When thinking about estate planning, it’s natural to focus on “how”—that is, the wills or trusts that enable the distribution of wealth. As critical as these documents are, the heart of a successful wealth transfer plan lies in the “why,” explains Tamara Costa, an advanced planner at Fidelity. “Your personal legacy is more than legal documents,” Costa says. “It’s about what you want the money to represent and the impact you want to have on the next generation.”
Once you’ve established your goals for your legacy, you also need a plan to communicate your wishes to the next generation. “Legal documents can leave a lot of room for misinterpretation,” cautions Costa.
Rob Giordano, a vice president with Fidelity Private Wealth Management, recalls a recent meeting with a couple who had a net worth of about $100 million. They had decided that each of their 3 children would get about $1 million each, with the rest of the money in a trust for subsequent generations, prioritizing funds for education. “The parents didn’t grow up with wealth. Their goal was to leave enough for their kids so that they wouldn’t have to worry about money, but not so much that they wouldn’t have to work,” Giordano explains. “It was important for them to have a conversation with their kids to explain their reasoning, so it didn’t seem like they were simply overlooking them.”
An opportunity for reflection
Everyone’s relationship to money is shaped by their childhood and personal experiences with money. Spouses should have an open discussion about their views, says Costa. “Often mom and dad have very different ideas about what should happen to their money, especially if they were raised in different circumstances. For example, you may feel that money is something to be enjoyed, while someone else might feel it’s something to be preserved.”
Once you have established broad goals and values, you can consider how they might translate into specifics, such as funding travel for your heirs or maximizing your support for certain charitable causes.
Leading by example
If you hope to make ongoing philanthropy a part of your legacy, make it a regular part of your conversation with your kids today. “A bequest in your will may not be the best way to demonstrate charitable commitment,” Costa says. “We have clients that feel passionately about various causes and they either donate regularly or volunteer their time, or both. Whether they are donating to organizations or volunteering their time, they have family conversations about causes they are passionate about and lead by example, perhaps including family members in a conversation to determine which charities to donate to, or volunteering together as a family.”
Another way to encourage your beneficiaries to continue your charitable legacy is to set up and fund a donor-advised fund (DAF). With a DAF, you donate cash, stocks, or even private company stock and are eligible for an immediate tax deduction. You then invest your contribution so it can potentially grow over time, while advising the fund to recommend grants to nonprofits of your choosing. Any growth within the DAF would be tax-free. Besides the immediate tax benefits, your heirs can be named as successor to the DAF, allowing them to potentially continue making grants indefinitely.
The limits of control
For families who wish to protect their wealth during and after their lifetimes, trusts can be a tool to consider. Trusts can help distribute assets fairly between family members, even in the case of divorce or remarriage; protect assets against litigation; minimize potential gift or estate taxes; and help provide for a special needs child.
But restrictions sometimes put in place by trusts can have unintended consequences for heirs, cautions Costa. “As a parent you’re trying to prepare your child for independence, but sometimes a trust can create co-dependencies.” Costa suggests thinking about whether the trust terms are drafted simply for tax planning and whether the beneficiary might interpret the restrictions as disempowering. “It’s important to consider whether restrictions are intended to control a beneficiary’s behavior, or to empower them,” she adds.
Among the questions to consider: Will the trust’s distribution guidelines be conservative or liberal? Should a beneficiary also serve as trustee, which might create tension between them and other heirs? “We talk to clients about their fears about giving up control, and what messages they might be sending with various distribution structures,” Costa says.
Sharing your story
The estate planning process can offer an opportunity for family conversations to explain the plan itself as well as the intent behind it. Costa suggests arranging a family meeting to discuss your plans, possibly including a financial professional or attorney as a neutral third party.
Costa recalls one couple who wanted to create a trust structure that would allow for their daughters to enjoy regular distributions from the trust, but also ensure that there were available resources for their grandchildren’s education. “To avoid misinterpretation, we helped facilitate a family meeting to educate the daughters on trusts, explain how certain provisions could be misinterpreted, and helped the clients communicate their intent to their daughters,” she says.
Some parents may be hesitant to discuss their estate plans if they aren’t ready to disclose their finances to their heirs. Especially if your kids are younger, there’s no need to discuss specific numbers right away, says Costa. “Often parents want to wait until they feel their kids are ready for a certain amount of responsibility, or sometimes when they have a child of their own.” She suggests writing down a family mission statement, which could include information on your family's history, wealth creation, and your aspirations for the future. Costa cites examples of value statements within mission statements, such as: “We value education and each family member attaining an undergraduate degree,” or “We value helping children in need,” for a family that donates money to that cause.
A mission statement shouldn’t be confused with a side letter, or a letter of intent, a non-binding document providing additional context and guidelines to help a trustee make decisions about distributions of a trust. “The idea of a mission statement is to capture values; not all of them have to be connected to money, whereas the side letter is meant to give guidance to a trustee for making distribution decisions,” explains Costa.
Carrying the torch
Your kids and grandkids have grown up in a different world, and different circumstances than you, and their relationship to wealth will likely reflect that. But knowing their family’s unique history can help them navigate their feelings during a challenging time as well as offer an opportunity for them to create the next chapter. "By sharing your story with your family, it can help them understand your legacy and values, and potentially assist them in processing their emotional reactions," says Giordano. “The next generation’s values might not be the same as yours—but knowing your values can help them carry the torch.”