As a parent, we often ask ourselves, what do we want our family legacy to look like when we pass away? What assets or trusts do we want our children and grandchildren to inherit, and at what phases of their lives?
Family legacy planning is something that many people don’t necessarily like to talk about, but it is something that you must discuss. The last thing you want is to confuse your beneficiaries about your final wishes regarding certain trusts and assets.
To avoid confusion and ensure your family has a lasting legacy, you should look into estate planning services. Continue reading below to learn how to protect your legacy best and who you can contact for more information.
What Is Family Legacy Planning?
Legacy planning is when you prepare how your assets and other property will be passed on to your loved ones after you pass away. Family legacy planning is a synonym of estate planning, but many financial advisors also use the term family legacy planning.
This was most likely because the term “estate planning” evokes death, and the word “estate” is usually associated with only the “wealthy” when that is far from the truth. Anyone can create a family legacy plan, but depending on how significant your assets are, the planning process can become complicated, especially if you try to make the plan on your own.
Is Family Legacy Planning Important?
Going through the legacy planning phase ahead of time is an excellent way to avoid a headache later when you aren’t there to help your family sort through your assets and belongings. Transferring wealth from your estate to your beneficiaries is not a simple process. Dealing with the probate process can take months, sometimes a few years, to complete.
Many estate plans rely on trusts to avoid the time-consuming probate process, but everyone plans out their estate differently.
To figure out which one works best for you, you may want to collaborate with an estate planning attorney who can help you prepare your trusts and wills. Estate planning services can help you arrange your investments and build a financial plan to ensure a family legacy for your children, grandchildren, and the next generations to come.
Estate Planning Documents
You must be aware of several different vital documents for estate planning. For example, revocable living trusts (RLTs) give the person who created the trust complete control of the assets tied to the trust while alive.
This document will then direct how assets are divided and passed along when the person dies. If you are married, your spouse will have complete control of the assets until they pass away.
Pour Over Wills
A pour-over will ensure that your remaining assets will automatically transfer to a trust you already established. These types of wills are typically used in conjunction with RLTs.
Health Care Directives
Health care directives typically consist of a durable power of attorney and a living will for health care. Health care directives outline your wishes for medical care, and they can help provide guidance about your health care wishes if you become too sick to communicate your needs.
Included on healthcare directives:
- Artificial hydration
- Pain medication administration
- Nutritional needs
The durable power of attorney selects a person to make health care decisions if you cannot do so. If you list your son as the “health care proxy” for a power of attorney, they can make health care decisions on your behalf if you become too sick.
How to Leave a Family Legacy
It isn’t uncommon for parents to want to leave their wealth to their loved ones or their children, and sometimes this can be the best option, depending on the size of your estate. Some people wonder how much they should leave their children and if there should be any guards up for inherited assets.
When framing the goal of your estate, there are a few questions you should ask yourself:
- What age should the money transfer to my beneficiary?
- How much wealth is enough?
- Should we create incentive milestones before transferring funds?
You can create incentive milestones when your loved one graduates, gets married, or if they wish to start their own business. Setting these milestones can give you the peace of mind that your trust will only distribute your wealth at predetermined times.
Potential Inheritance Issues
There are concerns that your children may lose their inheritance if they get sued. If someone does present a valid claim and your child must pay the settlement amount, creditors may be able to go after those inherited assets to settle claims. You can avoid this by using a well-structured Irrevocable Trust which means that creditors won’t be able to touch those assets.
How to Protect Your Family’s Wealth
One of the most significant ways to protect your family’s legacy is knowing all of your possible opportunities. Many people often miss out on any key opportunities to transfer their wealth effectively. Some forget about tax implications which can significantly impact how much of your wealth stays in your family.
For example, account titles are an opportunity that most people miss. Most couples jointly title their assets, leading to issues when they pass away.
Any jointly titled assets count toward each person’s individual federal estate tax exemptions when they do pass away. When you strategically title your assets instead, you and your spouse can own twice as many assets before incurring the tax.
