After four posts on estate planning, we are getting deeper in the financial aspects of your death. Do you leave people behind that are financially dependent? Do you wish to make gifts to nephew and nieces or simply make a donation? After reading this article, you will be ready to assess if you have enough money to cover your last wishes. If you don’t I will also show you how to calculate your need in term of liquidity at the time of your death.
Before you assess your need, you need to go back in this series and calculate your estate net worth. Than, you need to know how much liquid asset will remain once the taxes are paid. Then, you can start calculating to know if you have enough money left for your heirs.
If you have a family, you automatically have financial dependents. Financial dependants are people who need a part of your income to support their life style. This usually includes your children and your spouse as we usually need both salaries to run the household.
The best way to determine how much you need is to assess how much your financial dependants need per year and for how long if you would ever pass away. Once you determine how much you need, you will need a financial calculator or a friend that knows math 😉 You basically have to find the present value of these future cash flow.
The question is:” how much do I need today to create an annuity that will give 30K per year indexed at an inflation rate of 2% during the next 30 years?”. If you have a financial calculator you do the following operations:
PMT: -30,000 (payment)
I: 2% (interest rate)
N: 30 (amortization)
COMP PV: (that will give you the present value).
This amount is what you need as liquid asset in order to purchase the annuity. In order to find this amount, your heirs can use your life insurance, your non-registered funds or ultimately sell a property (if you have more than one, if not, your spouse would have to move to an apartment).
Children school fees
You can apply the same calculation for school fees if you want to make sure that your children will have enough money to pay their tuitions fees. If you leave more than 25K per kids, you are better off creating a holding so it can be manage according to your will.
If you have no financial dependents, you would technically not need life insurance since nobody will need your money to live anyway. However, if you want to play Santa Claus with your nephews and nieces or with your friends or family, you can also plan to leave them a few bucks 😉
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