The Ultimate Estate PlanSubmitted by Affiance Financial on June 20th, 2012
By Steve Lear
This article is written for the “millionaire next door”—someone who’s net worth is between $500,000 and $10M—who wishes to leave a financial legacy.
As I grow older, I find myself thinking more frequently about the people I will one day leave behind. I always thought that planning for one’s death would be sad—and perhaps frightening. Surprisingly, however, I have found that it actually can feel invigorating and empowering to establish a legacy plan.
As a financial planner, I have probably attended at least 25,000 client meetings over the past 30 years. In doing so, I have learned that every individual can create a legacy that will have a positive and meaningful impact on future generations. Most people believe that the estate planning process is complicated, but it doesn’t need to be so.
I suggest the following steps to create a financial legacy:
Decide to whom you wish to leave money. Do you want to take care of only those individuals who are financially dependent on you, or do you want to leave something to others as well? Naturally, you want to make sure your spouse has sufficient capital with which to continue an agreed-upon standard of living. You will also want to make sure your children have the necessary funds to allow them to gain the tools they need to become self-sufficient adults and contributing members of society.
Probably the most difficult, but ultimately the most rewarding, decision is determining the amount you want to leave. Most people assume that the more they leave, the better. For the reasons outlined below, I don’t believe that's the case. And once you have decided upon a dollar amount, you have established parameters that can in turn help you make other financial and life-style decisions.
In deciding on an amount to leave to your heirs, consider the following:
- Beyond basic support if they are under age 18, a financial legacy to your children is a gift, not an obligation. Your children are not entitled to the money you have earned, any more than you were entitled to receive a legacy from your parents. The best gift you can give a child is the means by which to acquire the education or skills they will need to create their own definition of financial success.
- Do not leave an amount that will take away anyone’s ambition to strive for his or her goals and succeed on his or her own. This is especially important for children. Consider an amount that will enhance their ability to succeed, such as money specifically earmarked for college or graduate school.
- Consider whether your children might feel like taking care of the assets they inherit is a burden rather than a privilege.
- Regarding grandchildren, unless you lack the confidence that your children will take care of their children, I suggest leaving them a token amount or nothing at all.
- So what’s the right amount? One line of thinking is that, if one has the means, $500,000 is a sufficient amount for each child. But ultimately each person needs to decide for him or herself what that number should be. There is no one right answer.
Once you have decided on a dollar amount, you need to decide how to fund it. I believe that the most efficient, effective and leveraged  way to fund a financial legacy is through the use of life insurance. For a married couple, a second-to-die life insurance policy is a good choice; for a single person, a permanent policy. Using life insurance as the funding vehicle for a financial legacy offers the following advantages:
- It will pass income tax-free to your heirs.
- If owned properly , and depending on its size, it will also pass estate-tax free.
- The payments come in the form of a check, which is easily divisible among many beneficiaries.
- Inheriting life insurance proceeds is far less complicated than other types of inheritance, such as a family asset.
- If an heir wishes to purchase an asset (such as a piece of art) from the ultimate beneficiary of your net worth (such as a charitable entity), he or she would have the finances with which to do so.
Finding the assets:
How will you pay for the life insurance policy?
- If you start early enough, you can allocate some of your cash flow. Hopefully, when you are older you will reach a point where the cash value will cover a portion of the cost. My wife and I begin funding our policy when we were both 32 years old. By age 47, the policy had enough cash value that we were able to cut our premium in half.
- If you are older and already have a sizeable net worth, you can use a simple capital transfer technique. This involves moving assets from an existing investment account to the legacy insurance policy.
We know how this policy will benefit your survivors. But how will this plan benefit you?
The primary benefit to you is that you will sleep well, knowing that your legacy has been established. In addition, it will free you so that you can spend your net worth as you desire. Knowing that you have already provided for your heirs will allow you, guilt-free, to:
- travel wherever you wish
- build a lake home
- support organizations that are meaningful to you
- leave your estate your charity
I believe we live in a society that grants its citizens remarkable opportunity. Of course, depending upon the circumstances of birth, the path is easier for some than for others. But many of us are lucky enough to have been provided with a platform with which to accumulate wealth. However, with wealth comes responsibility. With this in mind, I challenge each of you to do the following three things, in the following order:
- Create a legacy for your heirs.
- Use your net worth to do the things you want to do. Enjoy life. Live each day with intent, passion, and meaning.
- Use the remainder of your estate to give back to the society that allowed you to acquire the education and skills you used to create your life style and accumulate your net worth.
For those of you who have already implemented this strategy, I congratulate you on your wisdom and foresight. Feel free to introduce yourself to others as an “ultimate estate planner.” When they ask what you mean, explain what you did, and why. Reach out to your estate planning professional and request “the ultimate estate plan.” Estate size is not a determining factor—rather it’s your desire to live a bigger, more interesting life and to create a meaningful financial legacy to others. Go for it.
 Leverage is defined as using a small amount of funds (such as a life insurance premium) to gain a much greater return (such as a death benefit).
 Life insurance that is owned either by the children or by an irrevocable trust, and that is managed in compliance with existing tax laws, will keep the death benefit out of your estate.