Legacy planning is not just for the rich and famous

Many of us will remember the Barbra Streisand song “The Way We Were” and the verse “Memories light the corners of my mind.” When we think of family and the next generation, we want those memories to be positive and not locked away in the corner. That is why if we want to leave a meaningful legacy, we must have a plan.

When we hear the word legacy, many of us think that it only applies to the rich and famous. It is important to remember that a legacy is the transfer of family goals, dreams, history and, yes, financial assets.

Many families have history that should be shared with future generations. They have goals, dreams and aspirations for future generations. This is where the “family love letter” has a role. The family patriarch and matriarch may write an informal family history that sets the tone for the dreams for future generations. In my family, my father wrote a six-page letter to my son on my son’s first birthday. I gave it to my son when he was 35. At that age he was able to appreciate what was written to him. He has it framed in his office. It is a legacy he will share with his children. Even though my father passed away years ago, his dreams keep giving.

Financial considerations are an integral part of legacy planning. We get to review the pronouns we learned in grade school. Who should receive the financial legacy; what should they receive; when should the assets be passed to them; how should the current generation structure the financial legacy that will pass to future generations? Let us review several ideas of how to transfer the financial legacy.

Life insurance, insuring the life of a member of the current generation, owned in a trust, is the basic legacy transfer tool. The trustee operates the trust for the benefit of the trust beneficiaries. The trust structure protects the financial legacy from creditors, predators, in-laws and outlaws. As an example, the trust document may state that the grandchildren beneficiaries receive a distribution from the trust annually on their birthday until they reach a certain age. At that point they may receive a percentage of the amount in trust. The life insurance on the grantor of the trust ensures that the trust will be funded, and provides positive leverage of family cash flow.

A second idea for structuring an intergenerational legacy is the creative use of an IRA. The example is taking the current IRA and splitting it into several IRAs. Take the required minimum distribution (RMD) from the primary IRA and name grandchildren as the beneficiaries of the other IRAs. This allows maximum stretch potential and income tax management. A joint life policy insuring the grandparents and payable to the children may “re-inherit” them for the amount, skipping directly to the grandchildren. Of course, additional planning is necessary if the grandchildren are minors.

A final example of how to structure a legacy involves the use of charity. The patriarch and matriarch may wish to include a charitable distribution in their will, or they may desire to make gifts to charity while living. A gift of low basis, higher value stock is an excellent example. The gift is made to charity and an income tax charitable deduction is allowed. There are limitation guidelines that will not be discussed in this column. The charity may sell the stock, and the capital gains payable on the gain over cost basis are avoided since the charity is in a zero percent income tax bracket. The charitable bequest has been made, and the children and grandchildren have been disinherited. Life insurance covering the patriarch and matriarch can replace the value of the assets that have been gifted to charity. If the life insurance is owned in a trust, it may provide cash flow for several generations.

Legacy planning is not just for the rich and famous. We all have a legacy, whether planned or unplanned. Active planning gives us control and allows us to pass both a financial legacy and a legacy of the heart.

James T. (Jim) Swink, ChFC, CLU, is vice president at Raymond James Insurance Group.