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High Net Worth Legacy & Estate Planning Guide

Updated: 4 days ago

Legacy planning for high-net-worth individuals can be a complex process, as it goes beyond merely transferring wealth to future generations. The ultimate goal of legacy planning is to pass on your assets and values, while simultaneously preparing your family for the responsibility of wealth.



Older couple standing in front of their home


Legacy Planning includes:


·       defining and passing on family values and heritage

·       ensuring the stability of family businesses

·       philanthropic giving

·       preparing multiple generations for the emotional and social aspects of wealth


Legacy planning is an essential aspect of wealth management for high-net-worth families, and it becomes increasingly important as wealth grows. We all know families torn apart when wealth is passed from generation to generation. Sadly, the transition period is when most disputes arise. Legacy planning is one way of mitigating this risk.


You likely already have an estate plan and that’s great. An estate plan is one (necessary) piece of an effective legacy plan, but you shouldn’t limit your legacy plan to just the legal documents in your estate plan. You should be planning for all aspects of passing on the wealth you’ve built.


Every legacy plan is different, based on the needs of the family, but I often see lifetime giving, philanthropic planning, family heritage planning, and business transition come up in legacy planning. The goal of a well-crafted plan is to ensure that your wealth supports the aspirations of future generations while reflecting your personal values.


Pillars of High Net Worth Legacy & Estate Planning


There are five pillars of HNW legacy planning, some of which are applicable to all families and some of which are only important in particular situations. I’m going to break down each pillar in the order of importance.


Financial Asset Transfer (Estate Planning)


Ensuring the smooth and efficient transfer of financial assets is a core component of legacy planning. This involves various strategies and tools designed to minimize taxes, protect assets, and provide clear instructions for distribution.


This is the all-encompassing version of your traditional estate plan. In high net worth estate planning, the estate plan typically refers to the specific documents defining how assets are to be distributed. Depending on your wishes, family structure, and wealth, you might need to consider advanced strategies like those I mention below.


Key Strategies:


  1. Wills and Trusts: Setting up wills and various types of trusts (e.g., revocable, irrevocable, charitable) to manage and distribute assets according to your wishes.

  2. Estate Tax Planning: Implementing strategies to reduce estate taxes, such as gifting strategies, family limited partnerships, and life insurance trusts.

  3. Gifting: Utilizing annual gift tax exclusions and lifetime exemptions to transfer wealth during your lifetime in a tax-efficient manner.


Revocable (Living) Trusts


What is a revocable trust?

A revocable living trust is a legal document that allows you to manage your assets during your lifetime and specify how they should be distributed after your death. As the name implies, it can be altered or revoked by the grantor (the person who creates the trust) at any time.


What does a living trust do?

  • Asset Management: Allows you to manage and control your assets while you are alive.

  • Avoid Probate: Assets in a revocable living trust bypass the probate process, making the distribution quicker and more private.

  • Incapacity Planning: Provides a plan for managing your assets if you become incapacitated.


Who needs a living trust?
  • Those Seeking Flexibility: Individuals who want the flexibility to change or revoke their trust as their circumstances change.

  • Privacy-Conscious Individuals: People who want to keep their estate matters private, as trusts are not public records like wills.

  • Incapacity Concerns: Those who want to ensure their assets are managed according to their wishes if they become incapacitated.

Potential Drawbacks:

  • No Tax Benefits: Unlike some other trusts, a revocable living trust does not provide tax benefits.

  • Cost: Setting up and maintaining a revocable living trust can be more expensive than a simple will.

  • Complexity: Requires careful management and funding (transferring assets into the trust), which can be complex.


Irrevocable Trusts


What is an irrevocable trust?

An irrevocable trust is a trust that, once established, cannot be altered, amended, or revoked by the grantor. The assets placed in the trust are no longer owned by the grantor and are managed by a trustee. It takes assets out of the grantor's estate.


What does an irrevocable trust do?

  • Tax Benefits: Can provide significant tax benefits, including reducing estate taxes and protecting assets from creditors.

  • Asset Protection: Shields assets from creditors and legal judgments.

  • Estate Planning: Helps reduce the taxable estate of the grantor, potentially lowering estate taxes.


Who needs an irrevocable trust?

  • High Net Worth Individuals: Those with significant assets who are looking to minimize estate taxes and protect assets.

  • Asset Protection Seekers: Individuals who want to protect their assets from creditors and lawsuits.

