The Foundational Aspects of Planning Your Legacy
Elliot Dole, CFP®, EA, AEP®, CExP™, CAP® with BAM Alliance, 9/30/2019
Families who have determined that they’ve accumulated more wealth than they expect to spend in their lifetimes often approach legacy planning looking primarily for tactical help and technical expertise. They may come to the conversation simply seeking the specific tool or set of tools most appropriate for passing their wealth to heirs and charities with as little as possible lost to taxes or unwanted third parties.
Such discussions, however, almost invariably reveal the crucial need to first answer some other, more fundamental questions. How would these families define success? Does success start and end with passing assets to children with minimal taxation? Or is that only the beginning?
Some families make a conscious choice to pass on values as well as wealth. Family reputation, community involvement, and family traditions are also aspects of wealth. The leaders of such families are actively working to prepare their heirs to receive wealth through their legacy planning.
Creating a legacy plan happens when we take the emotional risk to begin putting intention and planning behind identifying:
The values we want to pass on to our heirs.
The importance we place on leaving an inheritance.
Our interest in including a charitable legacy.
Discerning what we want to do and why we want to do it is a central part of the planning process. In fact, this exercise may never end as the world evolves around us and we change as well. Many families feel that, once these essential foundational questions are raised, they must fully develop answers to them before qualitative planning can start, but I’ve found that ideas and beliefs are enough to kick things off. Making a list with your spouse and sharing it with your advisor can be cathartic, in addition to the initial step on your journey toward implementing a meaningful legacy plan.
Embracing the effort needed to build a legacy plan rooted in your values can be a generative act because wealth has the power to help bring the family together (or, conversely, tear it apart). But, as I alluded, passing assets to the intended people and organizations with minimal taxes and expense is really only part of successful legacy planning. Data in a recent study shows that 70% of transferred wealth fails to make it from the first to the third generation.* Why these terrible results? Did the first two generations have advisors lacking technical skill? Or is it that children didn’t receive the coaching to prepare them to become good stewards of wealth? Overwhelmingly it is the latter. Even the best investment portfolio and an airtight estate plan will not overcome unproductive intergenerational communication, inadequate training, and an underdeveloped family culture.
The real solution lies in creating capacity and nurturing culture – that is, to prepare the heirs.
Start with the “why” in mind. In default estate planning, planners almost never ask why we want to pass our wealth to our children. Most of us don’t even think to ask ourselves that question. Answering it, though, is highly personal and depends on a number of factors. It deserves meaningful discussion between spouses, to begin with.
More widely, families that are successful in planning their legacies tend to cultivate certain qualities, including clarity of purpose, effective and deliberate communication, and clear expectations and formal agreements (estate documents, for instance). These families have worked through their shared beliefs, their why. Finding common values can help a family arrive at a shared vision and a mission statement. Communication – why, what if, how – leads to mutual understanding, breakthrough ideas and a framework for governance, including how families will connect across generations about issues they are facing. Successful families also define roles and their expectations for said roles, for everyone from individual family members to their professional advisors.
Advisors qualified and equipped to serve families seeking to leave meaningful legacies will lead family stewards through the vital work of creating and implementing the roadmap that will increase their chances of success dramatically.
So, define what success means for you. Let your advisors help you meet that definition. The result should be a comprehensive plan to leave the right amount of wealth to the right people for the right reasons in ways that best improve the odds of your right outcome.
* Barclays Wealth Insights, Volume 14, “The Transfer of Trust: Wealth and Succession in a Changing World”
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