Do you have a plan for your assets when you pass away? Legacy and estate planning outline an individual’s personal and financial wishes and ensure estate representatives can execute them. It’s an uncomfortable but necessary part of a retirement strategy that preserves an individual’s estate, avoids probate, minimizes tax liabilities, and prevents confusion.
A financial advisor can establish a comprehensive legacy and estate plan that facilitates the transition of wealth to beneficiaries and arranges charitable contributions according to your values. Legacy planning provides peace of mind for you and your family so everyone understands what should happen with your estate after you are gone. Here are five things to know about planning your legacy.
Step 1: Understand the Difference Between Legacy and Estate Planning
Legacy and Estate Planning complement one another, but they are different. An individual solely looking to plan their estate might consult an estate planning attorney. Estate planning involves preparing the legal documents associated with the distribution of assets after death, including wills, trusts, power of attorney, and advance directives.
Legacy planning is one step further in the process. It goes beyond the transfer of assets and deals more with the intangible aspects of a legacy, like values and traditions and the impact of an individual’s wealth on beneficiaries, loved ones, and the community. For example, legacy planning includes charitable giving and business succession.
Legacy planning includes both estate and legacy aspects for a more holistic strategy. The first step to legacy planning is understanding the difference between the two. Then, think beyond the assets of your estate and consider what history, stories, values, and traditions you want to share. Decide if you wish to contribute to family needs like education, child or pet care, or perhaps there is an organization you support.
Step 2: Create a Will and Name an Executor
A last will and testament is the most fundamental piece of an estate plan, yet less than half of Americans have one, Gallup reported. Even more disturbing, just over 75% of Americans age 65 and older have a will.[1] A will summarizes the manner of execution of the important details of an individual’s life in the event of their death, such as dependent care and asset distribution. The person responsible for following and carrying out these instructions is known as an executor.
The executor plays a vital role as they are responsible for paying debts, distributing assets, and handling probate processes if needed. A good executor is organized, trustworthy, and capable of managing legal and financial responsibilities.
There are consequences to not having a will. In these instances, state laws dictate the distribution of assets which may not agree with an individual’s intentions. Estates land in probate, which is a lengthy, complicated, and costly court process that can cause stress and discord among loved ones. It’s in everyone’s best interest to create a will and establish an estate plan.
Step 3: Establish a Trust to Avoid Probate
A will is essential, but unfortunately, it doesn’t avoid probate. The only way toward a probate-free estate is to establish a trust for assets like property that don’t allow the naming of a beneficiary. A trust allows an individual to maintain control of their assets during their lifetime and the smooth transfer to beneficiaries after death. There are two main kinds of trusts.
- Revocable: Living or revocable trusts provide flexibility and permit changes during an individual’s lifetime. They can avoid probate but cannot shield assets from creditors or lawsuits.
- Irrevocable: These trusts prohibit changes once established, but they do guard against creditors, lawsuits, and estate taxes.
Finally, trusts can specify a purpose for assets, for example, education. A trust requires a trustee to manage it. This role is different from the executor of the estate, but it is possible to name the same person.
Step 4: Consider Tax Implications
Taxes can diminish wealth. Estate planning aims to reduce the tax burden against an estate and its beneficiaries. A financial advisor specializes in helping clients evaluate their assets, identify and implement tax-efficient strategies, and ensure that beneficiaries do not suffer the burden of tax liabilities. A few strategies to explore with an advisor include:
- Gifting: An individual can gift up to a certain amount annually ($18,000 in 2024) to beneficiaries without incurring federal taxes.[2] This reduces the estate value and tax liability over time.
- Trusts: Irrevocable trusts safeguard assets from estate taxes.
- Life Insurance: An irrevocable life insurance trust (ILIT) transfers life insurance proceeds tax-free to beneficiaries.
Step 5: Regularly Review and Update Your Plan with an Advisor
Many factors can impact estate and legacy plans. Changes in financial circumstances, marriages, divorces, births, and more can warrant adjustments. Unintended consequences can result from an outdated plan, such as assets going to a previous spouse after divorce.
Regular review and updates with a financial advisor ensure that retirement, insurance, and investment accounts remain current and the plan evolves with life circumstances consistent with an individual’s intentions.
Start planning your legacy today. Consider how you want to be remembered and who you want to gift to and discuss with your family. At SHP Financial, we collaborate with reputable estate planning firms to build a customized and complete legacy plan as part of your Retirement Road Map®. As your trusted partner, we’ll optimize and preserve your wealth so you can rest assured that your values are honored, your wishes respected, and your beneficiaries unburdened. For a complimentary review of your finances, contact a professional at SHP Financial today.
Sources
[1] https://news.gallup.com/poll/351500/how-many-americans-have-will.aspx
[2] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024
