When approaching retirement, it’s common for people to start thinking about legacy planning: how they’ll be remembered and what they’ll leave behind. In most cases, leaving a legacy for children, grandchildren, or charities – and other causes people are passionate about – takes careful planning and the advice of a financial planner.
Read on for five ways to leave a lasting and meaningful financial legacy after retirement and beyond.
One big area where people can leave a legacy is real estate, such as a second home or a vacation property.
“Sometimes families have a vacation home that means a lot to the family,” says certified financial planner Constance Stone, co-founder and consultant to Ohio-based Stepping Stone Financial, Inc. But individuals interested in doing so should explore setting up a family limited partnership or a trust for an easier process to transfer interest in the property.
According to Stone, leaving behind a vacation home “can be a wonderful thing—and also a source of disagreement and problems. You have to think ahead of how to set it up so that the entity keeps going.”
There are also some tax breaks for family limited partnerships in addition to the ability to transfer ownership between different siblings, Stone adds.
While vacation real estate can be a slam dunk for an inheritance, the same isn’t always true of the family home.
“The family home can be tough, because it’s fraught with so much emotion,” says Stone. “I’ve seen more family conflict over the family home and its contents than anything else.”
People thinking about leaving collectibles or anything worth monetary or sentimental value should include directions in estate planning documents with clear instructions for how those items are to be divided.
“Leave a list: If you want to leave certain things to certain family members, that list will generally be honored, as long as it’s referenced in the will,” Stone says.
Another way to leave a lasting legacy is naming children or grandchildren as the beneficiaries of traditional Individual Retirement Accounts (IRAs) or Roth IRAs.
“The best thing you can leave to children are Roth IRAs,” says Stone, noting the tax expense of traditional IRAs.
Distributions from Roth IRAs are tax-free as long as the person who set it up met the five-year holding period for contributions and conversions, she notes. Beneficiaries have five years to take out money from the account, unless they transfer the retirement plan account to an Inherited IRA, which allows them to stretch distributions throughout their life expectancy.
“If you don’t convert it to an Inherited IRA [after the donor dies], then you have to take [all the money in the account] in five years,” says certified financial planner Karen DeRose, founder of Illinois-based DeRose Financial Planning Group, of both traditional and Roth accounts.
People choosing to set up beneficiary IRAs can name multiple beneficiaries, Stone says. Once the donor dies, the IRA is divided into separate accounts for each beneficiary and they can access their funds independently of the other beneficiaries. While there is no legal limit to the number of beneficiaries that can be named on an IRA, some institutions limit that number.
To make sure IRAs are set up correctly to avoid distribution penalties or taxes, it’s best to talk to a knowledgeable tax advisor, DeRose and Stone recommend.
Similar to beneficiary IRAs, it’s also possible to purchase an annuity and name a child as the beneficiary. Upon the donor’s death, the child then has an income stream from annuity payments over their lifetime.
“Because the child is younger, there will be a bigger stream of income throughout their lifetime,” says DeRose. “It’s another great way to guarantee a child’s income.”
Prior to 2019, when individuals reached age 70 ½, they were required to start taking required minimum distributions (RMDs) from qualified retirement plans, such as Individual Retirement Accounts (IRAs) and 401(k)s (excluding a current 401(k) if the individual is still working). However, the SECURE Act, passed in 2019, made a big change to RMD requirements by extending the age from 70½ to 72.
Distributions start at a certain percentage of the total balance of all IRAs and increase as the individual gets older.
“A lot of people don’t need the money [from the required distributions] and turn around and reinvest it,” DeRose says of her clients. “If you don’t need it, I tell them, ‘Why don’t you take part of it and buy a second-to-die life insurance policy?’”
These policies pay out only after the second spouse in a couple passes away, making it one of the cheaper life insurance policies, according to DeRose.
As an example, suppose there is a married couple with two children that purchases a $1 million second-to-die policy that costs between $20,000 and 25,000 a year and they pay for it with their excess distributions. Once both spouses pass away, their two children each get $500,000 from the policy.
“Putting the insurance payout into an irrevocable trust makes it income- and estate tax-free, and they’re leveraging their gifting,” DeRose adds. “It’s a beautiful thing to do. It’s a great strategy.”
For those desiring to leave behind a legacy benefiting a charity they’re passionate about, a Roth IRA may not be a good idea because non-profit, 501(c)3 organizations don’t benefit from tax breaks like individuals do, says Stone. However, bequesting depreciated stock to a charity can lower estate taxes.
“If you had a lot of stock that depreciated in value that you want to unload, those are often looked at for charities,” she advises. “It gets the depreciated stock out of your estate, and you don’t have to pay taxes on that—and the charity isn’t impacted by taxes either.”
Leaving a legacy isn’t all about the money, either, adds Stone, who advocates for a more holistic view. For example, many people don’t think about cleaning out their homes while they’re still around to do it.
“Get rid of the stuff you don’t want left behind, so someone else doesn’t have to make those hard choices,” she says. “Kids feel like they’re throwing their parents’ lives away. If they’re already going through an emotional time, it makes it even harder. There’s a sense of guilt.”
Another lasting legacy is in the form of lifestyle. “Some of the best things that my parents left me were an appreciation for what I had, and not expecting—or wanting—a lot of material things,” Stone says. “Family was important. Religion and church was important. Hard work was expected, and it helped me develop good life skills.”
