What is the Difference Between Legacy Planning and Estate Planning?

Legacy and estate planning are often confused but are distinct aspects of financial planning. Both aim to protect and transfer wealth to future generations, but they differ in focus. Legacy planning centres on leaving a lasting impact, while estate planning deals with asset distribution after death. This article explains the unique features of each and their respective benefits.

Legacy Planning

Legacy planning, as the name suggests, focuses on the lasting legacy an individual wants to create for their family, friends and society. It encompasses not only the distribution of assets and wealth but also the values, life lessons, and charitable goals that the individual wishes to pass on. Legacy planning takes a more holistic and long-term perspective, considering the impact of one's decisions on multiple generations.

Estate Planning

Estate planning is a more technical process of managing and distributing one's assets and wealth upon their death. It involves creating legal documents such as a Will, setting up trusts, and designating beneficiaries, amongst other tasks. The primary goal of estate planning is to ensure that the individual's financial affairs are in order and that the distribution of assets occurs efficiently and according to their wishes, minimising tax liabilities and potential disputes further down the line.

Legacy Planning Components and Tools

• Intergenerational Wealth Transfer: Legacy planning involves the transfer of financial assets and resources across generations, ensuring that the wealth is preserved and grows over time. This may involve setting up family trusts, creating investment portfolios, and establishing family businesses.
• Philanthropy: A significant component of legacy planning is giving back to society through charitable endeavours, donations, and endowments. This can be accomplished by setting up charitable trusts, creating scholarships, or establishing foundations, or of course leaving a pledge in a Will.
• Family Values and Life Lessons: Legacy planning incorporates the preservation and transfer of family values, traditions, and life lessons. This may involve documenting family histories, and conducting regular family meetings to foster unity and shared values.
• Mentorship and Education: Part of creating a lasting legacy involves mentoring the next generation and providing them with the necessary skills, knowledge, and opportunities to succeed. This can include funding education or simply providing guidance and support.

Estate Planning Components and Tools

• Wills: A Will is a legal document outlining how an individual's assets should be distributed upon their death. It includes details such as the appointment of an executor, distribution of assets, and provisions for minor children.
• Trusts: Trusts are legal arrangements that hold assets on behalf of beneficiaries. They can be used for various purposes, including tax planning, asset protection, and charitable giving.
• Beneficiary Designations: Beneficiary designations involve naming the individuals or entities that will receive specific assets, such as retirement accounts or life insurance policies, upon the individual's death.
• Power of Attorney: A lasting power of attorney is an official document that grants trusted people the ability to make decisions on an individual's behalf, about their property and financial affairs and/or health and welfare, at a time in the future when an individual no longer wishes to, or is fully able, to make those decisions. A "Property and Financial Affairs" LPA gives others the authority to deal with bills, bank accounts, savings and investments and other financial matters. A "Health and Welfare" LPA covers decisions about health and care. This LPA can only be used if someone is incapable of dealing with such matters themselves.

Legacy Planning Flexibility

Legacy planning is an ongoing, dynamic process that evolves as an individual's circumstances, goals, and priorities change. It involves regular review and adjustment if necessary to ensure that the plan remains aligned with the individual's vision and objectives. As a result, legacy planning demands a proactive and adaptable mindset, encouraging individuals to think about their impact and future generations on a regular basis.

Estate Planning Flexibility

Estate planning, while still requiring periodic updates, is generally a more static process focused on an individual's current financial situation and immediate family needs. Once the essential legal documents are in place, such as a Will, trust, and lasting power of attorney, the focus shifts to updating them if necessary, usually in response to significant life events. However, compared to legacy planning, estate planning requires less frequent reassessment and adjustment.

Legacy Planning Tax Considerations

Legacy planning aims to minimise the tax burden on both the individual and their beneficiaries by employing tax-efficient strategies for wealth transfer and charitable giving. By reducing tax liabilities, more assets can be passed on to future generations or allocated to charities to enable them to continue to do their great work.

Estate Planning Tax Considerations

Estate planning also seeks to minimise tax liabilities, primarily through estate and gift tax planning. This involves transferring assets in a way that minimises inheritance tax, for example utilising the annual exclusion, and employing various estate tax reduction strategies such as setting up trusts, making charitable donations, or gifting assets during the individual's lifetime. The ultimate goal is to maximise the amount of wealth passed on to beneficiaries while complying with tax laws.

