Whether retirement is around the corner or far away, legacy planning should always be on your mind. Understanding how to leave a financial legacy behind, what it is, and how you can maximize it will leave your loved ones with more than just your memories, but your ongoing financial support too.
We will investigate what is financial legacy, how to create a financial legacy, why is legacy planning important, and how to leave a financial legacy for your family.
What is a financial legacy?
A financial legacy is what you leave behind for your loved ones when you die. It can be monetary as well as financial knowledge. It’s the idea that you leave your loved ones in good financial hands. They will know that they have money from what you left behind. More importantly, they’ll know what to do with it because you gave them the necessary foundation.
Your financial legacy may include any of the following:
- Money in savings or CDs
- Money invested in stocks or bonds
- Real estate
- A family business
- The knowledge to handle finances
Why is legacy planning important?
Legacy planning means you plan how your assets will be distributed and used. Your legacy plan includes details of who receives what and how they should use the funds. For example, if you have a fund set up for your child’s college education, you can leave instructions for using the funds.
Without proper legacy planning, the state decides who gets the funds and how they’re used. The state also takes its fair share of the money, too, which probably isn’t how you envisioned your money being used.
Legacy planning ensures every dollar goes where you intended and ‘hopefully’ your heirs use it as you requested.
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How to leave a financial legacy for your family
To leave a financial legacy for your family, you need a will. It’s important not only to create a will but to regularly update it too.
A will is a legal document that specifies where each asset goes individually. It’s a listing of your final wishes. It must be followed through because it’s a legal document (when drawn up correctly).
The great news is that you don’t need an attorney to draft up your will. You can actually create a will online using a trusted site like Trust & Will.
Sites like Trust & Will actually walk you through the process of drafting your will step by step. You simply have to answer the questions that are provided in the prompts. With Trust & Will, you can create your own estate plan in minutes!
Some people also leave life insurance as a part of their financial legacy. Life insurance is separate from the assets in your will, though. Since you paid the premiums with after-tax dollars, your heirs don’t have to pay taxes on the payout and can do what they want with the funds, such as pay your final expenses, use for living costs, or cover other expenses.
How to create a financial legacy
No two financial legacies will look the same, but here are the top considerations when financial legacy planning.
1. Homes make a great inheritance.
If your family owns a home, you can keep it in the family by passing it down to loved ones. Depending on how large your family is, you may need to put it in a trust to set up the different interests in the property to prevent arguments and misuse of the property after you are gone.
2. Be clear about your family home and personal belongings left behind.
Grieving families often have a hard time being rational when it comes to dividing household and personal items of their loved ones. Any items in your home of value (monetary or emotional), can quickly cause arguments and family division.
In your will, make sure to be specific about every item in the house and who it should go to upon your passing. That way, there aren’t additional issues your family must face.
3. Create a beneficiary IRA.
If you have an IRA (Roth is best), you can name your children, grandchildren, or any other beneficiary on the retirement account. If you leave your loved ones a Roth IRA, they don’t have to pay any taxes on the funds because you contributed the money after taxes.
The only catch would be if you (the account holder) didn’t have the account for at least 5 years before you died. If you did, your beneficiaries have 5 years to take the funds out or to roll them over into an inherited IRA which allows them to take distributions throughout their lifetime rather than within 5 years.
If you have a traditional IRA, your beneficiaries will owe taxes on any distributions they take.
4. Name a child as beneficiary for an annuity.
Like a beneficiary IRA, you can purchase a beneficiary annuity, naming your children or grandchildren as beneficiaries.
When you die, your beneficiaries will receive a regular stream of income from the annuity.
5. Use excess distributions for a second-to-death life insurance policy.
If you have a retirement fund that requires minimum distributions but you don’t need them, you can reinvest the funds into a second-to-death life insurance policy.
This policy covers a couple and only pays out when the second person dies. If you pay the premiums with your distributions, you won’t notice a difference in your pocketbook, but once the second person of the couple dies, your heirs will get the life insurance.
6. Gift depreciating stock to charities.
If you have depreciating stock in your portfolio and you don’t need the loss to offset any capital gains, consider gifting them to charities. You don’t have to worry about passing down the depreciating stock to your heirs and a charity won’t have to pay taxes on the earnings since they’re non-profit.
Steps to building a financial legacy
Building a financial legacy takes time and patience. Using these steps, you can set up your heirs for a lifetime of financial success.
Your financial knowledge is the foundation of creating a financial legacy. If you don’t understand how to stay out of debt, how investments work, or even how to build a financial legacy, it’s impossible to leave anything behind.
Start by educating yourself on all things personal finance. Become an expert in your own personal finance knowledge, so you can make sound decisions that help you build wealth for yourself and eventually for your loved ones.
Leave your loved ones, especially your children and grandchildren, the gift of good financial habits. Remember, they will learn more from what you do than what you say. If you overspend, use credit cards, and make poor financial decisions, chances are they will too.
Is that what you want to leave behind? Wouldn’t it be better if you left behind children and grandchildren that could take the wealth you leave them and put it to good use?
Of course, it all comes down to wealth. If you have money to leave behind, you’ll leave a financial legacy. Sure, your loved ones will love the heirlooms and items you leave them, but it comes down to the money, whether it’s life insurance funds, IRAs, taxable investments, or regular bank accounts, the more wealth you build while you are alive, the more money you’ll have to leave your loved ones.
How to protect your legacy with an estate plan and will
Creating a financial legacy is one thing, but protecting it is even more essential. Your final wishes may not be honored or even known without a will and estate plan.
If you have a simple estate, a will may suffice. But, if you’ve built a financial legacy and plan to leave money to many different people and have a variety of different assets, you may need the help of an attorney.
Some people also benefit from putting their assets into a trust. This helps avoid the probate process and ensures the money goes directly to the intended beneficiaries. You can set up your trust documents with Trust & Will as well!
When you create an estate plan and will, make sure you securely store the documents. The key people in your life should know where to locate them, especially your attorney and executor of your estate.
Is life insurance good for legacy planning?
Life insurance is a good ‘backup’ for legacy planning. Since life insurance is separate from your will and it pays out when you die, it’s a great way to ensure your loved ones have a ‘sure thing’ when it comes to getting a payout.
Life insurance is like an investment that you pay into now, and your heirs receive the payout when you die. It’s like setting up another financial legacy for them – one that’s almost a sure thing.
What is the difference between typical estate planning and legacy wealth planning?
Legacy planning and estate planning can almost be used interchangeably. The only difference legacy planning has over estate planning is the intangible pieces of a legacy plan. This includes knowledge and financial habits that you can pass on to your loved ones as a part of your plan.
It’s never too early or too late to think about your financial legacy. Stop and think about what you’d leave for your loved ones right now. Have you planned properly to protect them from probate? Are they protected from taxes?
Also, think about what you’ve taught your children and grandchildren about finances. Are you leaving them with the knowledge necessary to succeed? This is all a part of a successful financial legacy, and anyone can start creating theirs today.