“To ensure a lasting legacy, you need to get your documents in order and have a clear plan for how your wealth will transfer, avoiding taxes and inheritor pitfalls along the way.”
Asset distribution is how many estate plans begin, but we can create legacies for generations to come through our estate planning, says Kiplinger in the article “Legacy Planning: Create a Lasting Legacy.” You may not realize it until you sit down to prepare an estate plan, or even until you prepare a second estate plan. Your life has been devoted to building wealth and now it’s time to plan for the next generation. This is when estate planning becomes legacy planning.
Why is Legacy Planning Important?
If the goal is to leave wealth to children, the plan may be simply to bequeath assets.
However, if children are not good at handling money or if there is a concern about a marriage’s longevity, then you’ll want to look past a simple transfer of assets on death. For some families, a concern is leaving too much wealth to children, undermining the parent’s life of work and respect for their accomplishments. Legacy planning addresses these and other serious issues.
Which Documents are Necessary for Estate Planning?
Most people need the following documents:
Revocable Living Trust, or RLT. The person who creates this trust maintains full control of assets that are titled to the trust while they are living, and then directs how assets are to be passed on when one spouse dies and then after both spouses die.
Pour-Over Wills. Used in conjunction with a RLT, these work to direct assets to the RLT.
Durable Power of Attorney. These documents are part of planning for incapacity. They designate a person who will make financial and/or legal decisions for you, if you cannot do so.
Health Care Directives. Note that these have different names and details, depending on the state. For most people, they consist of a Living Will and a Durable Power of Attorney for Health Care. Together, these two documents provide a platform for you to share wishes about medical care. The Living Will gives guidance about your wishes, if you become too sick to communicate, including your wishes on pain medication, artificial feeding and hydration and resuscitation. The Durable Power of Attorney (sometimes called a Health Care Proxy) names a person who can make health care decisions, if you can’t do so for yourself.
How Do I Leave a Lasting Legacy?
Many people believe that their children should be the only beneficiaries of their wealth. However, for others, even those with modest estates, supporting an organization that has meaning to them through a gift in their will is just as important as leaving money to children and grandchildren.
Here are a few questions to consider when thinking about a legacy:
- How much wealth is “enough” for heirs?
- At what age should money be transferred to heirs?
- Should incentive milestones be created, like completing college, attaining higher education goals, or staying sober?
If assets are left directly to children, there is always the risk that they may lose the wealth. Sometimes that is not the child’s fault, but this can be prevented with good planning. Inherited assets can be protected in trusts, which can be created to protect wealth and provide for professional management.
Do Trusts Avoid Estate Taxes?
Another important consideration when creating a legacy, is minimizing tax liabilities. Not every estate plan is designed with taxes in mind, so you’ll want to discuss this with your estate planning attorney. The issue of taxes can become more complex, if the estate includes illiquid assets, including real estate or a family owned business.
Reference: Kiplinger (Oct. 30, 2020) “Legacy Planning: Create a Lasting Legacy”