Estate Planning for Your Family's Future

Estate planning can give you the power to design the future of your inheritance whilst also providing secrecy and protection. No matter your financial status or age, creating an organised plan of what will happen to your assets after you have gone can give you assurance that your loved ones and causes you care about will be provided for in the future. The most successful estate plans factor in several considerations in addition to a Will. For instance, who will benefit from your retirement funds or who will be granted the responsibility to give instructions for your medical care if you become unable to care for yourself.

Why Is Estate Planning Important?

It is essential to create an estate plan to ensure that your assets can be used to support your family in the event of your passing or inability to make decisions. If you do not have a will in place, your wishes with regards to financial matters, medical care, and other areas of your life may not be honoured. Not having a plan of action can result in a lot of pressure being placed on those close to you, particularly if they are responsible for taking care of your finances without an understanding of what you want.

Death and Incapacity

Considering one's mortality is not something people like to contemplate, but it is sensible to establish an arrangement to get ready for the inevitable, after all, we are all mortal, and we are all going to die some day. A Will is a commonly employed device for indicating where your assets go after your passing. If you don't compose a Will, the dreaded laws of intestacy may well come into play and choose what will happen to your possessions, and the outcome will probably not be what you want.

For instance, it might be your wish to give your possessions to individuals not related to you, or you could opt to assign guardians to look after minor children.

An estate plan can also guarantee that someone can take care of your financial affairs if you are incapacitated due to illness or injury. For instance, you may slip into a state of insensibility, be given medicinal drugs, or be too tired to even talk. If you do not receive assistance, you may end up not paying your bills and most likely your insurance policies could become invalid.

Create/Update Your Estate Plan

People commonly wonder what is involved in creating an estate plan, be it starting a plan from scratch or making changes to an existing plan. It is vital to establish who will administer your estate plan. This may include family members, associates, or an estate administration service. It is hugely important to decide who will be the primary and secondary heir(s) of your estate. These people could include your spouse, relatives, friends, acquaintances, and organisations you give donations to.

Provide a brief overview of all your possessions, including their current worth, the names written on the ownership certificates, account numbers, documents relating to them, and associated contact details. Some examples of these include:

• Property, including mortgage details
• Cash/bank accounts
• Savings accounts
• Investment accounts
• Retirement plans
• Life insurance policies
• Annuities
• Business ownership, or private partnerships you have an interest in
• Personal assets such as vehicles, jewellery, tools, artwork and belongings of sentimental value
• Any expected inheritance

Identify the essential individuals who need to take action for the purpose of your estate plan. The following people should be taken into consideration when making your end-of-life plans: the individual who will be in charge of your estate after you die; the individual who would make healthcare choices for you; and who will be the legal guardians of any young children or those with disabilities.

Carefully consider how you would like to divide the assets you own among your heirs (which may include not just family and friends, but also charities of your choice).

Locate any old estate planning arrangement or any estate planning paperwork that requires examination and/or refreshing.

Estate Plan Essentials

Some of the most influential elements that guide the development of estate plans are Wills and Trusts. Depending on your financial scenario, you may not have to include both.

Last Will and Testament

A Will, a standard part of an estate plan, is a legal document that outlines how one's belongings are to be distributed after death. You can designate in your Will who will get all your worldly goods. In the event of your death without a Will, the intestacy laws will decide what happens to your belongings and assets.

Typically, your family members, such as your spouse or children, are initially the recipients of your assets; if you are unmarried and do not have any children, then other relatives might be given your estate. No relatives? In the event of your death, the government typically takes possession of your belongings and property. If you and your significant other are unmarried, not having a Will that lays out what you want to happen to your resources after you're gone can lead to your wishes not being honoured. It is thus essential to set out your wishes in a Will, as intestacy regulations commonly just accept members of one's family.

Trusts

Trusts are commonly thought to be a tool utilised only by the extremely wealthy. In actuality, trusts can be advantageous for those wishing to have a financially advantageous way of transferring their inheritance to the people they leave it for, and for deciding the way their possessions are supervised through life and after death.

Establishing and managing a trust can be advantageous to families of all sizes and monetary means. One's choice of whether to create a trust and the design of the trust and its provisions relies upon their individual objectives.

