Every successful legacy planning strategy consists of six principal pillars as part of a comprehensive framework for effective long-term financial management of family assets, income, and property.
Building wealth is accomplished through decades of hard-work, discipline, and persistence; safeguarding that capital requires an entirely different framework to manage.
Unfortunately, many Financial Professionals will still focus on accumulating wealth and do nothing to create a legally sound framework for passing on that wealth to future generations.
If you don’t have a legally binding plan in place, there is a high risk of the loss of generational wealth due to lack of legal protections, or to family members making poor decisions about how to use that asset or maintain it.
By taking a proactive approach to planning for the future instead of simply amassing a large quantity of financial assets, you can create a structured plan for how your assets will operate at the time of your death, and how they will continue to provide for your family, while maintaining family cohesion.
A successful legacy planning approach has specific, legally enforceable guidelines for how your estate will be distributed, as well as the means by which that estate will be transferred to heirs.
Finally, an effective way to build a strong legacy is to ensure that you establish a structure for open and honest communication with your heirs about the financial decisions you make; this will help avoid family disputes caused by ambiguous communications in the event of your death.
1. Create a solid legal plan for transferring your assets
Every legacy planning strategy begins with a strong legal foundation.
A properly established estate plan serves as the foundation for everything else you do.
A valid estate plan legally binds your intentions to actual results, so you have confidence that your wishes will be legally enforced.
In addition to creating an estate plan, it is very important to create a well-established plan for how your Estate Will Be Managed during your lifetime and after your death, including the process of transferring your estate and all of its assets to your heirs.
If someone dies without a written will, the State administers the estate as they see fit.
The process of liquidating and distributing an estate via the State courts is termed Probate.
This can be an expensive procedure both for administrative costs incurred by the State and at the same time, it exposes the deceased family's financial situation in public view.
Additionally, when families go through probate, they are subject to erosion of their family relationships.
Wills are merely a base-level writing.
Wills indicate to whom assets will be left, and who will manage(Executor) them once the will is probated.
For parents who have minor children, the only document that can be used to create a legal guardian is a Will.
If a Will doesn't specifically state who the legal guardian will be, then the determination of who takes care of the children is left in the hands of the Court System.
Trusts provide a different level of control than Wills.
A Will tells you what you will receive after you die; A Trust tells you how and when you will receive it.
Trusts provide a great deal of flexibility in creating very detailed instructions on how and when a Beneficiary will receive funds.
Trusts avoid lengthy, expensive Probate Court proceedings.
For a large number of commercial properties, private business interests and illiquid assets, revocable living trusts are essential.
The structure of your Trust is essential to the amount of privacy and speed of transferring wealth.
Wealth transfer documentation will be updated to reflect changes with family structure and changes to the property held.
All legal documents related to the ownership of real estate, private business interest and illiquid property should be consistent with your family's current situation and financial reality.
All documentation will continue to evolve and be updated as changes occur within your family.
All documentation must show continuity of the Wealth and Estate throughout life; Wealth preservation and maintenance is not a concern of the Estate Planning process but should also be a concern during the family members' lifetime.
If one of the Wealth Managers dies, is incapacitated or is suffering from a medical condition and cannot perform their job, all management will stop and the Court will have to appoint a legal Guardian.
This is a complete waste of time, money and privacy.
Financial safeguards for continuity
A durable power of attorney allows you to designate someone to act on your behalf.
If you become incapacitated, and someone is designated as your attorney-in-fact (or agent) under a durable power of attorney, that person has the authority to sell your assets to pay for medical care; file corporate income taxes; manage rental properties or create and maintain an appropriate asset allocation for your investment portfolio with no legal impediment to maintaining business continuity.
Protocols for medical decision-making
A health care directive outlines what, if any, medical treatment you would like to receive or not receive.
The Medical Power of Attorney appoints a person you designate as your health care proxy to make decisions regarding your medical care and treatment according to your wishes.
In emergency situations, eliminating ambiguity about what you want your family members or friends to do significantly reduces their distress.
No one will be left wondering "what did he want?"
A significant source of conflict among family members is resolved.
3. Preserve and distribute your wealth
Accumulating wealth is just the beginning.
Creating a legacy as an efficient transfer of wealth across generations without evaporating during that process requires thoughtful transfer planning.
To effectively transfer wealth between generations, beneficiaries must be aligned to the ownership structure of the asset and any potential liquidity event.
