When considering a legacy plan for your estate, it is important to recognize the differences in your heirs to make sure you are leaving them an inheritance that makes sense for their situation. “Beneficiaries are not created equal” is a phrase I tell the families I serve when we are working on their Legacy Plan. We may love our kids the same, but this does not mean they should each be treated equally when considering their inheritance.
Consider the following differentiators when devising a Legacy Plan for your heirs. How old are your heirs? What is their marginal tax bracket? Are they married? Do they have children? Do they have issues with personal finance? Do they have addiction or gambling issues? Do they have special needs that qualify them for government benefits?
Other considerations should be applied for how your heirs receive their inheritance. Do you want them to receive an equal amount? Do you want them to receive a lump sum payout upon your passing? Do you want their inheritance to come to them in installments over time? Is there an age that you would like your heirs to reach before receiving their inheritance? Are any of your beneficiaries charitable organizations?
Legacy plans can range from very simple to very complex. The simplest legacy plan that I find most helpful for families is designed to avoid probate and move assets to the beneficiaries in a lump sum payout. This is done by listing beneficiary designations on all your assets. Retirement accounts, investment accounts, bank accounts, and homes can all list beneficiaries. These designations pass directly to the named beneficiaries and do not count as the residual estate distributed through a Will, which negates the need for probate. If your heirs are minor children, this strategy would avoid probate, but your children would have complete access to the inheritance when they turn the age of majority as determined by their state residency – typically 18 or 21.
Lump sum distributions are simple, but they could lead to other issues no matter how old the beneficiary is. What if your beneficiary goes through a divorce after receiving the inheritance? What if your beneficiary has trouble with personal finances? What if your beneficiary has addiction issues that could be accelerated by having access to a large sum of money?
The way to avoid the issues with lump sum distributions while still avoiding probate is through a Trust. Trusts provide control by directing the trustee on when and how distributions are to be made. Essentially, the trust holds the assets until the beneficiaries reach a certain age or when specific needs for funds are granted. These distribution schedules and rules can be the same for each beneficiary, or they can differ depending on their situation.
It is crucial to consider the many variables that can negatively or positively impact how and when your beneficiaries receive their inheritance. The legacy you leave should be a blessing that enriches the recipients’ lives. The strategy you choose plays a significant role in making this happen.
Financial Enhancement Group is an SEC Registered Investment Advisor.
