What is legacy planning and why is it important?

Key takeaways

• Legacy planning ensures bequests are used in a manner consistent with the values of the deceased.

• Estate planning identifies assets and determines to whom they should be passed along.

• Developing and executing a diversified plan for asset growth can enhance the effectiveness of a legacy plan.

What is legacy planning?

Testators use legacy plans to specifically state how they want their assets to be employed upon their deaths. This could mean actions such as the creation of charitable trusts to serve causes they care about, or establishing education funds for their children and/or grandchildren. The key factor here is a statement of personal purpose, which grants the decedent the ability to ensure the deployment of their assets are reflective of their moral sensibilities. In other words, estate plans serve primarily to outline the distribution of assets, while legacy plans dictate how distributed assets are to be used.

How legacy planning works

Legacy planning employs financial tools such as trusts to accomplish long-range post-mortem financial goals. This has the added advantage of bypassing probate proceedings, which could encumber assets for months, at times even years. 

Legacy planning designates plans for heirlooms, works of art and items whose value may be more sentimental than monetary. It can also be used to ensure family history is passed down to succeeding generations through video productions, audio recordings or other readily consumable media. 

Critical to the functioning of a legacy plan is the drafting of a will — and continually updating it as circumstances change over the course of the benefactor’s lifetime. This will ensure their assets are distributed according to their preferences. 

Why legacy planning is important

Overlooking this important task before dying places families in financial risk. It is estimated that only 40% of Americans have taken the time to craft a will or living trust. That means 60% of the people in this country will leave their families at the mercy of the states in which they resided. 

Making one’s desires known in this fashion can also defuse the potential for conflicts capable of undermining the integrity of the family. Another key aspect of legacy planning is the minimization of the tax burden on an estate. 

How to get started

The first step toward the creation of a legacy plan is gathering relevant information. All assets and their locations should be identified, including bank accounts, investment accounts, real estate, insurance policies and works of art, as well as valuable personal items and collections. 

The second step is to create a list of heirs. Charitable intentions should also be considered at this juncture. It is at this point a person should be designated to serve as executor; an alternate for that person should also be identified. A discussion should be had with those people to be certain they understand the responsibilities that will fall to them, as well as the potential pitfalls they will encounter. 

It is also recommended to seek professional help in this effort, as laws governing probate, taxes and the transfer of wealth vary from state to state, and there may be federal concerns to address. An experienced professional can help navigate these hazards. 

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What is estate planning

Earlier, we said legacy planning and estate planning have a lot in common, and that one is largely dependent upon the other. It is indeed difficult to craft an effective legacy plan absent a sound estate plan. 

The process of crafting documents to ensure the decedent’s desires are met in terms of asset distribution and final wishes is called estate planning. Key documents include the last will and testament, power of attorney designation, an advance directive and the establishment of irrevocable wills and trusts. 

Getting an estate plan right can ensure the legacy plan is conducted properly.

How estate planning works

The process is largely similar to that of creating a legacy plan, in that tangible and intangible assets will need to be identified and located. 

Tangible assets include:

    •  Homes, land or other real estate

   •  Vehicles including cars, motorcycles or boats

    •  Collectibles such as coins, art, antiques, timepieces or trading cards

    •  Other personal possessions

Intangible assets include:

    • Checking and savings accounts and certificates of deposit

    •  Stocks, bonds and mutual funds

     •  Life insurance policies

    •  Retirement plans such as workplace 401(k) plans and individual retirement accounts

    •  Health savings accounts

     • Ownership in a business

Appraisals are generally conducted to ensure the values of the items passed on are correctly assessed. Valuations based upon how heirs might perceive the bequests are acceptable as well. The goal is to ensure assets are distributed as equitably as possible — if that is a concern.

Family needs should be considered – in terms of insurance coverage as well as guardianship for children. The circumstances of their care should also be documented. Estate planning also entails the communication of directives regarding medical care (a living will), financial trusts, durable financial power of attorney and limited power of attorney.  Direct beneficiaries and contingent beneficiaries should be named for insurance policies, bank accounts, investments, and retirement accounts. 

This is also the time to investigate tax laws to determine how to structure the estate to minimize tax liabilities. A grantor retained annuity trust can ease tax burdens. It is also a good idea to determine the nature of the taxes in the state in which the bequestor resides, as some impose estate and inheritance taxes while others do not. 

The services of a competent estate attorney and a knowledgeable tax professional can be invaluable in this endeavor. Completed estate plans should be revisited annually to be certain they keep pace with changing circumstances. 

Alternative investments and legacy planning

While Yieldstreet can provide investment opportunities for individuals looking to allocate outside of public markets, it does not provide tax or legal services, and readers should consult a qualified professional. 

Yieldstreet was founded with the goal of improving access to alternative assets in the private market by making them available to a wider range of investors. While traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation, a more balanced 60/20/20 or 50/30/20 split incorporating alternative investments can make a portfolio less sensitive to public market short-term swings.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.

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