Over the next 25 years, analysts anticipate $68 trillion to be passed down to younger generations and charities. While the importance of legacy planning is not limited to the forthcoming Great Wealth Transfer, it does spotlight the significant amount of wealth that has been created, primarily by Baby Boomers, and the need to transition these assets thoughtfully. A legacy plan, regardless of the size of a portfolio, is an essential component of the financial planning process, ensuring the assets an individual has spent their entire life accumulating will transfer to the people and organizations they want, and that family members are well-prepared to inherit and execute their wishes.
There are, however, four common missteps that can cause individuals and families to veer off track.
Failure to create a plan
It’s difficult for individuals to think about their own passing, so this tends to push planning off “to another day.” Of course, if an individual passes before a plan is in place, their goals and wishes cannot be executed.
I guide clients to establish a legacy plan as early as possible. While every individual is different and there is no steadfast rule regarding when precisely to create a plan, sooner is almost always better. When an individual begins to envision or has a preference about where and how their assets are transferred – say it is passing down specific heirlooms, charities receiving a portion of wealth, or a family business transitioning to younger generations – it should trigger the need to put a plan in place.
Understand that a legacy plan can evolve over time; you don’t just set it and forget it. A plan should be rooted in what an individual or family envisions today, but with the flexibility to accommodate for changes in the future.
Lack of communication and trust
A common, and hazardous, reason that legacy plans often don’t succeed is a lack of communication and trust. Not communicating a plan early on can create a rift between generations, especially if it is different than adult children might expect or incorporates other people and organizations that come as a surprise to heirs.
I’ve seen individuals have great success by bringing their adult children – who are in their 20s and 30s – into the conversation to establish the communication early on. If sharing monetary figures is uncomfortable, focus on the overall, high-level strategy instead, reviewing timing, familial values and what the plan seeks to accomplish. Open communication can mitigate negative feelings, such as distrust or confusion among family members, allowing for a more successful transfer.
Another reason families don’t succeed in transferring wealth is inadequate preparation among intended heirs. The ability to get individual family members on board with defined roles can be challenging, but it can alleviate a lot of potential headaches and obstacles down the road.
I frequently work with clients to coordinate a Family Alignment Day, where we review the vision and values of the plan and make sure everyone is on the same page. From there, we think through what everyone’s contribution to the plan can be – for example, if one family member is highly organized, perhaps they take control of coordinating family meetings to oversee the plan and ensure it remains on course to meet objectives on an annual basis.
While a broad bucket, the final reason plans don’t succeed is because of mistakes, such as overlooking tax implications or legal issues.
Enlist the help of professionals and create an “A-team”— composed of specialists, such as a financial adviser, tax professional and estate planning attorney — who can work in tandem to ensure the plan will meet its intended goals. For example, from a tax standpoint, professionals should flag upcoming legislative changes, as they could justify altering the plan. One instance of this: Many provisions in the Tax Cut and Jobs Act of 2017 will sunset after 2025, specifically impacting income tax rates and brackets, and estate and gift tax exemptions.
Whether creating a legacy plan today, or as part of the millions of households in the Great Wealth Transfer that will establish plans soon if they haven’t already, preparation and flexibility are keys to wealth transfer success. Set up an accommodative plan early on, have open communication with family members, and review philosophies and values to make sure everyone is on the same page. This will leave loved ones with the ability to understand, respect and meaningfully execute the legacy plan’s objectives.
Julie Virta, CFP®, CFA, CTFA is a senior financial adviser with Vanguard Personal Advisor Services. She specializes in creating customized investment and financial planning solutions for her clients and is particularly well-versed on comprehensive wealth management and legacy planning for multi-generational families. A Boston College graduate, Virta has over 25 years of industry experience and is a member of the CFA Society of Philadelphia and Boston College Alumni Association.
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