Financial Plan vs. Estate Plan: What's the Difference?

By: Helios

 

A financial plan is, at its core, a look at your current financial health and a map to help you reach your goals. It usually looks at four categories: your income, your expenses, your assets, and your debt. If we keep all four of these in balance, you have enough money to invest in a way that matches your risk tolerance. A well-designed plan puts you on track to reach your goals.

But what if something were to happen to you? (Or your spouse, if you have one?)

Accidents can happen, and when they do, they have the potential to derail even the best financial plans. That’s where an estate plan comes in.

 

Estate plans pick up where financial plans leave off

When we work with clients, we try to make sure they have a retirement plan in place, a term life insurance policy, and assets of some kind — a house and car, Roth IRAs, 401(k)s or a combination of things. Our goal is always to make sure you’re on track to reach your goals, which for many clients include helping kids through college, retiring around age 65, and generally feeling on top of money in the meantime.

With that in mind, let’s consider a hypothetical. While this can be tough to think about, it’s important that you do. In this hypothetical, you’re in a car accident that kills your spouse and sends you to the hospital with serious injuries. This is where an estate plan would kick in to help protect your financial plan.

Without getting too morbid, we want to walk through how.

An estate plan generally consists of a will, trust, power of attorney (financial), healthcare directive, and guardianship details for your kids.

Ideally, your estate plan reflects what we’re already building with your financial plan. In this case, you might create a will that divides your assets equally among your kids if both you and your spouse die. You may even go a step further and create a trust to hold your assets, and name it as the beneficiary for your retirement accounts and life insurance policies. To provide for your kids, you name them as the beneficiaries of your trust, but stipulate that they won’t get the money until they turn 25, unless they want to access it early to pay for school. You name your cousin, who’s also your best friend, as the trustee. You also make him the guardian of your kids if something happens to you.

To keep thing simple, you name him as your power of attorney for both financial and medical decisions. As part of this, you create a healthcare directive and tell him your wishes — for instance, you might not want any extraordinary measures taken to save you.

 

An estate plan in action

If this hypothetical car accident happened, your cousin would be called to the hospital and briefed on your condition. He could then direct them not to take any extraordinary measures, per your wishes. As your financial power of attorney, he might also pay your mortgage while you’re unconscious.

If you were to die after a few days in the hospital, your estate would go into probate. Without a will, this can be a daunting process, but since you planned ahead, all a judge needs to do is sign off on the will with your cousin as executor. As an added benefit, the assets in your trust bypass probate, meaning they won’t become part of the public record, so your family’s finances stay private.

As executor and trustee, your cousin would settle up any debt using funds from your estate and would help ensure the funds in your trust are invested well for your kids. (He could potentially enlist an Advisor like Whitaker-Myers Wealth Managers to monitor those investments). He also moves into your house where he can take care of your kids as they grow up. 

At 18, your first child uses funds from the trust to help pay for college. A few years later, your next child does the same. Remember how you wanted to use your financial plan to help your kids pay for college? Now, your estate plan is fulfilling that wish for you.

While this scenario would be far from ideal, putting these provisions in place allows you to protect and provide for your children the same way you might if you were able to live out your best-case scenario. Put another way, an estate plan extends the life of your financial plan beyond your actual life.

 

Choice and control

We know it’s crucial to build wealth during your lifetime, so you can retire comfortably and take care of your family. One of the driving forces behind wanting that kind of financial security, though, is to set your family up for success.

Money is a key driver of that, but you can’t take money with you when you go. So a solid financial plan NEEDS to include details about what happens NEXT for your money. While this can be an uncomfortable topic, an estate plan doesn’t have to be hard, and getting it done early gives you choices and control. You want to have a say in what happens to the money you worked so hard for during your lifetime, and you want to make sure the people you love are protected no matter what happens to you.