If a life insurance policy has an incorrect beneficiary designation attached, that will completely eliminate the entire purpose of drafting an estate plan.
Wealth and assets must be identified and quantified, and the wealth creator must accurately map assets to their intended beneficiary.
The Legacy Planning Formula is an example of many wealth creators utilizing an administrative structure to create harmony and consistency between different asset classes, thereby providing a single, predictable mechanism to transfer their wealth.
Creating that type of consistency and harmony is critical to ensuring that all forms of wealth are transitioned without delay and without having to incur high levels of stress and/or expense by creating interim administrative structures.
Beneficiary designations must be harmonized
Assets such as Retirement Accounts and Annuities, and Life Insurance proceeds do not flow through the Will.
In the event that there is a conflict between the way an individual’s trust is set up and the way it is written in the documents that make up an estate plan, the outcome will be confusion and potential lawsuit.
Yearly accounting of the Beneficiary/Trustee/Executor designations will be crucial.
The need for an annual audit is vital after any significant change in your life, such as a divorce, death, receiving a large amount of money from a private equity sale, or becoming a grandparent.
Creating liquidity from illiquid assets to pay estate settlements
Wealth transfers can present many difficulties with respect to illiquid (non-liquid) assets.
When an estate consists primarily of commercial real estate or a privately held business, heirs/beneficiaries may incur a large tax bill, and they will not have the cash necessary to pay those taxes.
This may force them to sell the property quickly and at a discounted price.
If a strategy is put in place to create liquidity immediately using a death benefit created by a life policy, the heirs/beneficiaries will have a tax-free source of cash to pay the tax without forcing the sale of the underlying assets.
4. Establishing family governance and communicating between generations
Legal documents cannot substitute for effective family communication and family governance.
Heirs/beneficiaries are the number one reason for loss of generational wealth due to the conflict between family members regarding heirs/beneficiaries.
The risk of conflict is exacerbated by the fact that there is often no clear understanding of the family legacy intent or the way the estate plan is structured.
Family members often feel betrayed by the contents of the trust and/or the unequal or inconsistent distribution of business shares resulting in costly and time-consuming lawsuits that deplete the estate's resources.
Reducing the potential for conflict between heirs or beneficiaries
Creating a clear, open family governance structure creates a powerful and effective “pressure-release valve” on future family member conflicts.
Family members should meet regularly and discuss their intentions regarding the family business and estate.
Having these conversations ahead of time serves to clarify expectations and allows for more educated decision-making at the time of execution.
Discussing philanthropy goals, estate executor responsibilities, and reasons for complex distributions of assets will minimize opportunities for conflict among family members.
When family members are not speaking to one another, they are creating a significant financial liability.
A culture of open and candid communication creates a solid foundation for the entire Family Legacy Planning Strategy.
By providing the next generation with education on basic financial literacy and being responsible stewards of sudden wealth, we will be better able to prepare the next generation to manage the sudden influx of capital.
5. Managing estate-related taxes and financial risks
Preserving Capital requires invasive and pre-emptive risk management.
The tax code is typically the greatest risk to Family Transferred Wealth.
Transferring Wealth: The Threats of Estate Taxes, Generation-Skipping Transfer and Capital Gains taxes immediately dissolve a large portion of an Inheritance.
To combat this threat Wealth Transfer should be engineered specifically for the purpose of mitigating these types of taxes.
Proactive tax mitigation opportunities
ILITs (Irrevocable Life Insurance Trusts), Charitable Remainder Trusts and GRATs (Grantor Retained Annuity Trusts) lessen the taxable footprint of the Estate systematically.
Annual Gifts, strategically created by Wealth Creators, allow for the transferring of Wealth to Beneficiaries without tax liability when the Gifts are made, while also allowing for the transfer of Wealth to Beneficiaries when the Beneficiary's are deceased.
The above mentioned methods allow for Wealth Transfer to occur to Beneficiaries or Charitable entities while simultaneously reducing the future tax liability.
Protection from creditors and liability
Risk Management also includes aggressive Creditor Protection.
Inheritances can be set up using specific Asset Protection Trusts, thereby shielding the Wealth from the potential fallout of Divorce, Bankruptcy and Business related Lawsuits.
Protecting Wealth from future Taxation is important, but equally as important is to ensure that Wealth is not lost due to the bad financial choices of the Beneficiaries.
