Proper legacy planning requires careful thought and preparation. Many people never get around to putting their wishes in writing, causing heartache and perhaps financial difficulties for their family when they pass away.
The basics of estate planning begin with a will, financial power of attorney, an advanced medical directive and potentially a trust. Beyond simply executing documents, however, life insurance can play a critical role in bringing your plan to life, ensuring your intentions are carried out.
Getting the basics right
First, let’s cover the basics of estate planning:
Wills. Only 40%* of people have a will in place, a surprising oversight considering how difficult it can be for a surviving family without one. If you pass away without a will, the allocation of your property is governed by the laws of the state where you reside. A will dictates how your assets are distributed and who is in charge of ensuring that your wishes are properly implemented. You can also use a will to name a guardian for minor children if both parents die suddenly; without a will in place, guardianship is decided by the court.
Trusts. The downside of a will is that it is a public document that must go through probate. If you want to keep your financial affairs private or avoid the expense of probate, you may want to consider passing a majority of your assets through a trust, but you’ll still need a will in place to handle any contingencies. Trusts can be useful for people of all circumstances — not just the very wealthy.
A trust is beneficial because it enables you to exercise greater control over the eventual division and dissemination of assets, ensuring they are distributed precisely as you intended. As a grantor — a person who establishes a trust — you’re using a document to convey your intent when you’re no longer able to do so on your own, whether because you’re incapacitated or because you’ve passed away.
Financial Power of Attorney. A financial power of attorney makes it possible for someone you designate to act on your behalf regarding personal financial matters. The power of attorney may go into effect immediately, or in the future if you become incapacitated, and can no longer act on your own behalf.
Advanced medical directives. A healthcare power of attorney allows an appointed individual to make medical and related treatment decisions for you if you’re unable to do so. Parents are often surprised to learn that when a child reaches the age of 18, the parent can no longer legally make medical decisions for their child. A hospital might not even talk to a parent of an adult child without a health care power of attorney document in place. The same holds true for those caring for older relatives.
Another important consideration is to include language that allows you to state your wishes for end-of-life medical care, in case you become unable to communicate your decisions.
Multigenerational legacy planning
Beyond the previously defined basic estate planning documents, multigenerational legacy planning provides a viable strategy for funding your estate plan.
Consider a grandparent who wants to provide for future generations in a typical, three-generation family. In this scenario, grandfather James would be generation one. His daughter, Jessica, would be generation two. Jessica and her husband have two children, Sophia and Noah (generation three).
In many families, estate planning is primarily concerned with the transfer of wealth from generation one to generation two — from James to his daughter Jessica. However, multigenerational legacy planning also looks to the financial well-being of the grandchildren who make up generation three — while balancing the overall needs of all three generations.
While James has done well financially, he’s in his mid-60s and in the early stages of retirement. He wants to provide for his daughter and grandchildren but also wants to ensure that he does not compromise his own lifestyle or outlive his assets. This means traditional wealth transfer strategies, where he’d give part of those assets away to a future generation, may not be the appropriate approach.
Life insurance can play an important role in a multigenerational legacy planning strategy, helping grandparents set aside assets specifically to benefit their children and grandchildren, yet still retain control over those assets during their own lifetimes.
In this example, Penn Mutual allows James (generation one) to put life insurance in place on his daughter Jessica (generation two), for the ultimate benefit of his grandchildren Sophia and Noah (generation three). Grandfather James determines he wants complete control over his policy and the assets within it while he’s alive. He also wants to ensure the distribution of those assets are properly carried out according to his wishes when he passes away.
As a result, he works with an estate planning attorney to set up a revocable trust to own a life insurance policy — a trust for which he is the trustee, which gives him complete control and allows him to access the policy’s cash value, if available. Should James wants to change the overall plan during his lifetime, he can.
When James passes away, the trust becomes irrevocable, which means it can’t be changed, and there is greater certainty that his intended plan will be followed.
Remember, though, the life insurance is on generation two — James’ adult daughter Jessica — so the death benefit isn’t paid until after she passes away. In the meantime, because James set up the trust to list both generation two and three as income beneficiaries — James’ daughter Jessica and his grandchildren — they can use the policy’s cash value for important purchases, such as paying off a mortgage, making a down payment on a house, or funding college or post-graduate education.
After Jessica (generation two) passes away, the trust will dictate how the proceeds will be distributed, income tax-free, to Sophia and Noah (generation three).
Regardless of where you are with your estate planning — whether you need to create an estate plan, update an existing estate plan, or take it a step further to ensure you’re funding that plan in the most efficient manner— talk with your financial professional. You may want to consider how using life insurance to enhance a multigenerational plan can make it possible to leave a legacy for generations to come.