IIAR

Creating Your Financial Legacy

All parents aspire to build a life for their children that is better than the one they lived. One way many parents seek to accomplish this worthy endeavor is by building a strong financial legacy. If you are fortunate enough to accumulate more wealth than previous generations of your family, you should work diligently to ensure that this wealth will translate to a financial legacy built to last not only for your children but for generations to come. The building blocks of a lasting financial legacy for your family may include lifetime gifts, proper estate planning, the appropriate utilization of life insurance, and open communication.

Lifetime Gifts

When contemplating your financial legacy, your attention may immediately shift to estate planning and the post-death transfer of wealth. Lifetime gifting, however, should not be ignored and can enhance any well-designed legacy plan. In 2023, an individual can make annual exclusion gifts valued at up to $17,000 per recipient without any estate or gift tax consequences. Gifts of any amount can also be made directly to educational or medical facilities on another individual’s behalf without any estate or gift tax consequences. By incorporating lifetime gifts as part of your long-term financial legacy plan, you can reduce the size of your estate and mitigate potential future estate tax exposure. You can also help acclimate beneficiaries to their future inheritance while providing oversight and helping them develop financially responsible habits.

Proper Estate Planning

A proper estate plan is critical to leave a lasting financial legacy. A solid estate plan is built on the five core documents of estate planning – a revocable living trust, a “pour-over” will, a general durable power of attorney, a durable healthcare power of attorney, and an advance healthcare directive or living will. Once you have a solid foundation in place, you may want to discuss more complex estate tax planning strategies with an attorney if you believe estate taxes will be a concern.

When building your estate plan, you must ultimately decide how your assets should pass to future generations. While an outright gift of a beneficiary’s inheritance may be the simplest option, you may instead choose to hold a beneficiary’s inheritance in a further separate trust to help protect and preserve your financial legacy. If structured properly, trust assets will be protected from a beneficiary’s creditors (including a divorcing spouse) despite the fact distributions can be made to help the beneficiary maintain his or her accustomed standard of living. Furthermore, because the beneficiary may not be considered the owner of the assets in the eyes of the law, the assets and future growth may avoid further exposure to the estate tax upon the beneficiary’s death. In essence, this type of trust planning can help you preserve assets from generation to generation in a tax-efficient manner.

Appropriate Utilization of Life Insurance

You may choose to purchase a life insurance policy for a variety of reasons. One of those reasons may be to help mitigate the impact of estate taxes. This is particularly true if you plan to pass on illiquid assets, such as real estate or business interests, to your beneficiaries. An appropriate life insurance policy may help provide your beneficiaries with liquidity to pay any estate tax liability that may be due upon your death.

If you are the owner and insured of a life insurance policy, the value of the death benefit would be included in your estate. This would compound the estate tax issue you were trying to solve in the first place. As a result, you may consider working with an attorney to create an irrevocable life insurance trust (ILIT) to own the policy outside of your estate. If you transfer an existing policy to an ILIT, you must outlive the transfer by three years for the policy to be removed from your estate. However, if your ILIT purchases the policy directly, it will immediately be removed from your estate. To provide the trust with the funds to pay premiums, you can make annual contributions to the trust. These contributions will not have any gift tax consequences if the trust is structured properly, trust beneficiaries are notified of the contributions, and the contributions do not exceed the annual exclusion gift threshold multiplied by the number of trust beneficiaries.

Open Communication

In today’s world, discussing one’s finances with friends or family members (particularly younger generations) almost feels taboo. Although having these conversations may make you uncomfortable, you simply cannot avoid them. Doing so would be a disservice to your family and may jeopardize the lasting legacy you’ve worked tirelessly to build. Instead, you should embrace these conversations as an opportunity to educate younger generations about your specific intentions and finances in general.

When having these conversations, your first goal should be to provide your family with the basic information necessary to facilitate an efficient administration of your affairs. This information includes a list of assets, the location of assets, and the contact information for your team of trusted professionals (e.g., your attorney, accountant, and financial advisor). By ensuring your family members don’t waste time tracking down key information, you will help facilitate a more efficient administration of your affairs from a time and cost perspective.

The second goal should be to help your family better understand the plan you have put in place. When doing so, you should be sure to provide insight into your decision-making process. For example, if your estate plan calls for gifts to charities or individuals who are not in your family, explain why you decided to make those gifts. If you decided to hold a beneficiary’s inheritance in a further separate trust, explain the numerous benefits of doing so. While every member of your family may not agree with your decisions, these conversations will help them understand your decisions. If they understand your decisions, they are less likely to bicker amongst themselves or harbor resentment toward you or other family members.

The third goal of these conversations should be to educate younger generations and enhance their financial literacy. A sudden influx of available funds could be a tantalizing prospect for your beneficiaries. Without a basic understanding of issues such as personal finances, applicable tax laws, and creditor exposure, these beneficiaries may make irresponsible decisions. Even if you choose to hold a beneficiary’s inheritance in further trust, the beneficiary may pressure a trustee to make ill-advised distributions for his or her benefit. Just one poor decision caused by a lack of understanding can jeopardize the legacy plan you worked so hard to build.

Leaving a lasting and meaningful financial legacy requires discipline and significant planning. The concepts addressed in this article may help you advance toward your ultimate goal. Nonetheless, you should work closely with your financial advisor and estate planning attorney to create and maintain a plan that addresses the specifics of your unique situation.

IMPORTANT DISCLOSURES

The IIAR and NRF reserve investment funds are currently managed by Stifel Financial Services under the investment policy established by their respective board of directors. Members of IIAR may use the services of Stifel for personal and business investments and take advantage of the reduced rate structure offered with IIAR membership. For additional wealth planning assistance, contact your Stifel representative: Jeff Howard or Jim Lenaghan at (251) 340-5044. Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.