What Is Legacy Planning, and Why Is It Important?

Posted by Jacob Adams on Jun 20, 2022


Legacy planning is the process of protecting and transferring assets from the current generation to the next. Careful planning can help preserve the value of your future bequests, assist your heirs with forming their investment strategies, and assist with managing tax obligations. Legacy planning may also include the inclusion of value considerations.

First, legacy planning requires a will or the establishment of a living trust, either of which can communicate your wishes for the distribution of your assets after your death. A will defines what you want to happen to your property after you die, but a trust takes effect while you are still alive. A trust is a document that the trustor (also called the grantor) creates to designate to a trustee the right to manage assets for the benefit of the future heir (beneficiary).

Differences between Wills and Trusts

A will can include more than the distribution of your assets. For example, it can serve as an appointment for guardianship of minor children. A will can also hold the instructions for your funeral arrangements and may designate the will's executor. Most wills must proceed through a legal process called probate, which is used to transfer the assets from the deceased to the designated beneficiaries. Some simple estates can avoid probate with a clear will, but if the person planning has substantial assets, they are probably better off with a trust.

Avoiding probate is one of the advantages of using a living trust instead of a will. Often, the trustor will establish a revocable living trust. Per the term revocable, the trustor can change the terms at their discretion and retains ownership of the assets while they remain living. However, the control is ceded to the trustee, who manages the assets following the grantor's instructions. The administration of the trust is to be for the benefit of the designated heir.

Revocable versus Irrevocable Trusts

On the other hand, the grantor can establish an irrevocable trust in which the assets are placed. Those assets no longer belong to the grantor, and the trustee is the legal owner. A grantor may want to use this strategy to manage tax liability if they have a higher tax rate than the intended beneficiaries. But one possible downside is that the trustor can’t change the terms or the beneficiary without that person's agreement.

Value Considerations and Charitable Remainder Trusts

Some planners maintain that legacy planning means more than distributing assets; it also includes sharing your vision for stewardship of those assets and creating a lasting positive impact on the world. Those individuals may consider using a charitable remainder trust to advance the trustor's philanthropic interests and determine the future distribution of assets.

With this trust, the trustor contributes to the trust and receives a partial tax deduction for the gift. The trust then pays income either back to the grantor or to a beneficiary for a specified time. That period can’t exceed twenty years or the beneficiary’s lifetime. The grantor also determines the amount of the income payments and the percentage of assets to pay out (between five and fifty percent of the account). After the set time, the balance goes to the designated charity, per the grantor’s wishes.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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