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Course: Financial Literacy > Unit 6
Lesson 9: Estate planning and legal instrumentsEstate planning introduction
Estate planning is when you make a plan for what will happen to your things, like your money or your house, after you pass away. This helps make sure your wishes are followed and can make things easier for your family. Created by Sal Khan.
Video transcript
- So let's talk a little
bit about something that frankly I do not like to talk about and I don't think most
people like to talk about, and that's the notion of
becoming very ill and dying, and then what happens to
everyone that you leave behind? And to understand why this
is an important scenario, let's imagine, and I'll just
put myself in this scenario, hopefully this does not happen. Let's imagine a scenario where something like that happened to me and/or my wife without us doing any type of planning, any type of end of life planning, any type of estate planning. You'd have a situation where
let's say heaven forbid we got into a car accident and we are not in a
position to make decisions on should we be put on
life support forever? Should some experimental
procedure be done? If we haven't given a healthcare proxy, and that's someone that
you put in writing, usually someone like a partner
or a family member or a child that can make a decision
for you in the event that you can't make the
decision for yourself, if we have not done that, if we have not given a healthcare proxy, then it's going to be somewhat arbitrary what's going to happen
to us in that situation, and it might not happen in
a way that's good for us or in line with our wishes or in line with our family's wishes. But let's say that that
plays out and then we die. Let's say I die and let's
say my wife isn't there. This is really a morbid situation. But if I do no estate planning, then all of the things that I own are then going to go into a
court process known as probate. And probate is where the
court tries to figure out, well, okay, Sal had all of this stuff. This is his estate, and his
estate is both the things that he has but also
the things that he owes. I might have assets, but I
might owe money on a mortgage. I might have a car loan, I
might have credit card debt. So the court in the probate process tries to figure out, okay,
who's going to get the assets and who's going to be able to cover all of these liabilities, all of this debt that might be owned? And it can be a long
process in the interim in which my children or
other folks that I care about that ideally I would've liked
to have access to those assets don't have access to it. And sometimes it can be
a little bit arbitrary 'cause it's gonna be decided by a court instead of me deciding ahead of time. And then just adding to that, if I haven't or my wife hasn't, whoever has passed away hasn't specified, what happens to your children? If you have children
who are still children, who's going to take care of them? If you haven't thought
about that and specified it, then a court might decide
just the nearest relative who may or may not want
to take care of your kids, and that might be, again,
a suboptimal situation. So in general, it's a good idea, especially once I would
say you have real people depending on you, probably once
you start to have a family, for someone to do end of life
planning, estate planning. Now some of you might
think, "Ah, I'm a kid. "I don't need to do this." Well, you can also talk to
your parents about doing this so that that type of scenario does not play out in your own life. And so it's important to
set a healthcare proxy, someone that you think understands
what you want to happen or has values similar to
yours to be your proxy in a situation that you
can't decide for yourself. It's important at minimum to have a will. A will will tell probate,
"Hey, these are my wishes. "I would like my children
to get my stocks equally," or that one kid who has been rebellious, maybe
they get a little bit less. I don't advocate that type of thing, but at least it becomes clearer so that when it goes through probate, it's going to happen. Now, there's ways that
you can actually really make things happen much quicker than even going through
that probate process, and that's putting assets
into something called a trust. A trust is an entity that
assets can be put into, and essentially it's an
entity that uses those assets, especially once you're gone
or if you're not in a position to manage them yourself to then divvy it up amongst other folks. So I can tell you that my
family, we have created, we have put our assets,
or not all of them, but a lot of them, the ones are that the most
important ones into a trust so that if worst case
myself and my wife die, immediately our children will
have access to the assets and be able to manage
the estate, so to speak. And so generally speaking, it's very important to do
this planning ahead of time. There's other words that
you're going to hear when you hear about estate planning. Beneficiary. Well, that's
the people who will benefit. Those are the people who are likely to, these are the people who
are going to get the assets. You're going to hear words like guardianship of
minor children, guardian. A guardian is the person
who takes care of children who are not adults yet. But the very important thing to consider if you are an adult now, especially with people depending on you, is to do this planning. And if you are not an adult, maybe you are in the care of other people, they might view it as a
little bit self-serving but it really is just prudent, encourage them to think
about these things. Because I don't think anyone
wants their loved ones to have to struggle in these situations or just because of a
little lack of planning have to end up in a very,
very suboptimal situation, especially at a time where they're already probably going to be dealing with things. Because you are an amazing
person and if you are gone, they're going to be very sad about that and you don't want them
to also have to deal with the stress of dealing with probate, not having access to financial resources, having to live with family members that neither you nor they wanna live with. That can all be avoided with
a little bit of planning.