Wealth can be difficult to accumulate, and even tougher to preserve. Legacy wealth planning is a term coined by the American Academy of Estate Planning Attorneys to describe the nuances of how one preserves wealth from risks when passing it on to heirs at death. The philosophy of Legacy Wealth Planning is not just about how much is left for heirs, but the meaning, impact and use of the inherited wealth later.
What makes it difficult to preserve wealth? One cause of asset erosion is the federal estate tax. The estate tax used to be a factor for many more Americans than today, as the amount you can pass on at death free of tax is now $5.25 million per person. Ohio used to have an estate tax also but not after January 1, 2013. If you have a net worth in the $5.25 million range or greater, congratulations but the bad news is that the government is waiting to collect more than 40% of the excess over that sum.
Income taxes can be another great risk to inherited wealth. Baby Boomers received billions of dollars of inherited wealth in the form of IRAs and 401k’s and annuities. They will pass on more billions of retirement accounts when they die. In addition to the estate tax, income taxes (federal and state) will erode that wealth either immediately or each and every year as money is withdrawn.
Another risk to accumulated wealth is lawsuits. People who have been able to accumulate a great deal of wealth are prime targets for those who are litigious by nature or who have scams to run. The elderly who control significant wealth are well known marks to such scam artists.
In addition, certain lines of work that lead to wealth accumulation can inherently lead to vulnerability. Physicians, real estate investors, developers, and successful business people or business owners are a few examples of litigation targets.
Remarriage of a surviving spouse that ends in divorce or death of the surviving spouse puts the surviving spouse’s estate at risk of claims by the next spouse. This puts the children at risk. Also, a new spouse can exert such undue influence that the surviving spouse may end up looting the estate of the first spouse to die, thus depriving the children of their eventual inheritance.
Then there are the proclivities of people who will be receiving inheritances from you. Not everyone is a good money manager. Sudden, unearned wealth for those not accustomed to high disposable income or having “money to spare” can be too much for some to handle. Fortunes can be lost due to mismanagement and frivolous spending. When you leave a direct inheritance to someone who doesn’t handle money well it may go down the drain in a hurry.
Some heirs have other issues, such as special needs due to mental or physical impairments; learning disabilities; troubled marriages; or substance abuse. Today the high bankruptcy rate threatens many an inheritance because an inheritance that vests at the wrong time is lost as part of the bankruptcy estate to be paid to the bankrupt heir’s creditors.
Some things are more valuable than money. Family history, lessons learned, values and virtues important to parents, grandparents, and other ancestors can be lost if not preserved and communicated in some way or another. Inherited wealth should be stewarded so as to honor and promote those values. Wealth transfer planning without thinking about the meaning of the inherited wealth to the heirs, what the heirs will do with the money, what the money will do to their lives, and how they will live their lives after the inheritances, are all affected by the manner in which an estate plan is designed.
Legacy wealth planning is a philosophy to estate planning that means taking steps to identify such issues that may affect the wealth you accumulate – after you pass it on to loved ones. Once the issues are identified and the concerns understood, then there is a foundation of values upon which to build the estate plan. Skilful lawyers who are masters at trust design and other estate planning tools can help craft a Legacy Wealth Plan. It involves family dynamics not just taxes and probate. Simple wills and powers of attorney just can’t meet the challenges.
If you are interested in developing a Legacy Wealth Plan we invite you to contact our firm to schedule a free, no obligation initial consultation.