  • Charitably Inclined: Those who want to make a substantial charitable contribution while receiving tax benefits.


Potential Drawbacks:

  • Inflexibility: Once established, the terms of an irrevocable trust cannot be changed, and the grantor loses control over the assets.

  • Complexity and Cost: Setting up and administering an irrevocable trust can be complex and costly.

  • Irrevocability: The grantor must be certain about their decision, as the trust cannot be undone.


Charitable Trusts

What is a charitable trust?

A charitable trust is a way to benefit a charity, but with specific tax benefits. There are two main types: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs), with different flavors of each that can be used for specific purposes.

What does a charitable trust do?

  • Charitable Remainder Trust (CRT): Provides income to the grantor or other beneficiaries for a set period, after which the remaining assets go to a designated charity.

  • Charitable Lead Trust (CLT): Provides income to a charity for a specified period, after which the remaining assets are transferred to non-charitable beneficiaries.


(I keep them straight by remembering the second word defines when the charity receives the assets. CLT = Charity getting the income via the lead trust)

Who is a good fit for Charitable Trusts?

  • Philanthropic Individuals: Those who have charitable intentions and want to support causes they care about.

  • Those with Taxable Estates: Individuals looking to receive tax deductions for charitable contributions and reduce estate taxes.

  • Income Needs: Those who want to receive income from their assets while eventually donating to charity.

Potential Drawbacks:

  • Complexity: Setting up a charitable trust can be complex and requires careful planning and legal assistance.

  • Irrevocability: These trusts are generally irrevocable, meaning they cannot be changed once established.

  • Administrative Costs: Ongoing administrative costs can be high, particularly for managing and maintaining the trust.

In summary, each type of trust has a very different purpose and they fit different needs:


  • Revocable Living Trust: Good for those wanting flexibility, privacy, and incapacity planning without immediate tax benefits.

  • Irrevocable Trust: Suitable for high net-worth individuals seeking tax benefits and asset protection, with a trade-off of inflexibility.

  • Charitable Trust: Ideal for those with charitable intentions looking to support causes and receive tax benefits, but with complexity and irrevocability.

 

Preserving Family Values and Traditions


Your wealth isn’t solely the assets you own; it’s also the family values, traditions, and heritage you’ve accumulated along the way. Legacy planning ensures that future generations understand and appreciate the family’s history and values.

Personally, this is the pillar I find most interesting. I think it’s incredibly important to remember our heritage. Having a clear source for family values and traditions makes that all the easier.

Key Strategies:


  • Family Meetings: Regular family meetings to discuss values, goals, and the legacy plan. These meetings foster communication and understanding among family members. Growing up, we just called these reunions. They’re a way for families to stay close, even in the throes of our hectic lives.

  • Family Mission Statement: Developing a family mission statement that outlines shared values and long-term goals, providing a sense of purpose and direction.

  • Education and Mentorship: Establishing educational programs and mentorship opportunities to prepare the next generation for their roles and responsibilities in managing family wealth. This is extra important for families who expect their progeny to join the family business.

  • Family Heritage: I’m seeing more families take time to record oral histories and write down the apocryphal stories that get passed from generation to generation. I enjoy genealogy, so I should include that as a possibility here as well.


Philanthropic Wealth Planning


Many high-net-worth individuals wish to leave a lasting impact through philanthropy. Integrating charitable giving into your legacy plan can ensure that your philanthropic goals are met and that your values are reflected in the causes you support.


Philanthropy doesn’t have to be limited to monetary donations though. Volunteering can be an incredibly rewarding way to give back. Personally, I volunteer regularly and it’s one of the best parts of my week.


Volunteering becomes particularly important as children begin growing up with wealth. Volunteering with those in less fortunate situations can be a great way of instilling a bit of humility, as well as work ethic.


There’s a great book, Wealth in Families by Charles Collier, that I recommend if you want to explore the ways that wealth affects family dynamics and how philanthropy can be a way of passing assets and values from generation to generation.


Key Strategies:


  • Donor-Advised Funds (DAFs): Setting up DAFs to manage charitable donations over time, providing flexibility and immediate tax benefits.

  • Private Foundations: Establishing private foundations to support charitable causes, allowing for greater control over charitable activities and the potential to involve family members in philanthropic efforts.

  • Charitable Trusts: Creating charitable remainder trusts (CRTs) or charitable lead trusts (CLTs) to provide financial benefits to both charitable organizations and family members.

