I always find it helpful to first look at some of the origins and developments of a subject. Estate planning is one of those things that has things that has changed quite a bit. It used to serve only the ultra wealthy ($100 of millions), who used to be a very small percent of the population. Looking back a few centuries, in England and America, there were not many very wealthy people. Small cottage industry styles of business and agriculture employed most people. There were a few large industry magnates, large land owners, those from or connected to royalty. Wealth and power was controlled by the few wealthy people, governments, and politicians. During those eras, most people had few assets to worry about after they died.
Starting with industrialization, and the growth of democracy, capitalism and entrepreneurism, and higher education; there was unprecedented amount of wealth generated in the hands of private citizens, everyday common people. We have really seen quite a bit of acceleration in this trend for individuals to become wealthy through hard-work, free enterprise, and investing. This has been especially true since WWII, accelerated with technology as evidenced by internet, leisure and sports industries. The demographics of our country has changed along with this. Today there are more millionaires than ever before as a result of favorable stock market returns, real estate appreciation, accumulations in IRAs and 401(k)s, and larger family incomes. In addition, the largest transfer of wealth ever seen—estimated to be in the tens of trillions of dollars—is due to occur over the next 30 years.
Other than wills, more involved estate planning, used to be only for the very rich, who could afford and justify paying a lawyer. Now moderately successful people can easily amass wealth north of several million dollars. When you add up the value of homes, stock portfolios and retirement funds, it is easy to see how it is possible.
Not only has the distribution of wealth changed, so has how estate planning has practiced. For many people, the focus on estate planning used to be to minimize estate tax. For example, within the last 20 years, the Federal Estate Tax, started taxing estates as small as $500,000 to $1,000,000, at rates of around 35%, and increased over 50% for the largest estates. Today’s exclusion amount (not subject to estate transfer tax) is over $5 million. This doubles for married couples; therefore unless someone’s net worth is over $10 million, or will be at life expectancy, the prime goal of estate planning isn’t any longer estate tax minimization or avoidance.
If estate tax avoidance isn’t the main goal, then what is? Estate planning will always deal with taking care of family and dependents, and dealing with the complexities of transferring business, real estate, privacy and creditor protection, probate cost avoidance, and charitable planning. However, wealthy people are taking a more active role in their estate plans, wanting to steward over their wealth, making sure family doesn’t just inherit large amounts of money, but do so in a fashion that rewards maturity. In addition, with many people with large charitable interests, charitable plans are playing a much bigger role in the overall estate plan. People leaving money, don’t want to be remembered as the old rich guy or gal, but successful people that contributed to other’s success and health, and society’s overall benefit long after they die. The want good stewardship while they are alive, and have some control from the grave. Thus the term Legacy Planning communicates the new paradigm versus estate planning.
What is a legacy? A legacy is what you want to be known for today and after you are gone, and what continues to live on. Someone might say: “This again is a negative, planning for when I am dead!” This could not be further from the truth. You create your legacy by how you manage your financial affairs and how you live your life now.
How do you create a positive living legacy? You probably already do it; you create it by demonstrating your beliefs and values:
- By how you give
- With your family and friends
- In the leadership roles where you serve
- Through your current or future career pursuits
- In the positive contributions you make to the world
- How you transfer your positive values and beliefs to others
- In how you live every aspect of your life
- In how you give gift money to family and charity, both today and after you are deceased
Creating a legacy plan is so much more than estate planning. It involves creating plans centered on the things you value most, the beliefs you hold, the people you love, and passing many of your beliefs and values to successive generations. It is a journey of rediscovery that many people go through when they hit mid-life, perhaps an exciting new chapter in your life. It is focused on your goals, needs and concerns, not the consequences of not planning.
Legacy planning is not focused on all of the intricacies and complexities of estate planning. That is why for the purpose of this article isn’t focused on the finer details of estate taxes, features and benefits of specific trusts, methods of transferring businesses and techniques to minimize taxes have not been discussed. Legacy planning starts with what you want, and not the legal pieces. High net worth people today want a plan that will do many things:
- Teach and transfer values to next generation
- Continue to give them control today
- Flexible to change
- Address their personal passions
- Helps the satisfy philanthropic concerns
- Provide for financial, emotional, professional, and legal needs of surviving spouses & children
- Maximize and control wealth for their long life span
- Gifting to family members while they are alive, so that they can transfer wealth in a way that helps rather than hinders the individual
- Transfer business (possibly to a family member) in a tax- and cost-effective way
- Privacy, creditor protection, and ongoing professional management
The Cost of Not Planning. There are some very practical reasons why people should plan too. If you don’t plan, you must be aware that you or your family will face many consequences of your failure to plan:
- You or your estate will over-pay taxes, both income and estate, as well as ongoing legal costs
- Assets will not pass equitably or as you intended
- Your business transfers may be very messy
- You will miss out on taking advantage of money- and tax-savings devices, because they will be lost if not done in a certain time period
- Your kids may fight over money
- Attorney fees will be much higher than necessary
- Your favorite charities will not receive what you intended to get
- Children may inherit money in such a way that might spoil them
Summary: Legacy planning is a process to put into action with your financial and legal advisors. Many legal, accounting and financial firms go the extra step by providing coaching, self exploration, and even individual and family workshops. The planning process is an opportunity to dream new dreams. The planning profession is privileged to witness and assist clients through this process of transforming the completion of previous successes into exciting new and satisfying ventures.