Few of us want to think about what happens when we’re gone.
Yes, we hope that we have somehow left our mark on the world—with our wisdom, our jokes, our caring, our recipes, with a persona that transcends our world and influences the world of others. We want to live life to remember it, but we also hope that when all is said and done, we’re remembered, too.
That being said, you know I’m not here to preach about the ways to do that. My job is to help you with one very specific aspect of dealing with your wealth and your family’s future—estate planning and making sure all of your paperwork is in order.
When the inevitable end comes, you can ensure that all of this wealth that you spent your lifetime developing lands in the hands that you want. If you don’t plan, your estate will wind up in the hands of the state to divvy up; each state has a statute that dictates how the assets are divided if there is no will. I’m confident that’s not what any of us want, including the state.
The bottom line is this: You want to keep as much control as you can so your wealth can get distributed as you wish.
While I do think that one of our innate drives as humans is to leave a legacy for future generations, too few of us realize that this concept doesn’t have to be relegated to when we’re gone. You should think about it now.
- To leave your legacy, you have to live your legacy.
To do that, you have to create opportunities to do so. By building your wealth, you simply have more chances to do whatever you can to improve yourself, your family, and the world. After all, this is the main act. You don’t want to get to the end of your life and have regrets about how you spent your time. Wealth gives you the freedom and power to do that.
Here’s the best thing about living your legacy and leaving it: It’s not that hard.
This part of wealth planning is more straightforward than an angry school principal. There are a couple of things that you need to do, and you just have to carve out a little bit of time to do them.
Unfortunately, too many of us simply ignore the basics.
Why? It can cost some money to get these financial and legal directives in order, it does take a little bit of time to make sure everything is arranged properly, and it’s simply just not something that many of us want to think about. It’s as if we close our eyes and ignore it, somehow we’ll magically avoid death.
Well, we all know that the unavoidable things in life are death, taxes, and crazy cat videos, so it only makes sense to deal with them head-on. In fact, as part of my 21-Day Wealth Makeover, we’ll spend a few parts of it dealing with this very topic—because it’s that important.
Why would you want to build all of this wealth only to lose control of it in the end? That’s right—you don’t. Take these steps now to protect your castle, your fortune, and all of your heirs.
Make an Inventory of All Your Assets (Financial and Sentimental)
You may be reading this and thinking that, hey, the only assets you have are a car, a computer, a modest savings account, and a 1966 comic book that your pop passed down to you. Or you may be on the other end of the spectrum and have a stable financial situation, many assets in different forms, and own a portfolio of diverse investments.
You may even have assets that you don’t think of as assets, such as copyrights or patents, or maybe even some digital assets that have value beyond what you typically think of as being in your “estate.”
In any case, the process is the same. If you haven’t done so, you need to take inventory of everything you own that has some kind of financial or sentimental value. That, of course, includes all of your financial accounts—ranging from your investment portfolios to retirement portfolios.
It also includes your major possessions, whether they are your home or any item with significant value, including jewelry, cars, or a boat. There’s a whole category of things that may have some value now or down the line, but you’re not quite sure—like antiques, those old comic books, baseball cards, or any other collectibles.
Then, there’s a list of items that might not have a whole lot of monetary value but has serious sentimental value for your family—like photos, recipes, new furniture, artwork (translated: things that cousin Joe and cousin Bob might fight over if there’s no clear directive for who gets what when you are gone).
Today, there’s a whole host of digital assets that may have a value that you need to think about in terms of ownership when you die—website domains, photos stored online, email accounts, social media accounts, and more.
The reason why you take this inventory is obvious:
- Before you can plan your estate, you need to have a complete picture of what your estate looks like.
Start an inventory, add and subtract as you accumulate and sell from it, and make it a habit to keep a complete picture of your fortune—no matter how big or small.
There’s more to this than just documents and paperwork. Different assets pass in different ways, depending on who gets it (like minors), and you’ll need someone to coordinate the passing of those assets.
Take Care of the Non-Negotiables
I know most of us like filling out forms as much as we like cramped airline seats. That doesn’t mean you can opt-out.
To plan your estate—and take responsibility for caring for your family—there are a few forms and documents that you must take care of. A lawyer and/or a financial advisor can help you with them (and you probably need both to properly advise you), but please don’t do what you do with the Sunday soup—put it on the back burner.
A Will
This is a legal document that details where you want all of your assets to go after taxes and fees (see why you need to keep an inventory of all of them?). A will also outlines who will be in charge of everything after your death (the executor or personal representative), including who will care for your kids if you have minors. Without this document, the state will divide up your assets. Last time I checked, the state has no idea which kid most enjoyed Mama’s antique ring.