Business Owners and Corporate Executives
If you are a corporate executive or a business owner, you can take many critical wealth planning moves to protect and add to your assets. For example, you should exercise your stock options before they expire if you have stock options. These options expire after ten years, so it is best to get started ahead of time.
If you are a business owner, there are ways for you to pass your business down to your descendants in a tax-efficient manner. It would be best to start succession several years in advance to take advantage of that opportunity.
Review Your Estate Plans Regularly
A common mistake many people make when planning their estate is failing to update paperwork. For example, someone may name their spouse as the beneficiary of a life insurance policy.
In the event that they divorce without updating the beneficiary for the insurance policy, the assets from that policy will still go to that ex-spouse instead of a child or someone else. Any time you have a significant life event happen in your family, be sure to revisit your financial paperwork.
Examples of major life events that may trigger a change in your finances:
- Business start-up
- Job loss
- New job
Even if you don’t experience these major life changes, it would be best to take a look at your paperwork at least once every three to five years. There may have been a new tax law or a personal financial situation that would make looking at your estate plan worthwhile.
Choose a Non-family Executor
Most people assign a child or someone in their family to be the listed executor, but that may not be ideal. Some people in your family may or may not want to bear that responsibility or have a hard time handling such a monumental task.
Being an executor can be a full-time responsibility and most likely require financial expertise depending on your estate. If you have a complex estate, which means you have homes in several different states, stocks, and other financial tools spanned over different accounts and states, you may not want to put that pressure on a family member.
If you have property or assets in different states, your executor will have to file taxes in all of those states and possibly go through probate court. If your beneficiaries don’t need the home, they may also need to hire a real estate agent to sell your property.
To avoid all of that, you can use an institution as the executor of your estate. They have the expertise and resources to take care of the probate process, and they know best how to pay taxes on your estate. When you list an institution as the executor of your estate, they can move through the process smoothly without conflicts that could arise if you list a family member as the executor.
Customize Your Plan
It is not uncommon for parents to have concerns about how their children will deal with their new inheritance. Some children may have substance abuse issues, mental health issues, or they may just want to spend any money that comes their way from your estate.
Other children may not have a good work ethic, leading to fears that they will only live off the money and not use it in ways that can benefit them and the next generation to come.
All children are different, so it is vital that your estate plan clearly addresses your beneficiaries’ specific needs and any potential problems. Trusts are excellent tools for dealing with those concerns.
For example, you can design your trust only to pay your beneficiaries as they earn income. You can even go as far as having the trust match all of their income earned.
You also can use your trust to equally divide assets between your children and protect your children after they marry. This is especially important because your child’s spouse may also inherit your assets.
How to Minimize Transfer Taxes
In addition to drafting your estate planning documents, you must also consider estate tax planning. As mentioned earlier, when you pass away, your executor will need to file taxes on any assets sold or inherited by your beneficiaries. If you don’t plan for future tax implications, the large net you thought you might have for your children and grandchildren may not be as large as it originally was.
Leave a Charitable Legacy
If you have a charity that you want to leave money to, you can have certain assets or funds transferred to your charity of choice without worrying about estate or gift taxes. Under the current tax law, any assets given to a charity are not subject to gift taxes or estate taxes as long as the institution is a qualified 501(c)3 organization. There is no limit on the amount of money you can donate to charity.
Annual Lifetime Gifts
Every year, you are allowed to donate $15,000 of your assets to another person or organization without incurring estate or gift taxes. If you do this every year, you can reduce the amount of your taxable estate over time, providing financial aid to your beneficiaries. For this type of gifting strategy, friends and close family members are excellent targets.
Charitable Remainder Trusts
These types of trusts allow you to make a large donation now and receive an income tax deduction equal to the value of the asset you donate within certain limitations. While you are alive, you will receive a stream of income from the trust, and the assets in the trust will transfer over to your charity of choice when you die.
Protect Your Legacy
Depending on the size of your estate and the type of assets you have, there are several different ways you can protect your family legacy. Estate planning can be overwhelming and time-consuming if you go at it alone. Contact us now to avoid the future stress of your beneficiaries trying to figure out who gets what and who needs to pay taxes!