Estate Planning: Why It’s Important and How to Get Started

Regardless of who you are and how much or little you’ve amassed in your lifetime, the same fate—death—awaits you just like everyone else.

As morbid as it sounds, death is a certainty you can count on, so you should open your mind and prepare for it while you can. Besides, wouldn’t it make you feel better knowing that you can protect your assets, establish your financial legacy, and take care of your loved ones even after your passing?

With estate planning, you can do all that and more.

Estate Planning: What is It and Why is It Important? 

What is an estate plan? The term itself might be new to you even if the concept is familiar. A lot of people think that estate planning in the Philippines is only for the rich and retired—but that's a misconception.

Most people have an estate. Yours may consist of your home, car, bank accounts, investments, and personal possessions. No matter how modest your assets are, you’d do well to protect them.

Likewise, it doesn’t matter what life stage you're in. It’s never too early to create an estate plan because you never know when you’ll draw your last breath.

“All this is well and good, but exactly what is the meaning of estate planning?” you may ask. 

Estate planning is the process of managing your asset base in the event of your death or disability. It involves taking stock of what you have, controlling your financial legacy, and ensuring that every decision concerning your possessions is made according to your wishes. 

Often done with guidance from an estate planning lawyer, this process involves designating heirs, beneficiaries, and guardians, as well as settling tax obligations. With an estate plan, you can leverage your assets to ensure financial security for your loved ones. It can go a long way in giving you peace of mind.

Estate Planning vs. Legacy Planning: What is Their Difference?

Estate planning and legacy planning are almost the same, with the latter being just a tad more nuanced.

So what is legacy planning? Whereas estate planning covers only the tangible aspects like creating documents and distributing assets, legacy planning involves a more holistic approach. It transcends the tangible and attaches a purpose to the process.

Legacy planning may include elements like securing proper education for your children and grandchildren, ensuring your pets are cared for, and donating to charity, among others.^[1]

With legacy planning, you can combine your ideals with your financials to leave behind lasting gifts for your loved ones.

5 Components of an Estate Plan 

An estate plan can have many inclusions. Below are five of the most essential ones.

1. Wills and Trusts

A will is a legal document that serves as the foundation of your estate plan. With a will, you can designate an executor who will administer affairs after your death. You can also provide instructions on how your properties and assets should be managed and distributed.

On the other hand, a trust is a legal arrangement in which you, the grantor, appoint a trustee to hold your assets for eventual release to a beneficiary. With a trust, you’re technically not holding your assets in your name, thus keeping them out of probate and allowing your beneficiaries to access them immediately after your passing. A trust also details how and when a beneficiary will receive their inheritance.

If you die without a will or trust, intestate succession in the Philippines will apply. This means that the management and distribution of your estate will be assumed by the probate court.^[2]

2. Durable Power of Attorney 

A power of attorney (POA) is a legal document that enables someone to manage your legal and financial affairs on your behalf. A person with a POA can also enact major life decisions concerning your health when you no longer can. A person with POA can pay bills, invest money, and settle taxes on your behalf.

3. Healthcare Directive 

Did you know that you can either write down your healthcare wishes and medical treatment preferences or appoint someone to make decisions for you in case you become incapacitated?

A healthcare directive names a healthcare proxy that can carry out your healthcare-related wishes as stated in your living will. With this document, you can avoid conflict when your family members have clashing opinions about the nature of your care.

4. Beneficiary Designations 

Ensure that each of your assets gets the right beneficiary, especially if you’re leaving behind bank and investment accounts, retirement accounts, and life insurance policies in the Philippines. Also, make sure to specify portions of your estate that you want each beneficiary to receive.

The upside to naming your beneficiaries is that you can directly leave them your assets without going through the probate process. This results in a relatively easy transfer of assets.

Take note that some accounts and policies already have their own beneficiary designations. Make sure that these match those indicated in your estate documents to avoid conflicts or disputes.

5. Guardianship Designations 

While most wills and trusts incorporate a clause about guardianship designations, some don’t. In case yours doesn’t and you’re leaving behind children of minor age, make sure you designate the right guardian for them.

Picking a guardian is not always easy, as the default answer isn't always the best answer. While the obvious choice is your closest living relative, a guardian must be someone you know and trust enough to make sure your children are well-cared for.

There are so many boxes to tick and criteria to meet. Aside from being willing to take care of your children when you’re gone, the guardian you appoint must share your values and principles and enjoy financial stability. Also, they must be capable enough to help your child manage the assets you’ve left behind.

Estate Planning in the Philippines: 6 Essential Steps

With guidance from an estate planning lawyer, you can carry out the following steps to kick off your estate planning journey.

1. Create an Inventory of Your Assets and Write Your Will

The first and arguably the most important step in estate planning is to write your will. It's easier to do that if you keep an inventory of your assets, so look around and list down all your tangible and intangible possessions.

