Financial Planning for Businesses

Dear Dave: Estate Planning

Many financial planners (and their clients) have been totally convinced that estate planning is a valid and important component of financial planning.

I disagree. Estate planning was a response to the first Federal estate tax introduced in 1797 (the stamp act of 1797) and then later as a response to the Federal income tax which was first instituted in 1861 in the United States (to help pay for the Civil war). By the time Americans invented the idea of “retirement”, taxes in this country had become a bit onerous, and estate planning, sometimes referred to as “tax planning” began to grow into a quasi financial planning concept. When the profession of financial planning was officially born in 1969, estate planning was woven into the profession-almost automatically.

Today, estate planning as a “form” of, or as a “component” of financial planning is given a cover of validity by appealing to the need to plan for various age-related diseases as well as death.

However, I think that true estate planning answers a legal problem, not a financial one. To say it another way, estate planning solves the legal problem of property rights after you die-specifically, what happens to your assets after you die. It does not really solve a financial problem. Tax planning, which I think is often confused with estate planning, is dealt with primarily through cash-flow planning and other aspects of long-term budgeting.

Sometimes, financial products are purchased as part of estate planning, but I regard these purchases as incidental to the process of estate planning. If you are purchasing financial products while putting together an estate plan, I might (depending on the circumstances) argue that you have already done an inadequate job of financial planning (not properly projecting what your financial responsibilities would be at the time of your death).

Does this mean that I think estate planning is, in and of itself, unnecessary or invalid? No way. But, I do not think it’s a valid part of a financial planner’s job. I think that financial planners should leave the legal stuff to lawyers.

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November 2nd, 2009 | by David | No Comments


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