Financial plans versus estate plans
People often confuse financial planning and estate planning, but they are different types of planning that involve different goals and decisions. This article explains what financial plans and estate plans are and lists the main components of each type of plan. It then says what kinds of professionals help to create financial and estate plans.
What is a financial plan?
A financial plan is a plan and set of documents covering all of a person’s finances. It gives the person an overall roadmap to their short-term and long-term financial goals, both when they are alive and after their death. A financial plan is a larger plan that has smaller plans inside it, including an estate plan. A typical financial plan might include:
- A list of financial goals, values, and priorities
- A budget of monthly income and expenditures
- An assessment of the person’s net worth (how much money and other assets they have, after any debt is subtracted)
- A strategy for building an emergency fund
- An investment plan, starting with an assessment of how much financial risk the person is comfortable with
- Ways to avoid and repay debt
- A retirement plan
- An estate plan
What is an estate plan?
An estate plan is a smaller part of a person’s overall financial plan. It contains documents that say what happens to the person’s estate after they die. (A person’s estate is everything that belongs to them, including money, property, pets, and belongings.) It is a way for a person to pass down their family’s wealth and legacy to future generations and make sure their assets go to the right people and organizations.
In addition to the financial elements, an estate plan also focuses on decisions and documents regarding the kinds of medical care and treatment a person wants if they are critically ill or at the end of their life. Many of the medical care-related documents in an estate plan are legally binding. A typical estate plan might include:
- A will
- Trusts, including a living trust
- A living will and other advance directives
- Medical and financial power of attorney documents
- Ways to minimize taxes and fees before and after death
Which professionals help to create financial plans?
A financial plan is created with the help of a financial planner or financial advisor. Neither a financial planner nor a financial advisor can give legal advice or create legal documents. A financial planner helps to decide on a strategy for meeting mid-range and long-term financial goals. They usually take a broad and holistic view of the person’s financial strategy and often form long-term relationships with their clients. The term “financial advisor” refers to various kinds of financial specialists, including bankers, life-insurance agents, and brokers. Financial advisors who work with the public need to pass a licensing exam. 1 They usually focus more on the investment side of the financial plan.
Which professionals help to create estate plans?
An estate plan is created with the help of an estate-planning lawyer.
While some of the documents relating to medical care and treatment can be created and made legally binding with the signature of witnesses or a notary (a public official who can act as a formal witness to a signature), experts strongly recommend that a person hire an attorney to make sure that the documents are properly worded and legally correct.
Many estate-planning lawyers have financial advisors that they work with as they help their client create an estate plan. A person can also bring their own financial planner to work with the estate-planning attorney on the estate plan.
Decisions related to aging and the end of life
Durable power of attorney
Engaging an attorney
Estate and inheritance taxes
Medical power of attorney
Overview of estate plans
Overview of legal documents
Overview of trusts
Using an online service
Will and testament
External supporting content
1 Financial Planner vs. Financial Advisor: What’s the Difference?. Investopedia.com.