Of course, you need to include beneficiary designations—that is, who are the people and what are the entities that will be entitled to your assets when you die? You will name primary ones and secondary ones. The secondary ones are in place in case there are no surviving primary ones.
Also, you should be aware that retirement accounts have beneficiary designations. These are generally not included in your estate and you should make these designations separately from your will.
Special attention should be given to the selection of your executor, especially if you have large or complicated assets.
While it might be tempting to designate a spouse or a friend as executor, the job often requires a huge investment of time to gather records and prepare proper accounts. You also want a disinterested party who can make unemotional decisions about such things as when to sell properties.
- You should also be aware that the executor can be sued by any of the beneficiaries for making mistakes in the administration of the estate, like missed tax deadlines.
Don’t inflict that on your best friend.
Durable Power of Attorney
This document allows you to designate a representative, such as an attorney, spouse, or child, to make decisions on your behalf in case you can’t. Without this, your family will have to go through a court to make any decisions involving finances, a complicated process.
A durable power of attorney can be effective immediately or “springing,” meaning that it springs into action when an event occurs, such as when you show signs of mental incapacity or you suffer a debilitating stroke.
A Living Will With Healthcare Directive
This outlines your medical wishes in case you’re incapacitated—what kind of life-saving and life-extending measures you want to be taken.
This, as you can imagine, will help your family avoid some very emotional and difficult decisions and conflicts in case you’re in a delicate medical situation. Related, a medical durable power of attorney allows you to designate a person to carry out the decisions you’ve outlined in a living will.
Insurance
You need to have life insurance and disability policies to help secure your family’s finances in the event of an untimely death or injury, especially if you are the primary income earner. For high-net-worth individuals, I recommend setting up a life insurance trust.
In this way, the proceeds of the life insurance policy are not included in your estate, so there are no estate taxes on the payout. When you die, the proceeds can be used to pay the taxes on your estate, leaving more for your beneficiaries.
- One strategy is to take out a loan to pay the premiums for a large cash-value insurance policy in an irrevocable life insurance trust (ILIT), which accumulates value tax-free in addition to having a face value payout.
The life insurance policy itself is collateral for the loan and the individual has no out-of-pocket expenses because the cash value in the trust pays the premiums for the policy.
Once you have these documents in place, it’s then important to decide how you will store them, whether it’s with a firm or online or some safety deposit box. In any case, you must tell a neutral and trusted third party how to access them (someone besides your spouse).
It may be an adult child, but preferably a family lawyer or personal wealth advisor, who can oversee the documents and the estate when the time comes, to help avoid any emotional, logistical, or family issues that may arise.
That also ensures someone knows how you want your legacy carried on, with no ambiguity and clear directions for how your wishes should be carried out—with all of those choices rooted in the family values that you’ve outlined and shared with your trusted third party.
I’m certainly biased toward choosing a wealth advisor over a lawyer because, by nature, the advisor is involved in your life regularly throughout many years and understands your goals and values, as opposed to a lawyer, who typically has occasional contact.
Consider the Extras
As you can imagine, that’s only the beginning process for planning an estate. There are so many complex situations—financial ones, familial ones—that many families will need to consider advanced planning tools. This is especially true for individuals with estates valued at more than $11 million.
That is the amount exempted from paying estate tax, which was set at 40 percent. While this may seem like a lot, remember that your house is included in your estate and many homes have skyrocketed in value in recent years.
- If you have more than the exemption amount, your estate will likely have to pay tax, unless you are married.
In that case, when one spouse dies, he or she can transfer their assets to the surviving spouse tax-free, meaning that married couples can currently shield $20 million plus before they have to worry about paying federal estate taxes, under the new tax law, which runs until the end of 2025. Estate tax planning is especially important when there are different constituencies to consider, such as multiple marriages and children from previous marriages who are potential heirs.
Some options that you may want to consider, or talk to a professional about include:
- Trusts. These allow you to deal with complex financial situations to protect your assets for your heirs and help pass on your assets with minimal inheritance taxes. I have already mentioned the benefits of establishing an irrevocable life insurance trust (ILIT) to help pay estate taxes for your heirs outside of the estate at little or no cost to you. Trusts can serve many purposes—such as protecting your money from an heir who might blow your fortune on a Las Vegas weekend (because trusts control the income flow based on timelines that you set up).
The two main types of trusts are intervivos, or living trusts, which are set up during the life of the grantor (the person who establishes the trust), and testamentary trusts, which are generally part of a will and only come into effect upon an individual’s death. There’s a difference between irrevocable trusts and revocable: Revocable trusts allow you to undo your asset transfers from that trust while you’re still alive, while irrevocable trusts don’t.