Rather than explore any of these in-depth here, I’ll just link to my other guides on the topics.

Continuity of Family Businesses

For families with business interests, ensuring the success of the business is a critical aspect of legacy planning. This involves creating a plan that outlines the transition of leadership and ownership. There are many, many ways of handling this.


I recommend you start by looking at your business and deciding what type exit you prefer, whether that’s an external sale, an internal succession plan to non-family executives, sale to the workers through an ESOP, or passing the business to the next generation of family members.


If you decide to pass the business to family members, there are a number of items you must consider. The most important question is if your family members have the skills required to successfully run the business. If they don’t, you have two options. The first is figure out a way for them to upskill and quickly. The more likely option though is to bring in a management team to handle day-to-day operations.


No matter the type of exit you choose, this is an area that I highly recommend professional advice. There are many points to consider and you don’t know what you don’t know. It’s worth working with an experienced professional.


Key Strategies:


  • Succession Planning: Developing a comprehensive succession plan that includes identifying and training future leaders, setting clear criteria for leadership roles, and establishing governance structures.

  • Buy-Sell Agreements: Crafting buy-sell agreements to provide a clear plan for the transfer of business interests in the event of retirement, disability, or death.

  • Business Valuation: Conducting regular business valuations to understand the value of the business and make informed decisions about succession and estate planning.


Addressing Emotional and Social Aspects of Wealth

Wealth transfer can have significant emotional and social impacts on family members. Addressing these aspects in your legacy plan can help mitigate potential conflicts and ensure a harmonious transition.


A common problem is the idea of equal versus fair distribution.


This comes up most often when looking at a family business being passed to the next generation. You’ll see one family member working in the business and another working elsewhere. An equal distribution would give an equal share of the business to each, but is that fair? How do you account for the sweat equity and growth of the business attributable to the family member working in the business?


Fair sometimes means an unequal distribution, a fact not always appreciated by the family member receiving less.


Key Strategies:


  • Counseling and Mediation: Providing access to counseling and mediation services to address family dynamics and conflicts that may arise during the wealth transfer process.

  • Equal vs. Fair Distribution: Balancing the concepts of equal and fair distribution to address the unique needs and contributions of individual family members.

  • Heir Preparation: Preparing heirs for their roles and responsibilities through financial education and personal development programs.


Creating a Comprehensive Legacy Plan


A comprehensive legacy plan requires a holistic approach that integrates financial, emotional, and social considerations. Frankly, it’s a completely flexible process that is built to fit the specific situation. Overall though, my process for creating an effective legacy plan looks like this:


Assessment and Goal Setting:

  • Evaluate your financial situation, assets, and liabilities.

  • Define your legacy goals, including financial objectives, family values, philanthropic aspirations, and business continuity plans. Define the Team:

  • Professional team creates detailed documents, including wills, trusts, and succession plans.

  • Establish governance structures and guidelines for family meetings and decision-making processes.

  • I implement the investment and tax strategies to optimize the management and transfer of your wealth. Communication and Education:

  • Communicate your legacy plan to family members to ensure transparency and understanding.

  • Family meetings are important. They can be something as simple as regularly meeting for lunch or as sophisticated as official board meetings. This is an opportunity to both spend quality time together and for family members to bring up problems in a constructive setting.

  • Provide ongoing education and training to prepare the next generation for their roles. Regular Review and Adjustment:

  • Review and update your legacy plan regularly to reflect changes in your financial situation, family dynamics, and legal or tax environments.

    • For example, if the current Estate Tax exemption sunsets in 2025, it might be necessary to make changes to the estate and philanthropic portions of your legacy plan.

    • Situations like substance abuse, divorce, or spending issues can also prompt a plan update.

  • Adjust strategies as needed to stay aligned with your goals and ensure the continued effectiveness of your plan.


Bringing it all together..


Legacy planning for high-net-worth individuals is a comprehensive process that goes beyond financial asset transfer. It involves preserving family values, ensuring business continuity, fostering philanthropic endeavors, and addressing emotional and social aspects. By taking a holistic approach and working with a team of experts, you can create a legacy plan that not only secures your wealth but also reflects your values and aspirations, leaving a meaningful impact on future generations.


If you would like help in defining your legacy, Plentiful Wealth is here to help. Our boutique, multi-family office approach allows us the flexibility to meet the specific needs of your family.


 

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