Therefore Spendthrift Clauses are used to manage the systematic dispensing of funds to Beneficiaries as opposed to providing the Beneficiaries with a Lump Sum.
6. Transferring core family values
As shown throughout history, transferring wealth without transferring core family values leads to the rapid loss and complete depletion of that wealth in almost all cases.
Data collected shows that inheritance gives heirs the opportunity to completely waste their inheritance within one generation.
Wealth magnifies existing behaviours.
Therefore, lack of financial discipline and a sense of purpose from those who receive an inheritance may result in their downfall when they are given a large sum of money.
Establishing family principles
Through the use of ethical wills and purpose statements, the founding family values and principles are codified (written down in some format).
These documents have no legal standing, but they do provide a framework through which a family unit (the family unit represents all family members) can operate.
When a family is able to establish a charitable foundation or donor-advised fund (a fund set up to assist heirs in making charitable distributions), this creates a vehicle for heirs to work together to distribute charitable funds.
This teaches heirs how to be financially responsible, how to manage investments, and how to be decision-makers on the board level.
Creating a charitable foundation or donor-advised fund allows families to create a shared identity that transcends consumerism and creates a steward mentality in beneficiaries.
The key to legacy planning: Take action, not create hope
Having hope doesn't create a legacy plan. To create a successful legacy, one must create definitive, committed action.
There is also a complete alignment of legal tools, tax strategies and interpersonal communication that must happen.
Delaying difficult decisions allows others (e.g., governments) to take control of the private family asset.
By ensuring one has clearly defined estate plans, automated incapacity protection, maximised asset transfers, and clearly stated family values, the wealth builder is doing everything possible to ensure their life's work will continue in their descendants' lives.
The execution gives one the chance for a successful legacy.
Frequently Asked Questions (FAQs)
What financial level or age should one start legacy planning?
Do not wait for either a retirement age or a specific net worth to create your legacy plan.
Legacy planning should begin when a person gathers a significant amount of assets, incurs business liabilities, or has responsibility for any dependant.
By planning early, you will maximize the compounded value of all possible tax mitigation techniques.
Equally important for all adults, regardless of wealth or age, is the establishment of incapacity directives (power of attorney for healthcare decisions and power of attorney for financial decisions).
If you wait to create these directivess, you give your control to the government.
Is comprehensive legacy planning really necessary for estates that are under the federal tax exemption limit?
Yes, estate taxes are only one of the many threats to your generational wealth.
An estate may not be subject to federal estate taxes, but it may be completely exposed to probate costs, state taxes, aggressive creditor claims, and poor management by the beneficiaries.
A structured legacy plan will clearly define how the capital will be distributed and will provide greater asset protection when a beneficiary undergoes a divorce or is sued.
Maintaining wealth necessitates the construction of a solid legal framework; it is more than just avoiding taxes.
What role does a privately held business play in a legacy planning strategy?
In most cases, a privately held business will be the least liquid and highest value asset in a family's overall investment portfolio.
If a privately held business does not have a detailed succession plan, the sudden death or incapacity of its owner typically results in a rapid sale or forced liquidation of the business at a severely discounted price.
A legacy plan will create the policies for the transfer of leadership, as well as creating buy-sell agreements for future ownership of the business.
A legacy plan will create the necessary liquidity to purchase (or buyout) the non-active heirs from continuing the business without diminishing the operating capital.
The continued operation of a business, without incurring sudden tax obligations or experiencing family disputes, will result from the establishment of a thoughtful legacy plan.
Do digital assets and cryptocurrencies require a unique approach in legacy planning?
Digital assets and cryptocurrency require explicit transition protocols.
Digital assets and cryptocurrency cannot be accessed by executors of the estate through the normal legal authority.
Therefore, if you do not provide correct private keys or seed phrases to your executors, you have made your capital permanently inaccessible.
Legacy plans must provide detailed information on how to access and legally transfer digital assets and cryptocurrency.
With this information in place, all digital assets will continue operating while at the same time providing security for the creator of the wealth.
Can a legacy plan be changed once it is created?
Legacy plans are created to be flexible.
Most foundational legacy documents can be amended, modified, or revoked while the creator is alive and legally competent.
However, some types of tax mitigation strategies, such as irrevocable trusts, are difficult to change once established because they require you to relinquish control over the assets.
Therefore, to achieve the maximum asset protection for your heirs, your legacy architecture should include a combination of flexible and irrevocable structures.