A trust is a legally-formed arrangement in which assets are placed in order to be guarded, managed, and distributed as desired. There are several players who are involved in creating and administering a trust, including:

• Trustor – Also known as the “grantor” or the “settlor,” this is who sets up the trust.
• Trustee – The person(s) or entity that manages the trust’s properties.
• Beneficiary – The person(s) or entity that receives the assets in the trust.
• Successor trustee – The successor trustee takes over if and when the original trustee dies or declines to serve.

When constructing a trust, you make regulations and stipulations that outline what will be done with the resources in the trust. The most effective way to execute your wishes through a trust is to determine the most suitable trust for your objectives, adhere to the protocols associated with that type of trust, and continually meet any legal requirements.

Benefits of a Trust

There are many reasons to set up a trust. Some of the common benefits of creating a trust include (but are not limited to) those surrounding:

• Taxes – Avoiding or reducing estate and gift taxes is probably one of the most popular reasons why people set up a trust.
• Probate – If you have a Will, the assets included in your Will normally pass through the probate process, which can be time consuming and costly. A trust on the other hand can directly and quickly pass the assets to beneficiaries.
• Estate Protection – A properly constructed trust can protect the assets from the beneficiaries’ creditors and lawsuits.
• Control – When setting up the trust you can dictate how and when you want the estate to be used.
• Minors & Dependents – Trusts can provide support for minor children or dependents with special needs.
• Charitable Giving – Trusts can help you donate to charities in a tax-efficient manner.
• Privacy – The contents of a Will and the details of the assets left in the Will usually become public while the terms of a trust do not.

Insurance Protection

Life insurance can be an integral part of estate planning. A life insurance policy can offer a significant tax-free payment to those receiving the benefit in the event of the policyholder's death. The money can be used to substitute for the wages the deceased was making, take care of any financial responsibilities, guarantee that the children can pay for school, and much more.

Lasting Power of Attorney

An LPA legally enables an individual to represent and act on someone else's behalf regarding their health,legal and financial matters. For exmaple, they are then able to settle debts and make investments for you in different contexts. A comprehensive estate plan should consist of concrete arrangements to ensure that you receive the medical care you prefer if you lack the ability to make or express choices, at any age. Without having your wishes for medical care recorded in a legal documen such as an LPA, you could potentially not receive the type of treatment you desire. To summarise, you may need to designate a Lasting Power of Attorney in your estate plan to let someone else make huge decisions for you in regards to health or money if you are not able to do so. We allow you to Apply for a Lasting Power Of Attorney online.

Frequently Asked Questions

What is the role of an executor in estate planning?

A personal representative, who is commonly referred to as an executor, takes on the task of managing an estate when the deceased passes away. That person carries out the stipulations in the Will to settle outstanding debts, submit tax forms, dispose of assets, distribute resources, and more.

How much does estate planning cost?

An estate plan of a typical nature should cost less than a thousand pounds. Speak to one of our specialist staff to determine which options are the suitable for your requirements.

What documents do you need for estate planning?

Examples of frequent records consist of a final Last Will and Testament, lasting powers of attorney and one or more trusts. Including insurance policies in your estate plan might be beneficial. The specific documents required depend on your circumstances.

Conclusion

Although legacy planning and estate planning share the common goal of preserving and transferring wealth, they differ in focus, scope, and methodology. Legacy planning is a more comprehensive, long-term approach that emphasises values, philanthropy and intergenerational wealth transfer. In contrast, estate planning is primarily concerned with the legal and financial aspects of distributing assets upon death. Understanding these differences is crucial in determining which approach is best suited for your needs and goals. If you wish to create a lasting impact that goes beyond the distribution of your assets, legacy planning will be the right choice. However, if your primary concern is ensuring that your assets are distributed efficiently and according to your wishes, estate planning will be more appropriate.

In many cases, a combination of both approaches may be necessary to create a well-rounded and effective financial plan for the future. What do you want to be remembered for is something to ponder. Maybe it's the daring mentality that draws you to explore every area of the world. Maybe it's the remarkable benevolence you show to those close to you or to a cause that's important to you. This is where considering and organising the transfer of assets upon death is important. Regardless of the path you choose, communicating your objectives clearly is crucial to developing and implementing a successful plan that protects your wealth, supports your loved ones, and leaves a lasting legacy.

Recommended Next Step

We feel it is best to talk to an estate planning specialist who is able to advise on what is best for your personal circumstances.

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