How to Pass On Your Wealth

One of the many advantages of having life insurance is that you protect your wealth for future generations, too. Many people believe insurance is only necessary while their kids are young, however, that death benefit is just as useful later in life. If you have significant wealth, or even if you don’t, it’s worth considering how to pass on your wealth so that it doesn’t simply disappear. 

Defining Wealth Before Discussing How to Pass on Your Wealth

The general definition of wealth, according to the dictionary, is “the state of being rich; material prosperity.” While this is true, we’d like to expand how you might be defining wealth into something more holistic. 

See, we don’t believe there’s any one number that signifies wealth. Wealth is about how you get your money to work for you, not about how much you have. We’ve seen young adults with starting salaries “experience” wealth because of their good money habits, just as we’ve seen multi-millionaires feel asset-poor due to poor money habits. 

That’s what it comes down to. Habits. Those who learn how to save, live below their means, and do their due diligence before making decisions have a better experience of wealth. This experience can be compounded by the use of whole life insurance, which allows you to leverage OPM (other people’s money) and save more efficiently. It takes hard work and discipline, and by the end of your life, it’s worth protecting that work for your heirs. 

Passing on Wealth to the Next Generation

If you accumulate any sort of wealth in your lifetime, that is at risk of disappearing when you die. Unfortunately, there are estate taxes, funeral costs, and income taxes to your heirs if they inherit anything. Additionally, without the right setup and protections, creditors might try to get their piece of the pie, too. If you’re intent on passing on wealth to the next generation, you’ve got to take certain steps in order to make this happen. Otherwise, it can all but vanish before a cent even reaches your heirs. 

We want to take the morbidity out of your “death day.” By treating your passing as a matter of practicality, you remove the fear, and can actually create some peace of mind for yourself by knowing that your loved ones will be taken care of, no matter what happens. Below are some ways to create peace of mind around passing on wealth.

Whole Life Insurance

Whole life insurance has many advantages, and in this case, it’s important that it’s permanent. This means that if you live a long and healthy life, you’re still going to have a death benefit. It also means that even if you use all of your other assets to create income in your later years, you’ll still have your death benefit to leave to your heirs. (This is the “permission slip” or “permission to spend” concept.)

When your heirs receive the death benefit, they’ll receive it income tax-free. And, creditors won’t be able to get their hands on it, as it’s a highly private asset that goes directly to beneficiaries. Hopefully, you can start to see why this is such a valuable asset to have in place. And the younger you are when you buy the policy, the better it is for you and your heirs. 

Estate Planning: Last Will and Testament

Estate planning is a broad category and one that requires some time and attention—no matter how old you are. If you have any assets, you want to have an estate plan. Otherwise, your estate could be reduced to almost nothing by the time it reaches your heirs. 

At a basic level, an estate plan includes your last will and testament. This is a legal document that indicates how your monetary and physical assets should be split. (Note: Your life insurance will go to the beneficiary you designate in your contract, regardless of what the Will says.) This can include everything from who gets the house, to which family member you want to take care of your pets. If you have children, you want to indicate who would take care of them in an emergency.

While your will is about your death, you must consider it a “living document.” It’s going to change with you over your lifetime. You’ll have to update your will many times over your life because you have to write it considering your current assets and lifestyle. That is to say, you don’t want to write your will as if you’ll die at age 90, you want to write it as if you might pass tomorrow. That way, you know your estate is covered.

The best way to go about this is to work with an estate planning attorney (we like the people at NNEPA). They’ll make sure your documents are filed properly, they’ll schedule annual reviews, and recommend additional protections based on your personal economy.

Estate Planning: Trusts

Speaking of additional protections, trusts are legal arrangements that can hold and distribute assets for you. If you have a lot of money and assets, trusts are a great way to reduce taxes and fees that occur when wealth transfers from one party to another. Trusts can also help you pass assets to charities, keep heirs from spending the money all in one place, or ensure a specific (non-equal) distribution of assets to many heirs.

For example, if you own a large portfolio of real estate, you can actually designate the trust as the owner of some properties. Any proceeds from sales go into the trust, which may help to alleviate significant taxes. An ILIT can help you pass ownership of a policy to your kids without triggering a gift tax. There are many types of trusts, of varying complexity and purpose, and an estate planning attorney can help you determine what will serve you best based on your assets and your objectives. 

What is a Legacy? Passing Wisdom to the Next Generation

In discussions of wealth, it’s also worth talking about legacy. Typically, your legacy includes your wealth and assets, as well as other less-tangible values. In the Perpetual Wealth book, we talk about how legacy includes your personal values, the charities you care about, the purpose you serve in the world, and the wisdom you’ve accumulated. Your legacy is the impact you leave upon people long after you’re gone. 

Shifting your mindset from passing wealth to passing on a legacy can make a huge difference in the way you approach this topic. For example, if you want your legacy to include passing good financial habits to your children, include it in your legacy plan. This could look like annual family retreats to talk about the family bank, and setting up a trust for your life insurance. Within that trust, you may include certain requirements—like the money must be used to support your child’s career or to purchase a new asset—that further your legacy goals in your children’s best interest.

The point is that you are so much more than a dollar figure, as is your family. You can choose to focus simply on passing that dollar figure to your kids as efficiently as possible, or you can give them the tools to keep good money habits in your family for generations.

To start your journey to passing wealth, book time with us today. If you have questions on how to get started, email them to we*****@pr****************.com.

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