What it means
Many people think of legacy planning as writing a will, but it covers much more. It includes deciding who gets what, who will manage the estate, who will look after any children and how a family business will carry on.
It also covers charitable giving, and the passing on of knowledge and values as well as money. Tax is a central part of the planning, because the way assets are passed on can change how much the family keeps.
Many countries tax estates, gifts or inheritances above certain thresholds, and rates and allowances are set by the tax authority and change over time. Advisers help to use gifts, trusts, insurance and pensions in line with current rules to reduce the bill legally.
Common tools include a will, trusts, lasting powers of attorney, life insurance and nominated beneficiaries on pensions and investments. A trust, which is a legal arrangement where a trustee holds assets for others, can control when and how heirs receive money.
Life insurance can provide cash to pay tax or equalise shares between heirs, for example when one child inherits the business. For business owners, legacy planning is also succession planning.
The owner needs to decide whether the business will be sold, passed to family or handed to managers, and how its value will be shared fairly. A clear plan protects employees and customers, as well as the family.
The most overlooked step is keeping the plan up to date. Marriages, births, deaths, new businesses and changes in the law can make an old will or trust ineffective.
Reviewing the plan every few years, and after major life events, avoids unpleasant surprises and disputes.
In practice
Real-world examples.
Example
A couple in their sixties meets a solicitor and a financial adviser to write wills, set up a trust for their grandchildren and name beneficiaries on their pensions. They agree who will manage their affairs if they lose capacity. Their children are told where the documents are kept.
Example
The founder of a family-owned engineering firm plans to retire in five years. She arranges for her two children, one working in the business and one not, to receive equal value, using shares for the first and life insurance proceeds for the second. A written succession plan sets out the timetable.
Example
A retired doctor wants to leave part of her estate to a medical research charity. She includes a legacy gift in her will and speaks to the charity about how it will be used. Her advisers confirm how the gift will reduce the tax payable by her estate.
Formula
Calculation
Net amount to heirs = gross estate - debts and funeral costs - estate tax. Estate tax = (estate after debts - tax-free allowance) x tax rate
Suppose a person leaves a gross estate of $3,000,000, with debts of $200,000 and administration and funeral costs of $100,000. The estate after these is $3,000,000 - $200,000 - $100,000 = $2,700,000. Assuming, for illustration only, a tax-free allowance of $1,000,000 and a tax rate of 30% on the excess, the tax is ($2,700,000 - $1,000,000) x 0.30 = $1,700,000 x 0.30 = $510,000. The net amount to heirs is $2,700,000 - $510,000 = $2,190,000.Case study
Seen in the real world.
Whitmore Family Holdings is an illustrative, fictional family business worth about $10,000,000, owned by a founder in his seventies. He had no will update for 20 years, and his two sons disagreed about whether to sell or run the company.
An adviser helped the family draw up a plan: shares were placed in a trust, the son who wanted to run the business received voting control, and the other son received a larger share of the investment property. A life insurance policy of $1,500,000 was arranged to cover the expected tax bill. The illustrative lesson is that a clear plan made in advance protected both the business and the family relationship.
Watch out
Common mistakes.
- Believing a will alone is a full legacy plan, when jointly owned assets, pensions and trusts may pass outside the will.
- Never reviewing the plan, so it no longer reflects marriages, births, deaths or changes in the law.
- Leaving family members to guess the wishes, which often causes disputes even when the money is divided fairly.
Questions
People also ask.
When should legacy planning start?
As early as possible, because options such as gifting and trusts work best with time, and it should be reviewed after any major life event.
Who should be involved in legacy planning?
Usually the individual or couple, a solicitor, a tax adviser and a financial planner, plus family members when open discussion would help.
Is legacy planning only for the wealthy?
No. Anyone with dependants, property or wishes about who gets what can benefit, because a plan reduces delay and confusion for those left behind.
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