Understanding the Importance of Legacy Planning

It is easy to think of your assets where each one contributes to your net worth in the same way, based on their financial value. For the sake of determining the net worth number, this is essentially correct. However, the equivalency ends there, as different asset types are not equal when it comes to spending them in retirement or leaving them in legacy.

Assets can be roughly categorized as qualified or non-qualified. Qualified assets are generally pre-tax retirement plans and pensions, while non-qualified assets are most everything else. Qualified plans usually receive a tax benefit when contributions are made and they grow on a tax-deferred basis, however all withdrawals are treated as taxable income. This is because those qualified dollars have never been taxed before being withdrawn. So, in a sense, qualified plans have embedded taxes.

When qualified plans are left in inheritance, those embedded taxes never go away. The beneficiary of a qualified plan must still pay taxes on withdrawals. By contrast, non-qualified assets receive a “step up in basis,” where any taxable gain is measured from the asset’s value at the owner’s death instead of their original cost. The net effect is inherited non-qualified assets can often produce tax-free withdrawals.

Legacy can mean different things to different people, but it almost always is regarded with high value and importance. In the context of financial planning, legacy usually revolves around how one will leave their assets to benefit those they love and further the values they cherish. These ideas occupy the categories of inheritance and charitable giving.

Inheritance happens whether we plan for it or not, but planning ahead can help mitigate unintended consequences. A common narrative is someone inheriting a large sum and then squandering the money because they weren’t equipped to handle it. One study showed that roughly half of all inheritances is spent or lost. A vital step in optimizing your legacy is thinking through how inheritance may affect the lives of your heirs.

Start by listing your heirs and an estimate of what they might receive. Consider their financial situation, the potential tax impact, and their personality and proclivities. Identify any potential dangers, as well as opportunities. Then work with your attorney and Nepsis® advisor to utilize the tools and strategies that reflect your values and the deep hopes you have for your loved ones and future generations.

One very significant unintended consequence of inheritance is the erosion of taxes. Not only are there taxes that may be embedded within an asset and passed on to beneficiaries, but there may be taxes on the inheritance itself. The degree to which taxes drag down an estate may be greatly impacted by the proactive planning one undertakes.

Taxes embedded in IRAs and other pre-tax accounts do not go away when those assets are inherited. Therefore, these are among the least advantageous assets to be inherited by an individual. Charitable organizations, however, are not subject to income taxes, therefore pre-tax accounts are ideal assets to be left as legacy donations.

The downside to leaving pre-tax accounts to charity rather than heirs is this effectively disinherits the heirs of the benefactor. However, this can be mitigated by using lifetime distributions from the IRA to fund a life insurance trust with the heirs as beneficiaries. At death, the IRA goes to charity tax-free, and the life insurance goes to heirs tax-free. Done properly, this strategy can eliminate both income taxes and estate taxes.

There are numerous ways to optimize your legacy with the pre-tax assets you have, but the details can be complicated. So, talk with a Nepsis® advisor about the taxes that may be hidden within your estate and your options for maximizing your legacy impact.

“I am not afraid of death, I just don’t want to be there when it happens.”  – Woody Allen

The topic of our own mortality is one that is difficult for most to face. Yet it is an integral consideration in our financial plans and goals for the future. At some point, we must consider what happens with our assets and loved ones, and what our eventual legacy will be.

As difficult a topic as death is, it can be equally hard to discuss our finances and “final wishes”. The lack of clear communication can have significant unintended consequences where uncertainty can lead to stress and even family conflict. The last thing any of us wants is our legacy to be a source of strain and struggle. A vital part of optimizing your legacy is proactive communication.

A great starting point for communicating your wishes is to write them down. At Nepsis®, we formalize this process with our Legacy Letter. This is a document that includes a list of key advisors and people to be contacted, the locations of important documents and items, and an expression of your wishes and desires for your family. This is a key component of every financial plan and can serve as the basis for further communication opportunities with your loved ones.

Consult with a Nepsis® advisor about putting together your Legacy Letter, as well as other questions you may have on how to maximize the positive impact you can have on those that will be recipients of your Legacy Plan. Giving With Clarity®!



Disclaimer: Please note that Nepsis, Inc. is not a tax advisor; the preceding items are suggestions that you may want to consult with your tax advisor about before making any decisions.

Advisory Services offered through Nepsis, Inc.; An SEC Registered Investment Advisor.

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