R101 #14 - Planning to Leave a Legacy?
Benjamin Franklin famously wrote “Nothing is certain except death and taxes”. Well, we discussed taxes in the last post so let’s move on to death. You are going to die one day. Most of us don’t want to talk about it or think about it. That fact that it is a certainty makes it one of the rare occurrences in your financial life where we can plan for it definitely happening.
Before you die, you’re also likely to experience a period of time where you are unable to make medical or financial decisions for yourself. This is where incapacity planning comes in and we’ll talk about that here too.
After you die, that’s where your legacy comes in. We’ll talk about what kind of legacy you may want to leave, and how to make it easier on the people left behind to execute on your wishes.
How to Prepare
I hear all the time from clients about them having parents who don’t share their finances, won’t discuss their final wishes, and don’t want to talk about death. This is total bullshit. If you’re older and this is your view, maybe I can make you think twice. If you’re younger and your parents are like this, seek out resources that will help you have the difficult conversation with your family members.
The first task is organization. Although you see it all the time in TV shows and movies, it sucks to have to dig through a loved ones personal papers, home, and life in order to figure out what you need to do when they die. It’s even worse these days because of all of the electronic access to important information that has replaced the paper that used to come in the mail. Make it easy on people by pulling together an inventory of personal information, account information, property information, beneficiaries, insurance policies, and if there is anyone they can go to for additional information like a friend, attorney, bank officer, etc.
The second task is documentation. There are certain documents that you need to have created to direct others when you can’t.
Financial Power of Attorney - This document assigns a person to handle your financial affairs while you are still alive. It ends when you die.
Healthcare Power of Attorney - This document assigns a person to handle healthcare decisions when you can’t. But how will someone know what you would have wanted?
Living Will - This document tells the healthcare POA what you want to have happened. What kind of life-saving measures do you want? What should they do if you are in a persistent vegetative state? What if you have a terminal illness?
HIPAA releases - Rules have tightened around who can have access to your medical information. These releases pro-actively allow important family members, powers of attorney, trustees, and others to have access when they need it.
Will - A will names a person (executor, or personal representative) to distribute assets according to your wishes, specifies the wishes for asset distribution, and names a guardian (guardianship designation) for minor children.
Trust - Trusts can be created for all kinds of reasons like incapacity, avoiding probate, managing property distribution, providing asset protection, and reducing estate taxes. I won’t go into to all the simple and complex trusts here - you’ll need to work with an attorney on these. However, every trust needs to identify trustees who carry out the instructions in the trust, and should be revisited every couple of years in case anything has changed - people, relationships, assets, laws, etc.
The third task is communication. I want to be very clear that it is an act of love to communicate your wishes, information, and documents to those who are tasked with doing something or making decisions for you or after you die. Don’t just surprise them, or make them work for it.
Share copies of important documents listed above.
Talk about your wishes and share them with everyone involved.
Create a letter of instruction that serves as the context behind the documents, and where to find any other information they may need.
What You Need to Consider
The more complicated your financial life and family are, the more you will need to consider. You likely have a variety of challenges that will require different solutions. Remember that everyone has an estate plan - even if they don’t. The laws of the state where you live will govern what happens if you don’t specify what you want. Most people want to avoid this.
Complicated Assets - The more assets you own (either financial, real estate, business, personal property), the more complicated your situation is. Some assets may be able to be left to a beneficiary via documentation like naming them on the account. Others can’t be - like your house.
Family Dynamics - Let’s face it. Some families are a shitshow in life, and it doesn’t get any better at the end of life or after death. Documenting and communicating your wishes ahead of time helps to avoid confusion, disagreement, lawsuits, and division. I’ve also seen people name joint trustees and/or powers of attorney. I’d recommend that you think carefully about this because it may be difficult for multiple people to agree and collaborate in what is usually a very stressful and emotional time.
Professional Assistance - If there isn’t someone you would trust to make decisions on your behalf, or execute them after you pass, you can hire a professional to do it. Depending on where you live and what you need, this could be an attorney, a professional fiduciary, a bank trustee, or something like a daily money manager. It may be well worth the expense.
Taxes - Lest you think that taxes end when you die - they don’t. There can be inheritance taxes/estate taxes under federal and state laws, your heirs could be responsible for income taxes depending on what assets they inherit, and at a minimum - someone will need to file your final tax return and probably one for your estate (and potentially trust) as well.
Back to Leaving a Legacy
Leaving a legacy is a great goal. Maybe you want to leave money to your kids or grandkids. Maybe you want to have a scholarship in your name at your alma mater. Maybe you want to support a charity. There are as many kinds of legacy as there are people. Take some time to clarify what you want to do, how much it will cost, what you need to do ahead of time to set it up, and if there may be tax benefits to doing it a certain way.
Just a couple parting pieces of advice:
Take care of yourself and your retirement first. Spend money on yourself to enjoy your life and make it comfortable. You don’t owe anyone anything.
Consider gifting during your lifetime as well. If you know you can afford it, it could give you great joy to gift to charities or family while you are still alive, even it if isn’t the most “efficient” way to give from a tax perspective.
Future generations may not care about what you leave them. Many people focus on leaving real estate, businesses, or personal property to the next generation. Ask those potential beneficiaries if they really want to inherit those things - wedding china anyone? Often the best gift you can give is ease of execution of your estate plan.
