Step 1: Ensure Estate Surplus

Here's the next post in this series on the 7-Step Estate Planning Framework. Previously, we provided an overview of the 7 steps you can use to prepare an estate plan. In this post, we will look into more details about how to go about determining if you will have a surplus of estate to take care of the loved ones you have left behind.

Here are the links to the 7 steps:

Step 1: Ensure Estate Surplus
Step 2: Ensure Estate Liquidity
Step 3: Plan Your Estate Wisely
Step 4: Write Your Will
Step 5: Register Your Will & Keep It Safely
Step 6: Consider Other Tools: Trusts, AMD, LPA & HOTA/MTERA
Step 7: Review Your Estate Plan

If you have already put together a financial plan (either on your own or with the help of a financial adviser), this would be a good time to pull out that plan (Watch out for the dust! ⚠️). The process of determining estate surplus is very similar to determining if you have enough insurance coverage against premature death. Thus, if you already have a financial plan and have implemented it to meet the premature death needs, then you are already done with this step and can move on to the next step.

However, if you have yet to put together a financial plan or not worked out your pre-mature death protection needs, there are 2 ways to proceed: Do-It-Yourself or engage a professional (financial adviser) to help you. The bulk of this post will be to help you DIY, and hopefully in the process help you understand your financial position better.

Do-It-Yourself Estate Surplus

The actual equation for this step is actually very simple:

Estate Assets - Existing Liabilities = Estate Surplus / (Shortfall)

Let's look into the details of each of the components:

Estate Assets

Estate Assets refers to all your assets that you have left behind upon your demise. They can be broadly categorised into 3 classes of assets, that corresponds to entries in your personal Statement of Net Worth:

• Personal Use Asset. These are assets used primarily for your own personal use (as opposed for investment). Examples of such assets include:
  • Home (primary place of residence). However, for the purpose of computing your estate surplus, you may want to exclude the value of your home as it is not an asset that you can sell to provide cash because your loved ones will still need to stay there. 
  • Car
  • Collectibles (jewellery, art pieces, timepieces, wine collections etc)
• Investment Assets. These are assets that are investment in nature. That is, they are expected to either generate cash-flow or to achieve capital gains over time. Examples of such assets include:
  • Stocks and shares
  • Unit trusts
  • Participating insurance products with cash values
• Cash or Cash Equivalent Assets. These are liquid assets that can be used to meet any immediate needs after your demise (like paying for funeral expenses etc). Examples of these are:
  • Savings and current accounts
  • Fixed deposit accounts
  • Money market accounts

You should tabulate all these assets into a spreadsheet along with its corresponding cash value. An example of such a spreadsheet can be found here: Estate Planning Calculation. You can do a File > Download As and save a copy to your desktop.

Existing Liabilities

The next part to tabulate are the liabilities associated with your estate. These again can be categorised into 3 broad sections:

• Long Term Liabilities. These type of liabilities are typically longer than a year (by definition) and typically includes:
  • Housing mortgages. Both for your primary residence and for investment properties.
  • Car Loans
  • Business Loans
• Short Term Liabilities. These type of liabilities are typically valid of less than a year and typically includes:
  • Credit card bills
  • Overdraft facilities
  • Balance transfers
  • Term loans
• Other Commitments. These type of liabilities are obligations to other parties not captured above:
  • Final expenses. Like funeral expenses, outstanding income taxes etc.
  • Children's education funding. Funds to be provided to ensure your children still get to complete their tertiary education.
  • Spouse retirement funding. Funds to allow your spouse to work part time to better look after the household in your absence, but still retire according to their original retirement plan despite their reduced income.
  • Gifts to other parties. These can include gifts to other parties like parents, siblings, supported charities etc.

The above Estate Planning Calculation spreadsheet can also help you tabulate all these liabilities.

Results of Estate Surplus Calculations

If the results of your estate calculation is positive, then congratulations, your loved ones are well provided for in the event of your untimely demise. The greater the surplus, the better off they'd be financially and will have one less thing to worry about.

However, if the above calculation results in a shortfall, then there is more that you'd need to do to better prepare for it. You can try to save more and invest to provide for the shortfall. But then, you and your family will be vulnerable from now till the time you've saved enough.

Another (better) approach is to use other fund creation techniques and this is key purpose of insurance. It is the most cost effective method to provide a large amount of funds in the event of one's unfortunate demise. As there are many different type of insurance products, with different features to fit different needs, it is best to speak with a certified independent financial adviser to recommend a suitable insurance product to fit your specific needs. He/She will consider the amount of funds needed, when you'd need those funds, the duration of coverage, your budget, any flexibility needed to increase or decrease the coverage at different times and many other factors before making a specific recommendation.

You can use the Contact Us page to request for help in finding a professional and trustworthy financial adviser.