Though you might not be ready to sort through your receipts just yet, there’s never a bad time to get things organised. The two terms ‘estate planning’ and ‘tax planning’ are often used interchangeably, but they’re two separate constructs.
Whether you’re planning retirement or supporting a loved one who is, it’s always worth knowing the differences between estate planning and tax planning – and a few tips for simplifying each process.
Tax planning and estate planning: What’s the difference?
Estate planning involves putting together a plan for the way your assets will be shared after you die. This process may involve establishing trusts, writing a will, naming beneficiaries for retirement accounts, and other end-of-life considerations. For many, estate planning is an important part of preparing to retire.
Tax planning is the overall process of reducing your tax liability through specific financial decisions. Over time, this might include contributing to retirement accounts with tax-related perks, making the most of tax deductions and credits, and setting up trusts or any account with tax benefits.
While both areas prepare you to make the most of your assets later in life, tax planning is specifically intended to help you maximise your personal financial resources and keep more of your money too.
What are the advantages of estate planning?
There are distinct advantages to planning administrative details for your estate. These include:
- Greater control: When the plans for your assets are clear and in writing, you gain full control of the direction and distribution of your wealth after you pass away.
- Peace of mind: Knowing where your money is going can help you to enjoy a fulfilling retirement without financial worries for your family.
- Improved family dynamic: Thorough estate planning can help to keep family conflict to a minimum. The topic of money can be challenging, but it’s important to address it.
- Secured legacy: When your assets go where you’d like them to, you can make sure that your values are preserved after you pass away. This is particularly relevant for those who want to leave monetary gifts to charity.
Are there any drawbacks to estate planning?
There are few disadvantages to estate planning for anyone looking for peace of mind later in life. However, the process can be costly and time-consuming for some, so it’s quite common for families to seek help from a finance professional.
What are the benefits of tax planning?
- Lower costs: Saving money is one of the biggest benefits when you take advantage of credits, deductions, or alternative tax-saving methods.
- Improved savings: It’s important to make the most of your savings during retirement, and tax planning can help you to achieve this.
Does tax planning come with risk?
Risk factors deter many people of retirement age from tax planning. Some strategies can incur costly fees if they’re done incorrectly, so working with a financial advisor is imperative – and this can be expensive. Others believe that they can make better savings elsewhere, since tax is only one factor that contributes to personal finances in retirement.
Tax planning and estate planning are useful, but for different reasons and purposes. If you’re unsure how to manage your finances as you head towards retirement, do not hesitate to seek advice from a professional – or call into your bank to find out about the easiest options first.