How to ensure your wealth lasts for generations into the future.
What does it take to build a family legacy? Many affluent individuals and couples take basic steps to protect their family’s financial well-being. Perhaps they draft a will, fill out beneficiary forms on their retirement accounts and insurance policies, and designate an executor who will oversee how their assets are distributed once they pass away. But those steps—while certainly important—are only the beginning.
Building a true family legacy that protects your family’s wealth and serves your needs in the near term, while preserving it for future generations, requires detailed planning and ongoing oversight and management, says Phillip Furlong, Wealth Advisor with Regions Private Wealth Management in Knoxville, Tennessee.
“Family legacy planning is not a one-time event,” Furlong says. “It needs to be a living and breathing plan that changes as your family changes and as laws change. Surprises can happen that can cause a lot of distress if they’re not adequately prepared for.”
Too often, he says, families delay long-term wealth planning because conversations about death and inheritance are difficult to have. But inadequate planning and miscommunication can lead to huge mistakes, similar to the horror stories you hear about in the news: Someone passes away who didn’t leave adequate instructions for how their estate should be divided and the heirs end up in an expensive, years-long court battle over the assets. Or perhaps someone didn’t update their estate plan to reflect changes in their family, giving the bulk of assets to one heir while overlooking others.
So, how do you verify you’re taking all the necessary steps to preserve your wealth and have it passed along according to your wishes? Here are five tips for building a lasting family legacy:
1. Know Your Opportunities
Many individuals and families miss out on key opportunities to transfer their wealth more effectively and tax efficiently. They should consider working with an advisor who can point them toward steps that will help them reduce their estate tax obligations and make sound decisions about their wealth while they’re alive.
Account titles, for example, are one commonly missed opportunity. Many couples jointly title all of their assets. When they pass away, all jointly titled assets will count toward their individual estate tax exemptions ($12.92 million in 2023). However, current tax law allows each spouse to own up to the estate tax exemption before incurring the tax. By strategically titling assets instead, couples could own as much as twice as many assets before incurring the estate tax—$25.84 million.
Corporate executives and business owners also overlook key wealth planning moves when they’re not careful. Executives with stock options, for example, will want to make sure they exercise those options before they expire, which is typically after 10 years, Furlong says. Business owners have many opportunities to pass their business along to their heirs tax efficiently, but they often need to start succession planning years in advance to take full advantage of those opportunities.
2. Review Your Plan Regularly
Another common mistake is failing to update paperwork. Furlong has seen many problems arise due to the failure to review a form or to make simple decisions.
For example, someone may name their spouse as the beneficiary on a retirement account or life insurance policy. In the event that the couple gets divorced without updating the beneficiary designation, the assets pass to the ex-spouse instead of the children or another beneficiary.
Revisit all your financial paperwork upon any major life event in your family—birth, death, divorce, marriage, business startup, job loss or new job. Even if you haven’t experienced a transition like this for a while, revisit paperwork every three to five years. Your personal financial situation or tax laws may have changed enough to make certain changes worthwhile.
3. Choose a Non-Family Executor
Many individuals and couples automatically assign the role of executor to their oldest child. But Furlong has witnessed plenty of cases in which that child would rather not have been given the job, for understandable reasons.
Depending on the complexity of your estate, the executor role can become a full-time responsibility and may require considerable financial expertise, Furlong says. “We have clients who have an ownership stake in many different businesses. Or sometimes they have homes in multiple states. As a result, the executor must file taxes in all of those states.” Moreover, executors may have to go through probate court in multiple states or find real estate agents who can help them clean out and sell residences. Straightening all that out can take years of effort and saddle a family executor with unwanted responsibilities and liabilities. “It’s a tough spot to be in, because other heirs may question what you’re doing and question your motives,” Furlong says. “As a parent, the last thing I want to think about is my kids fighting or disagreeing.”
To prevent such discord, many families with complex estates select an institution, like Regions, as executor of their estate. An institutional executor can adhere to the various state rules and protocols, keep family members updated and move the process forward smoothly and expediently, often without the conflicts that arise when a family member oversees the process.
4. Customize Your Plan
Parents often have unique concerns when it comes to how their children will inherit wealth. Some children may not have a strong work ethic, leading to fears that inheriting wealth will only lower their motivation. Others may have mental health issues, substance abuse problems or a tendency to spend every dollar that comes their way.
Because all children are different, it’s important that estate plans address the individual needs and potential problems associated with each child, Furlong says. Trusts are helpful tools for dealing with such specific concerns. For example, a trust can be designed to motivate a beneficiary by paying out funds as the beneficiary earns income—even matching that income dollar for dollar. Trusts can also be used to help equalize estates between children and protect children financially after a remarriage, since spouses typically inherit all assets. “Trusts are a great way to achieve specific estate planning goals and ensure those goals are carried out in the future,” Furlong adds.
5. Prepare Your Heirs
Communication is also a key part of ensuring your heirs are ready to take the reins. Some affluent parents may not want to tell their beneficiaries in advance about their inheritance plans, Furlong says. This may be due to modesty or the fear that the knowledge of a large inheritance may hurt their child’s motivation to achieve. However, offspring who are kept in the dark may feel financially helpless when their parent passes away. They will be given large and sometimes complex assets—real estate, investments, foundations, even businesses—with little guidance on how to manage them.
Instead, heirs should at least be given a basic understanding of how to manage the family’s assets, so they don’t make major mistakes once they inherit them. A good first step is bringing them in to meet with the family’s financial advisor, Furlong says. They can ask questions about the wealth transfer process, and they will know whom to contact when their parent passes away.
Another strategy is to let the beneficiary “practice” handling wealth. This typically is done by providing a financial gift and then coaching the child through the process of doing something constructive with it. One client Furlong worked with gave his adult child about $1 million. The child used some of the money to build a house and put the rest into a portfolio designed for long-term growth.
Other parents may guide their offspring through the process of investing in a portfolio, starting a business or building a charitable foundation. Gifting may be a good idea from an estate planning perspective because it reduces the size of a taxable estate, Furlong says, but it also has other benefits. “Gifting gives you an opportunity to find out the financial acumen, or the potential, of a beneficiary. And it may give you a lot of joy to see how it benefits your family while you’re still alive.”
Planning the future of your family’s wealth is a long-term process that should start sooner rather than later.
Three Things to Do
- Contact Regions Bank to get started on estate planning and trust administration.
- Learn more about creating a family legacy that reflects your family’s values.
- Listen to our podcast about creating a financial legacy for your next generation.
