Building the Legacy Plan

What is your legacy plan?

Most people are familiar with estate plans. The goals of the estate plan are to ensure that assets are transferred to the people you want in the most efficient manner, that is with the smallest burden in taxes and other expenses. The standard estate plan includes a will, a financial power of attorney, a health care power of attorney or advanced health care directive, and perhaps a trust or two. It also might include asset protection planning, long-term care, and some more sophisticated measures for owners of businesses and some other assets.

In legacy planning you take a step back and look at a much bigger picture. It often is reserved for individuals with assets that exceed the estate tax exemption amount. The more wealth an individual has, the more options there are. But there also are greater concerns. A legacy is your reputation with others. It is the reflection of what you did with your life, for your family, and for others. A complete estate plan that includes a legacy plan puts this larger picture up front, and the focus on estate planning tools and strategies is in the background.

A legacy plan should have at least three distinct stages with goals established in each of them.

Financial independence. It is hard to give to children, grandchildren, or charity if preserving one’s own standard of living is in doubt. The first step in a legacy plan is to estimate your lifetime needs and identify the sources that will provide for those needs. If you are married, of course your spouse’s needs are included in this step. The amount that can be given to heirs or charity now and that is likely to be available later can be estimated only after estimating your lifetime spending.

Financial independence means different things to different people. Many people want to ensure that their lifestyles will not be impaired under any number of possible scenarios. Others are secure with identifying the amount they will need in the most likely scenario and adding a modest cushion for surprises. The size of the cushion you want will affect the lifetime gifts in the plan and also the details of the estate plan portion of the legacy plan.

Family legacy. The next step is deciding what you want for your family. Again, this is an individual choice, and there are many different preferences.

Some people emphasize leaving something for their children, even if that means reducing their own standard of living. At the other end of the spectrum are people who do not plan to leave much property to their families. Some believe family members will waste the assets. Others believe the children already are well-established ? either because of their own efforts or lifetime help from the parents ? and do not need additional wealth.

In these cases, some want to provide for the grandchildren. They believe the grandkids face bigger obstacles than previous generations and will need all the help they can get. The legacy plan will be structured to bypass the children and make gifts to the grandchildren.

Some parents are concerned about how leaving wealth to loved ones will affect their heirs’ values and drive. For those in this last group, there are alternatives to direct gifts that we have discussed in past visits, such as leaving wealth with controls or that are tied to achievements.

In some families, equal treatment of the heirs is paramount. In others, some children are considered more deserving or needy than others. The goals for many parents are to keep some cohesion and harmony and the family, to enable the following generations to lead fulfilling and meaningful lives, and to perpetuate their values. These are all issues that should be considered as part of the legacy.

Public legacy. The final step is determining how wealth will be allocated outside the family. Estate taxes and ways to reduce them are part of this step. Also to be considered are gifts to charities and non-family members. After the goals for taxes and charitable gifts are set, the vehicles to use are determined.

In addition to determining the amount (or percentage of the estate) to leave to charity, the specific charities need to be identified. Then the owner must decide whether to give now or through the will. Finally, the estate planning details must be decided, such as whether to give specific assets, and whether to give directly or through trusts or other vehicles.

Most estate plans are developed using a process that is the reverse of the legacy planning process. The estate owner gives a list of assets and liabilities to an estate planner, and the planner presents options for minimizing taxes and leaving property to heirs and charity. This approach is fine for people whose assets do not greatly exceed their needs and that are below the taxable amount. But other people should consider the legacy planning approach.

The legacy plan is about much more than dollar values and the tax law. In the legacy plan, you begin by considering your values, goals, philosophy, preferences, and attitudes. These factors are translated into your preferences for your standard of living, what is given to heirs, and what is given to charity or paid in taxes. Some people find it helpful to draft a personal or family history, both to structure their goals and as a tool to help the following generations understand the reasons for the plan.

There are many possible goals for a legacy plan, and there are many trade offs involved in reaching any of the goals. Because of the trade offs, you need to establish one primary goal. Other goals will be secondary, and the plan will be geared to ensuring the primary goal is met. For some financial independence is primary, which could limit the wealth available for heirs and charity, at least during lifetime. Other people decide to scale back their standard of living to boost gifts to heirs or charity.

The legacy plan is a way of communicating and passing on your values, wisdom, and purpose. It also is a way of using your wealth to make a difference in the things that matter to you.

Most estate planners can help clients with a legacy plan instead of an estate plan. The process usually begins with the completion of a questionnaire that covers your wealth as well as your values and goals.

Legacy planning is not for everyone. Some do not have enough wealth to have concerns beyond establishing financial independence. Others do not like to grapple with the various value issues and trade offs or the additional time involved.

Those who plan for a legacy are more confident that their values along with their wealth will be transferred as they wish. The process also makes it easier to communicate plans and values to heirs.