An estate plan lays out two important things: a succession of authority and a designation of who receives your assets. We’ve written before about what it’s like to name – and to be – a successor agent. How do you decide the best way to distribute the financial and family assets that you own? Leaving a personalized legacy involves more than just dollars and cents.
We often want to provide our loved ones with a sense of financial security, and we want our legacy to reflect and affirm our relationship with them. An estate plan can convey intergenerational family values that we want to be carried forward, or new ones we want to create. The designation of a beneficiary in a will or a retirement account may appear to be merely a technical designation, but it usually carries a much richer context rooted in our relationship with that person or the experiences we shared with them.
Three overlapping areas create a sort of Venn diagram to guide you through the complexity of family and community ties: financial considerations, identifying your beneficiaries, and the sentimental and personal considerations that you want to communicate. Like many experiences in life, there is no perfect plan. With deliberation and reflection though, you can create something that is meaningful to both you and your heirs.
Financial Considerations: What You Own and What You Owe
Your financial landscape is key as you put together an estate plan. What are your assets? What are your liabilities? We’ll look at these two elements from a non-financial perspective as well, but understanding the financial considerations is an important first step.
A list of your assets could include bank accounts, savings or reserve accounts, retirement plans, and non-retirement investments. Additional assets that shouldn’t be overlooked include: life insurance policies, your home, investment property, income from an irrevocable trust, pension income, a loan due from a friend or an adult child, royalty income from a patent or an oil well, art, jewelry, or an antique car. On the other side of the ledger, perhaps more straightforward, will be what you owe. Perhaps you have a mortgage, car loans, or a business line of credit outstanding.
Knowing the character and values of what you own and what you owe and writing it all down is an excellent starting place. Keep in mind that financial considerations extend beyond simple dollar values. Tax characteristics, liquidity, legal requirements, and other elements intertwine to fill out the unique complexity of your financial landscape.
Identifying Your Beneficiaries: The Who and How of Transferring Assets
With this detail in hand, you are better equipped to think about your beneficiaries – that is, who gets your stuff. Parents typically want to pass their assets to their children and grandchildren and may begin doing so during their lifetime. Not everyone has children, and they focus instead on leaving a legacy for siblings and their children, or to dear friends as an expression of love, gratitude or support. If you’re married, it’s worth noting that you and your spouse may have different beneficiaries, particularly in second marriages. Charitable organizations are also often included in an estate plan, particularly when it’s an organization that’s been a significant part of your life – an alma mater, a community for which you’ve volunteered, or an organization you’ve admired and aligns with your values.
Once you know who your beneficiaries are, you’ll need to decide how to split your assets among them. Within families, the simplest approach is to split everything evenly. This is a common practice when beneficiaries are of the same category; for example, they’re all your children. Sometimes you may choose to leave assets unevenly. One of your beneficiaries may have a greater financial need than the other, and you may feel a desire or an obligation to provide additional support for them.
You might also choose to leave different kinds of assets to different beneficiaries. For example, you may leave privately-held stock in a family business to the child who now works in the business and is qualified to hold it, or you may designate a retirement account to the child in the lowest tax bracket, knowing the fully taxable distributions will be mandatory over ten years following your death. IRAs are also an excellent way to leave money to charity, because unlike an individual who inherits an IRA, charities don’t have to pay tax on the distributions. That reduces taxes to your heirs, and increases the value of the legacy to the organization.
Depending on the circumstances, you may also decide to place limitations or conditions on an inheritance. If your beneficiaries are still very young, you might stipulate that their assets be held in trust until a certain age, when they are (hopefully) capable of stewarding it themselves. If you have a child with special needs, you may need to create a Special Needs Trust to hold supplement assets for them without jeopardizing governmental support for their care. For adult children uninterested or uncertain about their ability to manage financial assets, you may name them as a co-trustee with a trusted professional or family member.
When you discuss drawing up or revising documents with an attorney, understanding your intention is crucial. They can explain the technical benefits or drawbacks, but you get to make the final decisions that shape your plan based on the complexities of your family and your assets.
Personal Considerations: Where Emotions Enter the Picture
Sentiment and nonfinancial value can be just as important to an estate plan as financial value. Personal property – things like furniture, memorabilia, and jewelry – can hold deep personal value for the recipients. Stone carvings made by your grandfather may not be worth much to anyone else, but to you, they may be a priceless reminder of his love of art and his craftsmanship. Your mom’s mismatched silverware may not be pretty, but it perfectly represents her practicality and inspired you to do the same when you moved off-campus with friends in college.
Designating who you want to have what, or providing a method that multiple heirs can use to choose who receives what, is exceptionally helpful. Share your thinking in a letter to your loved ones, or in conversation with them. Make gifts of specific objects before you go, or put a note on the back or the bottom indicating who you want to have it. Most people don’t provide this sort of guidance, missing the opportunity not only to avoid confusion and resentment, but also missing the chance to affirm a bond with a loved one during a moment of their grief in losing you.
Evolving Your Legacy
It isn’t fun to contemplate our demise, and many people put off any kind of effective planning before they go. Your plan and your documents can be updated as your life evolves; it doesn’t have to be perfect before you put it into place.
We encourage you to take a step forward with your planning, adopting an attitude of contemplation as you mentally meander through what you want and what you don’t want. Put some thought into the who, why, and how of your legacy. Use the opportunity of an estate plan to remember all you’ve been through, what you hope is ahead in your life, your loved ones, and the meaningful assets you’ve built, bought, earned, or inherited. Make a map of your landscape, and start planting seeds.
About Sam Wood-Bednarz, CFP®
Sam Wood-Bednarz is a Partner, Senior Advisor, and Director of Financial Planning. He provides clients with a sense of confidence and security in their financial lives.
About Kate Campbell King, CFP®
Kate Campbell King is the Founding Partner and Chief Investment Officer at North Berkeley Wealth Management. Kate provides clients with a unique approach to their financial decision-making.
This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.