Merriam-Webster dictionary defines legacy as “a gift by will especially of money or other personal property”, or “something transmitted by or received from an ancestor or predecessor or from the past.”1 There is often a misconception that “leaving a legacy” is only for the ultra-wealthy and only involves the gifting of wealth to future generations. We associate it with silver spoons and “trust fund babies” and unlikely-to-happen-to-me events (who actually has a mysterious rich aunt leaving behind a fortune that makes her long lost relative wealthier than their wildest dreams?). In reality, however, a “legacy” is something each one of us creates. While it can certainly include real property, it also includes the wisdom that we teach others and the impact we leave on our communities.
Building your legacy isn’t just about the future – it’s also about today. For instance, when I was in elementary school, the neighborhood ice cream parlor gave out free “kiddie scoop” ice cream cones if you brought in a report card with all A’s or B’s. On report card day, my friends and I would demand our parents take us for our free scoops. It was an ingenious way for the owner to leave a legacy and help spread his values amongst community youngsters – and, of course, since mom or dad had to bring us in and pay for their own ice cream, he even bolstered his business! If you don’t have the ability to give free ice cream, charitable gifts and/or community service can also create lasting impact around your values
While everyone leaves a legacy, there’s certain steps that you can take to make sure your legacy is as all-encompassing as you wish it to be. The first step to ensuring your legacy starts with you. By approaching the financial aspects of your life the way a CEO might approach a company, you can start focusing on how to create, manage and build your wealth. Although financial gifts aren’t the only part of a legacy, they are often the basis.
Keeping your spending modest, budgeting wisely, and not overburdening yourself with debt are all financial steps that will help you grow and maintain your nest egg to make sure your financial legacy is secure. Keeping the future in mind when choosing investments may also help you maintain a long term view and make smarter investment decisions. For instance, while you may have utter faith in your employer and love your company, holding only employer stock may be short sighted. After all, if the unexpected were to happen and your employer went out of business, you could lose both your job and your savings! Our biases and emotions impact our every decision but by taking a step back and considering the bigger picture, it can be easier to “tune out the noise” from our investment decision making.
There’s an old adage that goes “shirt sleeves to shirt sleeves in three generations”. The implication is that the first generation earns the wealth, the second generation maintains it, and the third generation loses it. But how much truth is in the adage? There are common misconceptions that wealthy people build their wealth to last for many generations. In reality, it is very few families who succeed beyond a couple generations.
One of the problems with legacy planning is it has traditionally focused solely on the givers of the wealth and not on the receivers. Teaching heirs about investing and being a steward of wealth, as well as developing an infrastructure around sustaining your legacy can help keep families unified and ensure each generation continues to build upon the legacy that the generation previous leaves. Moreover, most people’s financial habits, both good and bad, are informed by those of their parents.2 Through maintaining good personal financial habits, not only will you have more financial assets to leave to your heirs or charitable causes, you will also model behavior to the next generation that will help them continue your legacy.
Estate planning documents like a Trust or a Will are also great tools to leave behind a “statement of purpose” for future generations and to help lay out guidelines and incentives that you can reward with financial gifts – for instance, if education is a priority, then you can outline in your trust that funds can be used toward tuition, or if a family member graduates from university they get a monetary bonus from the trust. While a generic trust will suffice for basic estate planning, using a trust to pass on your wisdom and experience to future generations may require a little bit of legwork and a qualified estate planning attorney to customize the legal documents to your wishes 3.
Building a legacy doesn’t have to wait until you’re gone or even until the later stages of your life. Rather, starting early can help ensure that your heirs will know and share your values and have the financial literacy to build upon your legacy for their own children and grandchildren. One of the myths about generational wealth is that wealthy families discuss money and finances and parents pass their knowledge to their children seamlessly. However, whether it’s because parents don’t want children to feel that they don’t have to work or the general cultural norm that speaking about money is “rude”, even wealthy families often refrain from discussing family finances.
Try getting over the “money taboo”. In 2015, barely 17% of parents who make over $100,000 said they had conversations with their children about salaries4. While it’s understandable that family finances are often an unpopular topic of discussion, it’s impossible to prepare for the future without starting with the basics. Without a foundation in financial literacy, a sudden (or not so sudden) inheritance can be derailing – much like winning the lottery can be! However, by planning ahead, you can gift heirs your hard-won lessons about budgeting, delayed gratification, investing, the importance of giving, etc5. Further, discussing your wealth transfer plan with your heirs can help them prepare and prevent them from feeling overwhelmed. Share your trusted contacts and build a good team of advisors to help guide the next generation, and your legacy will have a multigenerational impact.6
The sooner you begin to think about your legacy, the more prepared you’ll be, whether its preparing future generations to take the reins of the family business, setting up an inheritance for your heirs, organizing trusts for ongoing philanthropic donations, or even teaching your children the foundation of smart money management.
At Treehouse Wealth Advisors, we take personal wealth personally. Learn more about how we can help you manage your legacy and our customized wealth planning services today.
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