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Important Considerations for Leaving a Legacy

December 28th, 2017 | 5 min. read

By Jacob Schroeder

Important Considerations for Leaving a Legacy - image.jpeg


Important Considerations for Leaving a Legacy - image.jpegThese days, being the child of a billionaire may not be as auspicious as it once was. Many famous business tycoons, such as Bill Gates and Mark Zuckerberg, plan to donate their fortunes to charity rather than keep it in the family.

Their intention is not only to use their wealth for curing diseases, expanding access to a quality education and achieving other worthy goals, but also to encourage their children to find their own way. As Warren Buffet said, “I want to leave enough so that my kids feel they can do anything, but not enough so that they can do anything.” In other words, they’re leaving a legacy in the form of strong values, such as hard work and self-sufficiency.

Although often associated with the rich, a legacy can be established by anyone, no matter your level of wealth. The purpose of a legacy is to continue to make a difference in the lives of others after you’re gone. And, leaving a legacy involves more than just the transfer of financial assets. It includes passing on your history, experiences and knowledge.

Still, a legacy – comprised of both your financial and intangible assets – takes more than just drafting a will. To ensure you leave a lasting impact, you need to be thoughtful and strategic.

Here are important things to consider as you begin the process of leaving a legacy.

Your financial security

When it comes to transferring your financial assets, don’t put the cart before the horse. Before you can leave a legacy for the next generation, you must first help yourself.

If you neglect your own financial needs to set aside money to help your children, you may end up doing the opposite. Instead, you may burden them with your own accumulated debt or healthcare needs and expenses. Therefore, it’s in the best interest of your loved ones that you first ensure a comfortable retirement for yourself.

Further, it’s important to implement your legacy goals into your overall financial plan. That reduces the chances of any confusion or having to backtrack on your promises. For example, you may have good intentions of leaving your home to your kids only to find out you need to tap it for income in retirement. A financial plan will show how to appropriately manage your assets to achieve your specific goals.

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Your savings and withdrawal rates

You’ll likely need to draw down your savings in retirement. If you plan to leave a financial legacy, you may want to preserve some or most of that money. That means you may have to be wary of your withdrawal rate, or how much you take from your savings each year. Depending on your other sources of income in retirement and level of wealth, you may be able to live off of only the interest and dividends generated by your savings. That likely entails saving more during your working years. This reinforces the need for a financial plan, which can detail the steps to take to help you build a legacy.

The tax consequences

In the end, the government is going to get theirs. But, there are a few tax strategies worth considering that can limit just how much.

  • Convert to a Roth IRA. If you pass on a tax-deferred retirement account, such as an IRA, to your children, they will have to pay income taxes on the distributions. A way to work around this rule is to convert some or all of your regular IRA savings into a Roth IRA. You’ll have to pay taxes up front on the amount you convert, but your heirs can take distributions from an inherited Roth IRA without being taxed. The caveat is that this strategy only works if you fulfill the five-year holding period, which stipulates the original owner must have held his or her contributions in the account for more than five years.
  • Stretch your IRA. RMDs from inherited retirement accounts are based on the beneficiary’s life expectancy. Therefore, the younger your beneficiary, the lower his or her RMDs and, subsequently, the amount in taxes they owe. This allows the rest of the account to continue to grow tax-deferred. In general, a “stretch IRA” works by naming children, grandchildren or even great-grandchildren as your IRA beneficiaries. (That is, if your spouse is taken care of.) Your heirs can then in turn pass it on, stretching the life of the IRA and creating an inter-generational wealth transfer.
  • Get under the estate tax threshold. Most people won’t have to worry about estate taxes. That’s because you can have up to $5.45 million in assets before you are subject to federal estate taxes (about double for married couples). Some states, have lower thresholds. But, if your estate is affected, one option is to gift some of your money. Under IRS rules, you can gift up to $14,000 per person per year. Recipients don’t have to pay taxes on the money, and giving money away to your heirs can help reduce your estate’s value under the estate tax exemption.
  • Be aware of the step-up in basis, which relates to how your assets are valued and taxed. Essentially, assets that you bequeath, including property and investments, are taxed based on their value when they are inherited, not when you acquired them. That can create a substantial tax burden for your beneficiaries since they will inherit assets at current market value.

It’s important to remember that IRS rules are complicated, so it’s not recommended that you try any of these strategies at home. Not all retirement accounts, for example, allow for certain tax strategies. Check with your tax adviser and financial adviser to determine the most appropriate strategy for you.

How you invest

Conventional wisdom is that when you near and enter retirement, you should reduce exposure to risk to generate a steadier return and better preserve your money. That generally entails trimming the amount of stocks in your portfolio while increasing the amount of bonds. With money you reserve for your heirs, however, you may want to consider a different approach, one that is more growth-oriented. Since your heirs have more time to ride out any market trouble, it may make sense to hold more stocks for their higher growth potential than conservative investments like bonds.

Insurance products come with certainty but also drawbacks

One way of guaranteeing that you will leave a financial legacy is to purchase life insurance or an annuity. It’s a good idea to have insurance that will provide income to your survivors in the event you pass away. As a legacy strategy, insurance products may offer certainty but also certain drawbacks.

Insurance products, especially in the case of annuities, can be very expensive. Also, they are often very complex, with many strings attached. Further, options for growth are limited. Your beneficiaries may be better off with money invested in a traditional investment account.

Setting up a trust

Most people already understand they should have a will, but it’s also important to consider the benefits of setting up a trust. A trust is created while you are alive with instructions on how property is to be managed and then distributed by a trustee upon your death. It can be a way to help prevent beneficiaries from misusing the money you plan to hand down.

Trusts don’t have to go through the probate process, saving your heirs time and money. Since there are different types of trusts, be sure to seek the counsel of an estate attorney who can help set up a trust that’s appropriate for your situation.

Ways to pass on things that are more important than money

In the end, most of us won’t be remembered for the money we left behind. Instead, our legacy will be the values, family stories, knowledge and character we’ve instilled in those close to us.

There are many ways to ensure you’re leaving a legacy comprised of the things that matter most: Create an ethical will, which is a document in which you communicate your values and provide life lessons for the next generation; mentor a younger coworker; spend time volunteering with your family and friends; research your family’s genealogy and write down your family history; teach your children how to manage money, so that one day they’ll have the fortune of being in your situation.

Ultimately, the most important thing you can do to leave a legacy is to live life how you want people to remember you.