Legacy planning recommendations

[sam_likh]

Hello
I have been working with Vanguard PAS for some time now and this year, the advisor recommended that I seriously consider legacy planning to make sure there is thought behind the legacy we want to leave behind behind for our 2 kids.

My wife and I are in our mid- 40s and feel like we are going to be ok in our retirement years. Looking for some thoughts on how we should approach legacy planning, what options we should consider, how do we think about tax situations where what we leave behind doesn't cause tax burden on the kids, what about whole life insurance.

Thanks in advance

EDITED: Initially I had incorrectly referred to 'estate planning' which is more in the legal realm. I updated to say I need advice on 'Legacy planning', looking for thoughts on what kind of investment strategies to consider for legacy planning.

[stan1]

For estate planning you would talk to an estate planning attorney not an insurance sales person. I think it is best to use an estate planning attorney who works in your state but most use 50 state software packages now. To be honest the way we've found our estate planning attorneys were word of mouth and a large number of 5 star ratings on Google reviews. That worked for us but your situation might be different.

From GPTChat:
An estate plan typically includes a will, power of attorney, and advance healthcare directive (living will). The will outlines how a person's assets will be distributed after their death, the power of attorney gives someone else the authority to make financial and legal decisions on their behalf if they become incapacitated, and the advance healthcare directive specifies their healthcare wishes in the event they are unable to communicate them. Other documents that may be included in an estate plan are trusts, financial and asset inventory, instructions for final arrangements and guardianship for minor children. Estate planning may also involve tax planning and coordination with other legal documents, such as prenuptial agreements.

If you have a special case like a family business, farm, special needs children, etc. you really must talk to an attorney and provide more information.

One of the first things an attorney will advise you is whether you need to worry about estate tax or not. Very few people do.

[sam_likh]

Thank you... I had mistakenly said 'estate planning' but I was looking for financial advice for 'legacy planning'. So more in the financial realm than legal realm. Apologies for the confusion

[Joey Jo Jo Jr]

I’d be interested in the Vanguard person’s definition of legacy planning. Sounds like estate planning but for more self-important clientele and/or those that haven’t accepted that they are actually going to die one day.

[fourwheelcycle]

I don't think there is any special investment strategy for legacy planning that is different from retirement saving. This forum offers a myriad of investment strategies, but I keep our portfolio mostly in Vanguard Total Stock Market and Vanguard Intermediate-Term Bond. You can choose whatever AA you are comfortable with.

It is hard to avoid true estate planning - you really need to do it, and I assume you have already done it at least once. Until your children are adults, your estate plan needs to identify a guardian to raise your children and a trust to manage and distribute whatever you leave in your estate if you both die. Your estate may include term life insurance proceeds, but hopefully (?) not whole life proceeds. Your estate plan could anticipate your legacy by providing if there is any money left in their trust when your children age 26, or 30, etc., it will continue in trusts for each child, with each child having some role as an advisor or full trustee over their own trust.

Once your children are independent adults, perhaps with families of their own, and if by that time you have clearly saved more than you need for your own retirement, you can think about more specific legacy provisions in your estate plan. My wife and I are leaving 25% to charity, via Vanguard Charitable, and 75% to our children. Attorneys on this forum uniformly advise you should leave your legacy to your children in trusts that will keep their inheritance safe from creditors and divorces, and out of their own estates when they die. Depending on where they live (Massachusetts is one example) your children's estate taxes could begin at the first dollar you leave them!

[HomeStretch]

… Looking for some thoughts on how we should approach legacy planning, what options we should consider, how do we think about tax situations where what we leave behind doesn't cause tax burden on the kids, what about whole life insurance. …

Whole life insurance does not make sense in most situations. Consider level-premium term life for your insurance needs and other measures for your financial planning.

Was the advisor’s comment about legacy planning a generic one or do you have a specific need for legacy planning for some reason? For example, state estate tax considerations, a Federal estate that anticipate will be subject to Federal estates, etc.

Personally I would avoid any complicated legacy planning like using irrevocable Trusts while alive unless I was fairly confident I would have an Estate tax issue.

Spouse and I plan to spend the bulk of our portfolio in retirement. We are doing Roth conversions and gifting to children now as part of our retirement/legacy planning. We will make QCDs in the future and we may be able to gift some I-Bond distributions tax-free to 529 accounts for future grandkids. Our beneficiaries will receive a step-up on inherited Taxable accounts and inherit tax-free Roth accounts which will primarily limit their tax burden to whatever they inherit in tax deferred funds. We make sure to keep our estate documents (including Trusts for our non-minor children), account titling and account beneficiary designations up-to-date.

[stan1]

If you are close to the 2023 federal estate tax exemption of $12.9M (over about $5.5M after 2025 unless Congress changes the law), or live in a state/city like New York with a lower threshold, that's an important discussion to have with your estate planning attorney.

If your estate is over $5M you should be talking to your estate planning attorney about something like an irrevocable trust. It's difficult to give advice in these types of situations without knowing any details about your situation. If you own a business, farm, or have a special needs child there are some things you should do with your attorney.

In your 40s you should look at your term life insurance and consider short and long term disability insurance.

Your concern that "what you leave behind doesn't cause tax burdens on the kids" is a little confusing to me. Taxable accounts and real estate are great ways to leave assets to your heirs as they get stepped up cost basis. Roth IRA accounts are not taxable. Traditional IRAs are taxed for both you and your heirs. If you have a more specific concern about tax burden for a particular asset that's a discussion to have with your attorney or you can give us more information.

In the news media and political banter there is sometimes fear-mongering about "death taxes". That is not what happens in the US in most cases.

[TomatoTomahto]

If your state estate amount would trigger estate taxes (eg, in Massachusetts), you should talk to an estate attorney. Doubly so if your estate exceeds the Federal exclusion amount (or will when it’s cut in half).

[fourwheelcycle]

... We are doing Roth conversions and gifting to children now as part of our retirement/legacy planning.

Same here. Best to let our adult children inherit Roth money tax free, since ten year withdrawals for IRAs will push their income tax rates higher than ours are now, regardless of Federal estate tax considerations. Gifts to charity in Roth conversion years further reduce our Roth conversion income taxes. Also best to get pre-709 gift money for children and 529 college money for grandchildren out of our estate now, with no risk it may be exposed to Federal estate tax later.