As you sail into the tranquil waters of retirement, it’s natural to reflect on the footprints you’ll leave behind in the sands of time. This process, often called legacy planning, involves envisioning how your story will echo in the hearts and minds of others. Typically, this legacy takes shape through the lives touched – be it children, grandchildren, charities, or any cause that sets your heart ablaze. Crafting such a memorable legacy requires thoughtful planning and often the wisdom of a family financial planner.
In this article, we’ll uncover five meaningful ways to sculpt a lasting financial legacy beyond retirement; let’s embark on this journey together.
1. Vacation Homes Make a Great Inheritance
Real estate, such as a second home or a vacation property, is one big area where people can leave a legacy.
Sometimes families have a vacation home that means a lot to the family, but individuals interested in doing so should explore setting up a family-limited partnership or a trust for a more straightforward process to transfer interest in the property.
Having a family meeting to ensure everyone’s wishes are known is very important. Leaving behind a vacation home can be wonderful, yet also a source of disagreement and problems. You have to think ahead of how to set it up so the entity keeps going.
There are also some tax breaks for family-limited partnerships in addition to the ability to transfer ownership between different siblings.
2. Be Clear About Your Family Home and Personal Belongings
While vacation real estate can be a slam dunk for an inheritance, the same isn’t always true of the family home.
The family home can be tough because it’s fraught with so much emotion. I’ve seen more family conflict over the family home and its contents than anything else.
People considering leaving collectibles or anything worth monetary or sentimental value should include directions in estate planning documents with clear instructions for how those items will be divided.
Leave a list: If you want to leave certain things to certain family members, that list will generally be honored as long as it’s referenced in the will.
The last thing you want your legacy to be is starting a family feud over who gets what.
3. The Power of a Roth IRA Conversion
Imagine bequeathing a financial legacy that continues to provide for your loved ones long after you’re gone. One such path is through a Roth IRA, designating your children or grandchildren as beneficiaries.
Roth IRAs come with a golden perk – their distributions are tax-free, provided the original account holder fulfills a five-year holding period for contributions and conversions. It sounds like a win-win situation.
However, the winds of change have swept across the landscape of legacy planning. The SECURE Act has ended the stretch IRA, necessitating a thorough review and probable revision of many existing plans. Under the previous regulations, a designated beneficiary could extend the required minimum distributions over their lifetime. A young grandchild, for example, could enjoy the benefits over 70 years. But alas, those days are behind us.
The SECURE Act has replaced the stretch IRA with a 10-year payout for most beneficiaries. This shift primarily affects those with substantial IRAs who had envisioned their accounts extending over the lives of their children and grandchildren. Trusts named as IRA beneficiaries may face particular challenges under these new rules, and these estate plans must be revisited promptly.
Picture this: your high-earning child inherits $750,000 in taxable income. It’s almost as if you’ve named the IRS a significant beneficiary to your estate, claiming around 40%. Not quite the legacy you had in mind, right?
To navigate these choppy waters, my clients have begun exploring the possibility of gradually converting their traditional IRA balances to a Roth IRA. This strategy allows you to spread taxes within your tax brackets, enabling your children to inherit the accounts tax-free. Now, isn’t that a legacy worth considering?
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
4. Crafting a Generational Legacy through Philanthropy
Philanthropy is more than just giving; it’s a potent instrument for families to transmit shared beliefs, values, and legacy. It serves as a bridge, connecting generations, fostering collaboration, and strengthening familial bonds. At Thrive Wealth Strategies, we’re passionate about nurturing this spirit of family-centered philanthropy.
A donor-advised fund can be your family’s vehicle for making a significant difference in the world. It’s a tool that empowers your family to weave a legacy that transcends generations.
However, to ensure your philanthropy leaves an indelible mark, you need more than just a donor-advised fund and noble intentions. It calls for introspection, clear objectives, and a well-charted plan. The cornerstone to maximizing your philanthropic potential often lies in a robust governance structure.
Family governance serves as the navigational tool steering a family’s collective journey. It involves the implementation of guiding principles into policies and practices. These principles outline the roles and responsibilities associated with their shared pursuits, such as family philanthropy. In essence, it’s the blueprint that shapes the family’s collective actions and decisions.
If your vision encompasses multiple generations, these practices could incorporate creating an educational program that helps new stewards comprehend their roles and responsibilities related to the family’s fund. You might also contemplate setting up separate funds for individual family members, offering guidance on how they can align their fund management with the family’s guidelines. These particular funds grant new stewards a degree of independence while still operating within the family’s preferences.
Consider also establishing systems for collaboration with external financial advisors, attorneys, and other professionals who can provide valuable guidance.
5. Embark on the Enlightening Journey of Mentorship
A mentor is akin to a lighthouse, a beacon of wisdom and experience guiding those navigating the seas of life. Each of us harbors unique insights that can illuminate the path for others. The mentor-mentee relationship is a symbiotic exchange of knowledge bolstered by emotional and social support. Often, these relationships evolve into lifelong bonds, enduring even when the mentee steps into the role of a mentor, influencing others. Imagine the ripple effect of such relationships, the countless lives touched, and the legacy it creates.
Legacy Planning is Seldom Done Alone
Successful family financial planning for generations is contingent on having a clear vision of the legacy you’d like to leave behind. Without an experienced guide, navigating the waters that will best suit your needs and your family’s can be difficult. The last thing any parent wants is to leave their children with burdens after they’re gone. Legacy planning is not something that happens overnight, but when it’s done tactfully, carefully, and with compassion, families can sleep soundly, knowing that all is in order – for generations to come.
Beyond my career, I get great satisfaction knowing that I’ve helped multiple generations of families fulfill the legacy they intend to. Please contact me with any questions regarding legacy or family financial planning.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
