“Estate planning” and “legacy planning” are closely related terms that are often used interchangeably. While both terms refer to planning for how to leave assets to your loved ones after you die, there are some important differences between the two.
Estate planning typically refers to financial bequests, while legacy planning refers to the process of passing along not only your assets but also your values. Estate planning involves documents such as wills, revocable and irrevocable trusts, powers of attorney, help care proxies, etc. Legacy planning does not necessarily involve formal legal documents, but many choose to spell out their philosophy and goals in memorandum to family and other beneficiaries.
Following are four reasons why legacy planning is important.
#1 – Legacy planning allows you to pass along your commitment to charitable giving.
If it is important to you to give back to charitable causes, you may want to pass along your charitable values to future generations. Legacy planning can help you implement strategies to do so.
For example, you may decide to implement a donor-advised fund (DAF), which is a 501(c)(3) charitable fund that receives irrevocable charitable gifts from donors. The fund holds the charitable donations for distribution at a later date, which can be years in the future.
As long as the assets are held within the account, they are exempt from taxes. This allows you to donate assets to a DAF and leave them in the account for future generations to distribute to charities over time and gives your children and grandchildren a role in determining how assets are gifted to various charitable organizations long into the future.
#2 – Legacy planning can help your family carry on your values.
In addition to passing along your charitable values, a legacy plan can help you pass along other important values as well. For example, if you worked hard over your lifetime to build your career and wealth, you may want to pass along this work ethic to future generations. A legacy plan can help motivate your heirs to work hard in their own professions.
For example, you may wish to establish a trust and include provisions to help motivate your loved ones while also offering financial support. If it is important to you that your family members pursue meaningful careers, you could decide to include a trust provision that states the trust will match each beneficiary’s annual salary. If an heir is not working, he or she would not receive assets from the trust.
Or perhaps you wish to incentivize higher education, in which case you could offer a lump sum of cash for obtaining a certain degree and/or achieving a certain grade point average (GPA).
#3 – Legacy planning allows you to support the education of future family members.
Planning for the education of future generations of family members allows you to support your loved ones’ dreams, reduce their financial burdens and give them the freedom to make a positive impact on the world. By supporting an heir’s education, you improve their job opportunities and income potential, empowering them to discover their own path to success and financial independence.
You may decide to establish an education trust with the specific intent of paying for education-related expenses. A trust allows you to set parameters on how the funds can be spent (tuition, books, room and board, etc.) and establish requirements for its use (must maintain a minimum GPA, for example).
Another option is to contribute to a 529 college savings account, which is a tax-advantaged account specifically designed to help individuals save and pay for educational expenses. Earnings within a 529 plan grow tax-deferred and can be withdrawn tax-free when used to cover education-related expenses.
#4 – Legacy planning helps prevent family disputes.
Taking time to spell out your wishes, your values and the reasons behind your legacy planning strategy is one of the most effective ways to prevent disputes among family members. A legacy plan allows you to articulate the “why” behind your decisions, which can help set your family members’ minds at ease and avoid future conflict.
Could you use some help establishing a legacy plan to support your family? We would love to have a conversation. To learn more about how United Capital Financial Advisors can help you plan for the future, please contact us.
