Legacy and estate planning can give you peace of mind, knowing that your wishes, finances, and assets are accounted for and allocated exactly as you intended them to be. Meanwhile, as the foundation of your overall legacy, your inheritance plan is a critical consideration that can significantly impact your loved ones and future generations.
Ready to begin crafting the legacy that fits you? Here’s what you need to know to get started with your inheritance plan.
Clarify Your Legacy Goals
Start by defining your vision through the lens of your values, principles, and legacy objectives. Your legacy isn’t just about your accomplishments — that’s just scratching the surface.
First, define what ‘legacy’ means to you. It’s nearly impossible to craft a personal legacy without understanding your core values and motivations. Why do you want to leave a legacy behind? What, if anything, do you hope to change or transform? How do you want to impact your community and future generations? The answers to these questions lie in your money values.
Your money values are a set of core beliefs, and an extension of your greater values that can shape your relationship with money and inform decisions around how you spend, save, or invest. Understanding your money values can clarify the legacy you want to leave behind. Ask yourself:
- What are my priorities? Think about health, family, career, community, etc.
- Who is important to me? This could be your family, friends, members of the community, relatives, and beyond.
- How would you impact the world if money wasn’t an object? Think about your passions and what truly lights you up.
Your money values are directly correlated to your inheritance plan, so it’s essential to be as specific as possible about why these considerations matter to you.
Understand Estate Taxes
The estate tax (sometimes called a “death tax”) is one that is imposed on a deceased person’s assets. Generally, most people will not have to pay the estate tax as the IRS exempts estates of less than $12.92 million from the tax, as of 2023.
If you’re looking to lower the value of your estate to minimize tax liabilities, there are a few strategies you can explore:
- Revisit your charitable giving strategy: Assets left to a qualified charity upon death will be deducted from your estate.
- Explore a 529 account (if applicable): If you wish to start an education fund for your children or grandchildren, you can contribute up to $17,000 per year to a 529 account without triggering the gift tax. Once the money is in the 529 account, it is not considered as a part of your estate.
- Consider gifting: The gift tax exclusion for 2023 has increased to $17,000, and the ‘gifts’ you give can reduce the value of your estate.
Connect with a tax professional to ensure that your affairs are in order. They will be up to date on the latest estate tax laws and exemptions, so you can feel confident you’re not missing any beneficial opportunities.
Create or Update Your Will
Your will is the foundation of your estate plan. It outlines how you want your assets distributed once you die, along with other requests like guardianship for minor children. Without a will in place, your assets will be controlled and distributed by the court, which can be a time-consuming, complicated, and potentially painful process.
One of the first steps to creating a will is to name an executor, which will be the person who administers your estate. As you think about choosing an executor, consider:
- If they can effectively handle the process
- How they will interact with your heirs and beneficiaries
- Their own financial status
- The person’s attention to detail and organizational abilities
Given the enormous responsibility of the executor role, you want to leave your legacy in the hands of a capable person you deeply trust.
It’s also important to note that contrary to popular belief, a will is not a one-time legal document that remains unchangeable once it is created. It must be regularly reviewed and adjusted, especially after significant life events such as marriage, divorce, or if one of your beneficiaries has passed away.
Explore Trusts as Estate Planning Tools
Trusts are a valuable and effective tool in estate planning, and they’re often underutilized.
A trust is a fiduciary arrangement that allows a third party – known as a trustee – to hold title to property or assets on behalf of a beneficiary. It will enable you – the grantor – to specify how, when, and to whom your assets are distributed. Many new to estate planning will consider this definition confusing. It can be. To put it simply, you can create a trust, you can manage the trust (the trustee), you can be the beneficiary of the trust until you die. Not bad, huh?
There are two primary types of trusts to consider when creating your estate plan:
- Revocable Trusts: Also known as a living trust, a revocable trust outlines how you want your assets handled. The main benefit of a revocable trust is that it can be updated after it’s been created. You can change your beneficiaries, the assets included, and the distribution requirements.