Your assets may include real estate, vehicles, and personal effects. Stocks, bonds, and mutual funds form a part of your estate. So do your savings accounts, businesses you own, and life insurance policies.

After assessing what you have, write your will and lay out what you want to do with your possessions. You can also name a trustee or executor to fulfill your wishes.

Your will gets authenticated through a legal process called probate. When you die, your will must be taken to the probate court or the executor named in the will. Once the court proves the validity of the will as your last true testament, your executor then gets legal power to act on your behalf.

2. Account for Your Family’s Needs and Establish Your Directives 

The next step is to establish your medical care directive and your durable financial power of attorney. These documents contain instructions on how to handle your medical treatment and how to dispose of your finances in the event of your death or incapacitation.

After the executor approved by the court settles your financial matters by using part of your estate to pay off your taxes and debts and file your personal income tax, they distribute what’s left of your estate to your beneficiaries.

This is why it’s important to anticipate and determine your loved ones’ needs. Compare your assets against your beneficiaries and decide who gets what. Who should inherit your jewelry and other valuable items? How should your land be divided among your successors?

Creating a clear directive will make it easier to carry out your wishes.

3. Get a Life Insurance Policy 

Life insurance—be it comprehensive or just microinsurance—can play a key role in estate planning.

There are many perks to getting life insurance in the Philippines. For one, it provides some financial relief in the form of a payout settlement to a person or people named as beneficiaries, if done correctly.

Life insurance can also replace your income if you pass away, ensuring that your dependents are still provided for when you’re gone.

Moreover, life insurance comes in handy when you’re a homeowner with a large amount of debt or estate taxes. With life insurance, you can ensure that your heirs still receive the assets you’ve left them without having to use parts of those to pay off your debts or taxes. Some life insurance policies also cover funeral costs in the Philippines.

A financial planner can help you identify the different types of family insurance that match your needs and financial capacity.

4. Review Your List of Beneficiaries and Guardians 

Insurance and retirement accounts usually have beneficiary and guardian designations. Double-check to ensure that what’s written in them is the same as what’s written in your will. Make it a habit to update the names as needed to avoid inconveniences for your loved ones down the line.

Also, don’t forget to name contingent beneficiaries to serve as backups in case your primary beneficiaries pass away before you do.

5. Address Estate Tax Obligations 

Estate tax in the Philippines refers to tax that is levied on the right of a deceased person to transfer property to their heirs or beneficiaries.

The Bureau of Internal Revenue (BIR) clarifies that estate tax isn't the same as property tax in the Philippines. Rather, it’s a “tax imposed on the privilege of transmitting property upon the death of the owner.”^[3]

Likewise, the estate tax is not the same as the inheritance tax in the Philippines. The slight difference between the two lies in who pays for which. While estate taxes are settled using assets from the estate, inheritance taxes are the obligation of the beneficiaries.

Following the provisions under Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law, a flat rate of 6% shall be applied to estate tax, which means that to compute for the estate tax, you must multiply the net estate by 0.06. To learn more about how to compute estate tax in the Philippines, check out this quick estate tax guide.

6. Get Your Digital Assets in Order 

With an estate plan, you can also give instructions on what to do with your digital accounts, including your websites, social media accounts, email accounts, and other digital assets. You can do this without legal help—just entrust your accounts to someone who can carry out your wishes.

Estate Planning FAQs

1. What are the five components of estate planning?

The components of an estate plan differ depending on each person’s circumstances and preferences. As mentioned above, the five most important components include your will and trust, power of attorney, healthcare directive, beneficiary designations, and guardianship designations (if you have kids or grandkids of minor age that need to be cared for).

2. What are the six basic steps of the estate planning process?

Estate planning is not strictly a step-by-step process where you must tick off one item from your list before working on the next. You can do some of the steps simultaneously without worrying about chronology.

As you’ve read above, the six basic steps of estate planning include the following:

1. Create an inventory of your assets and write your will.
2. Account for your family’s needs and establish your directives.
3. Consider getting a life insurance policy.
4. Review your beneficiaries and guardians.
5. Address estate tax obligations.
6. Get your digital assets in order.

3. What is the first step in the estate planning process?

The first and most crucial step in estate planning is writing your will, which serves as a blueprint for your appointed executor when managing your affairs.

Final Thoughts 

Planning for what happens after you die may not be easy, but it helps ensure that you have no unfinished business and your loved ones are provided for when the unthinkable happens. Start your estate planning journey before it’s too late.

Sources:

• ^[1] What is the Difference Between Estate Planning and Legacy Planning? (Law Offices of Elsa W. Smith LLC)
• ^[2] Succession 101 (Divina Law Dynamic Lawyering)
• ^[3] Estate Tax (BIR website)

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