When the topic of estate planning is broached, it is natural to feel uncomfortable or a sense of dread. Of course, this makes sense for any subject related to death. But instead of thinking about the end and using the traditional “estate planning” nomenclature, we try to reframe our client’s thinking toward preserving their family legacy. Having a legacy plan is not just executing your estate documents and transferring assets but is deeper and more comprehensive, considering both your wishes as well as passing down family values and traditions. A legacy plan is also more strategic and can involve several methods to potentially minimize taxes and maximize the transfer of assets to the next generation. Legacy planning still incorporates core estate planning components, but there are additional elements to consider as part of the process.
Initial Phases of Planning Your Legacy
The first step in any legacy plan is to establish and document your long-term wishes. What family values or traditions do you want to pass down to the next generation? How do you want to be remembered, either by your family and/or your community? These are important, fundamental questions to ask yourself first. The next important question to ask yourself in the process is: how do you want your financial assets to support your wishes? Part of this step is to review your net worth and list of assets (i.e., investments, cash real estate, collectibles, family heirlooms, etc.), but then it will be important to connect those assets to your specific aspirations. For instance, do you want to provide specific monetary support to family members, such as creating trusts that help pay for the cost of your grandchildren’s college education? Do you want to create a charitable legacy through a private foundation or donor advised fund? Last but certainly not least, who would you trust as stewards for your legacy if something happens to you? For example. if you have minor children, who would you name as guardian? Additionally, who would you want to make medical and/or financial decisions on your behalf if you were to become incapacitated?
All of these aspects are important to document as part of your plan, even before you move on to the formal process of executing estate documents. In fact, we feel it is important to document these aspects in a “Summary of My Wishes” document. This document can even serve as a cover letter or introduction to your overall legacy plan. Part of this summary document may also include a copy of your net worth statement, locations of certain assets, passwords to online accounts, and/or names and contact info of their professional advisors as well (i.e., CPA, estate attorney, financial planner, insurance agent, etc.).
Once you have taken the critical step of defining your wishes and values, it is time to work with a qualified estate planning attorney to draft and execute your core foundational documents. These core documents include: (1) Last Will and Testament, (2) Power of Attorney for Healthcare, (3) Power of Attorney for Property, and (4) Living Will. These are the main documents you need to state your wishes in terms of how your assets should be distributed, who gets what, and who is in charge to make decisions when you’re gone (or if/when you are unable to make decisions yourself). If you have minor children, these documents also help designate who will take care of them and at what age they receive financial assets. In addition to these four documents, a revocable living trust can also be considered a core document. However, this depends on your wishes and situation, as well as your desire to manage assets presently and avoid probate in the future.
After your core documents have been executed, you will also want to retitle any assets where it is appropriate, and if applicable, such as titling an investment account in the name of a revocable trust. You should also review and update beneficiaries on your retirement accounts and life insurance policies to ensure that they are aligned with your wishes and overall plan as well.
Legacy Planning Strategies
Beyond executing your core estate documents, there are a multitude of other strategies to implement your legacy plan, both presently and after you’re gone. Many of them provide income tax benefits and/or estate tax benefits as well. Common considerations include:
Gifting to Family – If you want to start transferring assets to family before you are gone, making annual exclusion gifts may be considered. You can gift marketable securities or cash, or a combination of both, up to $16,000 per donor and per recipient without incurring gift tax. If you are married, this can be combined at $32,000 per recipient. For example, if you are married and want to gift the max to two of your children, then you can gift $32,000 to each of them ($64,000 total). The two main ways to gift to family are directly or into a trust for their benefit, such as a Family Trust. An additional gifting mechanism, specific to education savings, is gifting to a 529 college savings plan. Assets grow tax-free and can be distributed tax-free if used for qualified college expenses. In Illinois, the donor receives a state tax deduction of up to $10,000 ($20,000 if married filing joint) for contributions made to the 529. From an estate tax perspective, any of these methods can help reduce the size of your potentially taxable estate.
Philanthropic Giving – Gifting to charity has multiple benefits including several tax advantages, such as an income tax deduction or removing highly appreciated securities that would have been taxable if sold. There are also many ways to gift to charity, such as the following examples:
Direct: Direct gifts to charity provide a charitable deduction in the year of the gift, potentially helping to lower your income tax bill. Direct gifts also help support specific institutions immediately, so if part of your legacy plan is to support certain organizations, then this is a great way to make an impact.
Cash vs. Securities: You can give either cash or appreciated securities to charitable organizations. Both provide a charitable tax deduction, although the amount may be limited to a percentage of your Adjusted Gross Income (AGI). Gifts of securities have the added benefit of removing highly appreciated securities that would have otherwise been taxable if you sold them.
Donor Advised Fund: A Donor Advised Fund (“DAF”) is a personalized charitable giving account that allows you to make a charitable gift, receive an immediate charitable deduction, but then have the freedom and flexibility to make charitable grants to multiple charities at different times. It is similar in concept to a private foundation. However, Donor Advised Funds are more simplified, lower cost, more flexible, and less time consuming to administer. With DAFs, you can also donate cash or appreciated securities, sell those securities tax-free, and invest the proceeds for future tax-free growth. The tax benefits and flexibility of DAFs are immense. From a family legacy perspective, the other beneficial aspect of DAFs is the ability to give the fund a personalized name, such as the “SMITH FAMILY CHARITABLE FUND,” and then pass down management of the fund to your successors. These funds create great opportunities to have philanthropic conversations amongst family and promote your charitable wishes that can carry on for years after your passing.
Transferring Life Insurance into a Trust – Life insurance can provide substantial protection against the loss of a loved one, particularly if that loved one was the primary breadwinner of the household. However, if those death benefits are received outright and the size of the estate is already substantial, these proceeds can significantly increase the likelihood of having a taxable estate. A common strategy to combat this is to title an insurance policy in the name of an irrevocable trust, called an Irrevocable Life Insurance Trust (or ILIT for short). Any death benefit proceeds received are then excluded from the grantor’s estate, and the proceeds can still be used to provide liquidity for the estate and the beneficiaries. An ILIT has an additional benefit of creditor protection as well.
These are just a few strategies and options to consider, but depending on your situation and plans, there may be several other, advanced strategies as well. For example, a Family Limited Partnership (FLP) can help you preserve management and control of family assets and potentially save on estate taxes, while benefiting the next generation. There are also trust vehicles such as an Intentionally Defective Grantor Trust (IDGT), which allows the grantor to pay income taxes on trust assets during their lifetime, thereby providing an additional way to reduce the size of the grantor’s estate as well as maximizing growth potential of the trust assets. These are just a couple of the numerous opportunities that exist to help you maintain your legacy.
To summarize, while legacy planning can be a more involved process, it is an excellent opportunity to achieve multiple goals of (1) preserving your wishes, (2) passing down ideals and values to the next generation, and (3) potentially saving on income taxes and estate taxes. To create the most effective and cohesive legacy plan, it is critical to work with a qualified estate planning attorney, tax professional, and financial planner. In addition to having the right team of experts, it is also recommended to communicate your wishes as a family. While it can be difficult to discuss the details of your estate with loved ones, even having a high-level conversation about your wishes and values, as well as the location of important documents, can be incredibly valuable and allow for a smoother transition.
At Tenet, we can help drive the process of creating your personalized legacy plan. With our deep expertise and team of professionals, we will serve as your dedicated partner for you and future generations. Please feel free to contact us to learn more about how we can serve you and your family.
Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC. The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice. This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice.