Estate Planning vs. Legacy Planning: Understanding the Difference

Estate planning includes a wide variety of potential activities. Not all of those activities are right for everyone who engages in estate planning. For example, someone with relatively few assets may want to find out more about trusts in order to avoid a court process called probate (which is required for a Will), and those with estates with large values may want to know about avoiding estate taxes. However, almost anyone can benefit from basic estate planning that uses powers of attorney, wills, healthcare directives and revocable trusts.

One decision you might want to make as you approach estate planning is whether you simply want to protect your assets and your interests or prepare to leave a legacy for others. You don’t need millions in the bank to consider your legacy; for example, real estate, like raw land or even a cottage on Cape Cod that is used by the family, can be a part of your legacy.

Understanding the difference between estate planning and legacy planning — and speaking to an attorney experienced in these matters — can help you make those choices.

What Is Estate Planning?

Estate planning in general refers to the process of protecting your assets and personal interests legally during your life and after you pass away.

Some common activities in estate planning include:

  • Understanding what you have. Many people start with an inventory of assets. This provides a comprehensive list of what you have now — and potentially an understanding of how you might grow that wealth in the future.
  • Deciding what you want to do with your assets now and in the future. Once you know what assets you have, you can work with an experienced estate planning attorney to determine how best to protect those assets and how to ensure your wishes for them are carried out even if you’re incapacitated or pass away.
  • Setting legal structures in place to safeguard your assets and wishes. Estate planning often includes the use of trusts, wills, and other legal documents to ensure your wishes are carried out and that your assets are protected – from creditors, lawsuits, divorcing spouses or taxes.
  • Making and implementing plans for the future. If asked, most people want to remain at home should some form of long term care be required. Some estate planning attorneys help with issues such as elder law, which can involve considerations such as long-term care like in-home care.

What Is Legacy Planning?

Legacy planning is a specific part of estate planning that considers what happens with your assets when you pass away. When you engage in legacy planning, you may take a more comprehensive approach to this than you would with general estate planning.

For example, with general estate planning, you may create a revocable trust that makes it easy for people to identify what assets you have and what you want done with them when you pass away and to help keep those assets out of probate.

However, with legacy planning, you consider in a holistic manner the legacy you want to leave behind along with your assets. With legacy planning you goal is to structure your affairs so that your values are transferred together with your assets.  The aim is for your estate to achieve goals and objectives that are important to you long after you have passed away.

Some common goals of legacy planning can include, but certainly aren’t limited to:

  • Emphasizing the importance of certain family values, like education, home ownership, marriage, entrepreneurial endevors and business ownership.  These goals may be encouraged through the use of a Family Bank. A Family Bank (often in the form of a trust or a business entity) may be created to provide grants or loans to family members at favorable terms to encourage the continuation of valued activities (ie. education, home ownership, etc.). 
  • Creating charitable foundations or trusts. You can set up a variety of legal structures that allow philanthropic efforts you care about now to continue even after you’re gone — and in your own name or the name of your family. You may even structure these entities in a way that encourages family involvement. 
  • Safeguarding assets against taxes. 
    • Individuals with larger estates may have the opportunity to leave larger legacies. However, they also may have to consider the impact of estate taxes on what they leave to heirs. Proper legacy planning can help to reduce the impact of estate taxes – often over multiple generations.
    • Almost every family is impacted by income taxes. Proper legacy planning will structure the legacy you leave so that income taxes are minimized. This is done by through basis step-up techniques, like powers of appointment, and qualifying an inheritance for lower ordinary income tax rates through proper design of the legal structures best suited for your situation.
  • Protecting assets against confiscation. Approximately, fifty perscent of all marriages in the United States end in divorce.  A proper legacy plan will protect your loved so that any inheritance you leave will not be subject to claims in a divorce.  In other cases, an heir may have a hig risk of being sued, so structuring the legacy to protect against lawsuits may be critical.  Finally, you may want to leave assets for loved ones, but you don’t trust their ability to manage the assets correctly. Creating trusts can help you protect assets against  mismanagement.
  • Setting guidelines for how assets can be used. You may have a specific purpose in mind for how heirs should use assets. Legacy planning helps you put legal provisions in place to ensure those guidelines are followed.
  • Supporting the growth of wealth now and in the future. By safeguarding your assets legally, you can protect them now and help increase the chance that wealth grows in the future.

What Are Some Possible Tools Used in Legacy Planning?

Many legal tools exist to help you protect your assets now, better build wealth for the future, and ensure your wishes are carried out regarding the use of your assets. The best way to understand what legal options might be right for your legacy planning is to talk to an experienced estate attorney.

However, here are a few options that might come up, depending on your situation:

  • Trusts. You can use trusts to protect your assets now and once you pass away. They can help streamline the process of passing assets on to others, keep assets out of probate, and ensure your guidelines for asset use are followed.
  • Family Limited Partnerships (FLPs). In some cases, it may make more sense for family members to own and manage assets, like an investment portfolio, together. In this case, an FLP might be a good decision for legacy planning. FLPs are also a great tool for sharing ownership of a startup company with children at an early stage, before growth or a buyout occurs. FLPs can provide strong protection from the divorce of or creditor claims against an owner.
  • Limited Liabiltiy Companies (LLCs) and Corporations. Many times clients want their children, and eventually their grandchildren, to own real estate together. For example, many clients want their children to continue to use their Cape Cod home for family use and enjoyment. But what you are really doing is placing your children into a business relationship with each other.  Effectively, they are managing your home for the needs of multiple families. This requires capital contributions from each heir to pay property taxes, insurances and maintenance and repairs. This can best be structured through a business entity, like an LLC or Corporation, that sets out what the rules are for each co-owner.  
  • Annual gift tax exclusions. You may be able to start creating a legacy by gifting assets to your loved ones before you pass away. Understanding the tax implications of doing so is important.  In order to build a legacy out of annual exclusion gifts, it is often best to use an Gifting Trust that allows for pooling of the annual gift and can be managed in a more controlled manor.

To find out more about legacy planning and what options you have, reach out to the Law Offices of Boyd & Boyd, P.C., today by calling 508-444-9688.