Making critical, successful decisions when it comes to wealth transfer and inheritance depends on a comprehensive understanding of what makes up that wealth. Here’s what you—and your heirs—should know.
This article is the fourth in a series taken from The One Page Legacy Plan by Phil Tobin, a free downloadable eBook from iGiftFund. In this piece, we’ll break down different categories that make up family wealth—and why they’re so important for the entire family to understand.
Financial decision-making is as emotional as it is analytical. And when it comes to generational wealth transfer, there’s a lot to consider.
To make good decisions, you need good information. Part of the process in ensuring that your accumulated assets and wealth transfer successfully to your heirs—developing your legacy plan—involves developing a strong understanding of the different types of wealth. It’s also important that you and your family work together to make sure this understanding is a shared one.
To start, it can be helpful to categorize your wealth into four buckets: financial wealth, social wealth, philanthropic wealth, and legacy wealth.
Financial wealth. This is money you can spend between now and the time you die, along with the wealth that will be given to your heirs. This is the wealth that your family will either use or keep.
Social wealth. This is money that you can’t keep, spend, or give to your heirs. A portion of your money
is taken by the government, usually in the form of taxes, to support the general welfare of the country. You do not have the ability to direct these monies. As an alternative to paying taxes, you can also gift some of your wealth to charity, fulfilling some of the same societal needs.
Philanthropic wealth. This is the portion of your wealth you gift to your favorite charities, most often given outright in the form of a check. In both cases of social and philanthropic wealth, whether by paying taxes or writing checks to charities, you end up losing control over how those dollars are spent. So, what can you do to make sure you distribute your philanthropic wealth in a simple, tax-smart, and meaningful way – without giving up control? The answer lies in the fourth form of wealth:
Legacy wealth. You can establish a philanthropic fund and turn what you would have otherwise paid in taxes into a tax-smart philanthropic fund from which you and your family can:
- Support your favorite charitable organizations and causes on your own flexible timetable; and
- Pass on your legacy of family values to future generations
Given the choice—and you do have the choice—would you prefer these matters to be guided by your family, or by the government? Would you prefer to decide how to allocate funds to your favorite causes and when? And, if you have children, wouldn’t you prefer to have a say in who will succeed you in making these decisions once you are gone?
Sources of family legacy wealth. You have control of your legacy wealth which is made up of your personal financial wealth and your personal philanthropic wealth. Determining the right plan begins with documenting your personal financial and philanthropic net worth.
Your personal financial wealth typically appears as assets on your balance sheet. It might include:
- Checking, savings, money market accounts
- Real estate, autos, boats, artwork, household furnishings
- Stocks, bonds, CDs, mutual funds, real estate
Your personal philanthropic wealth does not typically appear on your balance sheet. It might include:
Split-Interest Charitable Vehicles
- Charitable Remainder Trust, Charitable Lead Trust, Pooled Income Funds,Charitable Gift Annuities
- Private Foundations, Supporting Organizations, Donor Advised Funds,Community Foundations
Charitable Beneficiary Designations
- Life Insurance Policies, Charitable Life Insurance Riders, Retirement Plans,Pledges, Bequests
With the help of your trusted financial advisors, getting a handle on the “what” of your wealth is one of the first, most important steps in the future of your family legacy wealth. Making this kind of plan can help ensure successful transfer to your heirs when the time comes—but that part also requires determining the “why” of your family wealth.
Phil Tobin is Chairman and President of iGiftFund.
Next in this series: Assembling your family and determining your shared values—and your family mission statement—can help guide successful wealth transfer. We’ll explore concrete steps you can follow to draft your guiding mission statement.