- Irrevocable Trusts: This trust also defines how you want your assets distributed, but it cannot be changed or altered once put into place.
Trusts are an attractive option because the assets can avoid the costly probate process. They also allow you to control your wealth better and protect the legacy you’re actively building today.
Appoint Beneficiaries and Update Regularly
Wills and other documents will lay out how you want to distribute your assets, but they don’t cover all of your bases. You will need to name beneficiaries for certain financial assets.
A beneficiary is a person or entity named to receive the benefits from financial assets like retirement accounts, life insurance policies, and bank accounts. If you fail to choose a beneficiary, you risk your assets going through probate.
Appointing beneficiaries puts you in the driver’s seat of your financial assets, and just like a will, your beneficiaries should be reviewed and updated regularly to guarantee your choices still align with your utmost wishes.
Consider Charitable Giving
For many people, charitable giving is an integral part of their legacy and estate plan. As an estate planning tool, charitable giving can help streamline tax management and decrease the potential estate tax burden. Additionally, one of the most rewarding parts of charitable giving can be instilling a tradition of philanthropic efforts for generations to come.
There are many ways to implement charitable giving into your estate plan, including:
- Exploring donor-advised funds
- Creating a charitable remainder trust
- Utilize a charitable rollover from your IRA
- Donating appreciated stock
There are many ways to prioritize philanthropy during your life, and throughout your legacy. Consult with a professional on how to best utilize charitable giving opportunities, because each method you choose will have different tax implications and affect your heirs.
Address Family Dynamics
Having an estate plan is truly a selfless act for those you cherish the most in your life. Your legacy isn’t just about you; it’s about creating an ideal future for the ones you love.
Conversations about what happens when you die aren’t easy for anyone, but they are critical. There’s no way for your family and loved ones to know what you genuinely want unless it comes directly from you. Estate planning conversations will create ease for everyone involved, knowing that your legacy will be honored and there are clear directives on how to do so.
Here are a few things to keep in mind to ensure that your inheritance planning conversations are effective and productive:
- Begin the conversations as soon as possible. There is no point in putting off the preservation of your legacy, and it can be risky to do so.
- Prioritize open and honest communication. These conversations must be a safe space to ask questions and express your feelings. It’s also an opportunity to manage expectations and address potential conflicts head-on.
- Take notes on what was discussed. It’s easy to forget important thoughts, points, and instructions that come up in these conversations. Having the ability to reflect on them later will be necessary.
- Approach the conversation with an open mind. If you have a specific vision for your legacy, it can be easy to focus exclusively on that and forget about empathy. These types of conversations can be challenging for your loved ones, so it’s essential to lead from a place of understanding.
Ultimately, discussions like this require some strategy, and openness.. You may consider seeking professional mediation or guidance when necessary.
Plan for Incapacity
It’s not easy to account for every detail of the life you will eventually leave behind, but it’s crucial to be as prepared as possible. You’ll need to create advanced directives, living wills, and name healthcare proxies in the event you can’t continue to make these decisions on your own. No one knows your health better than you do, and an advanced directive will ensure that you are always in control of your healthcare needs.
You will also need to appoint someone to handle medical and financial decisions on your behalf. A medical power of attorney will make healthcare decisions in support of your best interests, while a financial power of attorney controls your finances with the same intention. These positions can be held by the same person, but always consider the strengths and weaknesses of the person or people you appoint.
Build a Legacy You’re Proud Of
As you begin to shape your legacy, consider your goals, tax implications, charitable giving strategy, your will, and your beneficiaries. Your goals may change over the years, and that’s okay. Updating necessary documents and beneficiaries, and reconnecting with your loved ones after significant life changes, can ensure the wishes reflected in your plan remain current and aligned.
If you’re looking to revise your existing inheritance plan, or need to start from scratch, reach out to an Abacus advisor today to learn more about how we can help build the legacy most desired for you.
Sources:
Javier Simon. 529 Plan Contribution Limits for 2024. Smart Asset. 15 Feb. 2024
Disclosure:
This material is not intended to serve as personalized tax and/or investment advice since the availbility and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.