One of the benefits of trusts is that they don’t go through the probate court process, which is what happens when you transfer property using a will. This saves your estate legal fees, time and also keeps the process private, while a will becomes a public document.
Many trusts are extremely complicated (they have to be to pass muster with the IRS) so I will include only a summary of their purposes. If you see one that you think could help in your estate planning, I suggest you contact a financial advisor or lawyer trained in estates.
- IRA Beneficiaries. As mentioned above in this chapter, you should make different beneficiary designations for your tax-advantaged savings accounts like a 401(k). If you have an IRA, it is possible to designate a trust as a beneficiary instead of a person like your son. If you fear a beneficiary is a spendthrift, you name the trust as the beneficiary and then have specific amounts paid out of the trust over some time. You can also include children from a previous marriage.
The problem with having a trust as an IRA beneficiary is that it seriously complicates determining when payouts have to occur under IRA rules. You should consult a trust attorney if this route sounds appealing.
- Grantor Retained Annuity Trust (GRAT). This type of irrevocable trust is ideal when interest rates are low and you own a depressed asset that you expect to appreciate in the coming years, such as a business. You transfer the asset into the GRAT and the trust pays you an annuity payment at a fixed rate. As long as the annuity payment is above a certain “hurdle rate,” currently at 2.6 percent, you then receive all of the appreciation in the value of your business or other asset which gets passed on to your heirs tax-free.
- Charitable Remainder Trust. These trusts allow you to transfer assets like stock or a business to a trust for charitable purposes and receive a partial tax deduction while providing for heirs like children. You designate who you want to be beneficiaries of the trust income for a fixed period. That could be you or your children. When the fixed term of the trust expires, the assets then pass to a charity of your choice.
- Charitable Lead Remainder Trust. This is a charitable remainder trust in reverse—the income from the assets goes first to a designated charity. After the fixed period, the assets are transferred to the non-charitable beneficiaries, such as your kids.
- Qualified Personal Residence Trust (QPRT). This irrevocable trust is designed to hold your primary and secondary residences outside your taxable estate. You are allowed to live in your residence rent-free and, at the end of the trust period, the residence will be transferred from the name of the trust to your beneficiaries. If the trust period ends and you want to stay in the residence, you have to pay fair market rent, which further reduces the size of your estate for tax purposes.
- Qualified Terminal Interest Property Trust (QTIP). This type of trust is useful to people who have children from a first marriage. It allows you to set up a trust to provide for your spouse while she is still alive. When she dies, the proceeds of the trust are passed to beneficiaries that you choose, such as your children from a first marriage.
- Generation Skipping Trust. This type of trust is, just as it sounds, designed to let you leave money tax-free to your grandchildren. Why not just leave it to your children? If you have used up your estate tax exemption, your children will have to pay 40 percent estate tax. When they die, your grandchildren will have to pay a 40 percent tax, further reducing the estate. The GST also allows you to bypass children who might be going through a messy divorce since the children and their spouses have no claim on the GST.
Every person can give up to an estimated $11.2 million—$22.4 million for couples—before a GST tax kicks in.
In addition, there are all kinds of variations and ways you can set up trusts.
For example, spendthrift provisions allow you to leave a lump sum to an individual, but only a percentage of it is doled out every year (so if your relative might be likely to spend all of a lump sum payment on retirement in Jamaica, you can set up a trust, so that relative only gets a certain amount of money each year for the life of the trust). That ensures you can provide some long-term financial stability, rather than having all of your earned money go to waste.
Write the Letter
No rule says you have to do it, and if you have all of your paperwork in order, then you’ll be covered legally. But one of the things I recommend you do is translate some of the legal speak that your family will be hearing when they review your will and go over all of the documents. Write them a letter. A personal one. A nice one. Something they’ll remember.
Yes, include some of the essentials, maybe a few additional directives about contacts for insurance policies, and where you hid the family heirloom in the basement. However, also include one last word of wisdom, one last page where you show how much they meant to you – the one last thought to leave as your legacy.
Final Thoughts
It’s tough to plan for the end of your life – but it’s a necessity to do so. Everything you’ve worked to build should be distributed in a way that can further perpetuate your legacy, and give your family members something to remember you by. If that’s money, assets, investments, and other valuables, that’s only one part of your legacy. The rest is less tangible, of course, but no less important.
Take the time to formulate a solid plan for what will happen to everything you’ve worked to build during your lifetime so it can continue to grow after you’re gone. Entrust it to people who you know will appreciate it, and maybe even benefit from it – and that can be a silver lining to make the less-pleasant thoughts more palatable.
Remember: Material possessions and wealth are only part of what we leave behind, but it’s vital to make these considerations while you’re alive to ensure they get handled properly. If you do it right, you could change your loved ones’ future. That’s a real legacy to leave.