financial planning but unfortunately something people tend to ignore, including myself. I am educating myself more on this topic and hoping to do better in this area. 

Who do I need to work with to do all this planning?

This is my final section for this article series. If you were reading all this and asking how on earth do I go about doing all this, you are not alone. If you don’t really want to spend a ton of money doing all this and consider yourself a DIYer, you can actually do a lot of this stuff yourself (depending on the complexity). But if you are not comfortable with that, a comprehensive financial plan requires you to assemble a mini team of professionals. I have personally worked hard on building this team for my family. In some cases, just like hiring people in a company, I have interviewed multiple candidates and finally chosen the professionals. You need a financial advisor to do your financial planning and can give you broad guidance on all these other aspects (I strongly urge folks to go with a fee-only financial advisor), a CPA/tax planner to help with your tax planning, an estate planning attorney for your estate plan, a trusted insurance agent for your insurance policies and if you are creating entities, an attorney who specializes in that. Over time, I have come to value the importance of professional advice however confident I am of doing all this myself. The value I receive comes from avoiding costly mistakes. If your financial picture is very simple, you can get away by doing a lot of this yourself. For eg. you can create a simple will for free, online. If you earn income primarily through W2 and some interest and dividends, you can probably do your taxes yourself. But if you have further complexity in any of this, do yourself a favor and work with a professional. It will be money well spent.

Concluding thoughts

None of the above plans are static documents – meaning, they will evolve and change with your life and circumstances. More importantly, don’t get overwhelmed by all of this and think you need to do this all in one day, month or year. You can take your time to work through each of these, bit by bit. That’s what we did anyway. Ultimately, I like to reiterate what I always say – none of this is actually about money. But this is about setting up your financial foundation so you don’t have to worry about money to enjoy the things in your life you care about. 

Thank you for reading and I wish you success in your financial journey.  

Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.