Legacy Planning Strategies for Preserving Generational Wealth

Once your retirement is financially secure, you may want to think about how to use your wealth to benefit the people or causes you care about—even after you're gone.

Legacy planning lets you set your philanthropic and financial goals while also putting a plan in place to ensure your assets are distributed according to your wishes over time. In most cases, wealth preservation strategies require help from professionals—including a financial advisor, an estate attorney and potentially a tax professional. Once you assemble your team, take these steps to build a comprehensive legacy plan together.

Organize your estate documents

Everyone should have a current will, power of attorney and healthcare proxy documents. Ensure that your loved ones know where these documents live and who they should contact in case of an emergency or loss. Having a basic estate plan and making it easily accessible may minimize stress for your heirs and help avoid or at least streamline the probate process.

You should also check that the beneficiaries named on your retirement accounts and insurance policies are up to date because your assets will automatically transfer to them outside of probate.

Take advantage of annual gifting

In 2024, you can gift up to $18,000 per person—or $36,000 for couples filing jointly—to someone without any tax consequence to yourself or the recipient. For example, if you're married and have a daughter and son-in-law, you and your spouse can give each of them up to $36,000 per year as a tax-free gift.

If you exceed that amount, the gift will count against your lifetime estate and gift tax exemption, which is set at $13.61 million for individuals and double that for couples in 2024. The rules for when and whether to file a gift tax return are complicated, so be sure to consult with a tax professional to ensure that your options are properly selected and documented.

"If you want to give during your lifetime, the first step is quantifying your gifting capacity to make sure you have enough assets to do it," says Richard Houston, a senior wealth planning strategist with First Citizens. "One of the biggest things we talk about in planning is what your lifestyle bucket looks like and what your legacy bucket looks like."

If you're certain that gifting won't impact your financial security, making annual contributions to family members can be a great strategy. Not only does it allow you to divest money from your estate, but you're also enabling giftees to use that extra money now—while you're still able to see them enjoy it.

Understand recent retirement account rule changes

Non-spouse heirs who received an inherited retirement account like a 401(k) or traditional IRA used to have to take a required minimum distribution, or RMD, every year based on their age and life expectancy. This policy meant that many IRA inheritors could keep the account funded and stretch it out over their lifetime.

The SECURE Act of 2019, however, changed the rules, requiring most non-spouse beneficiaries to empty those accounts within 10 years. In some cases, that can mean large withdrawals along with large tax bills—especially if a withdrawal pushes the account owner into a higher tax bracket.

One way to avoid this headache for your heirs is by converting those accounts now into Roth IRAs. You'll have to pay the tax bill up front when you convert, but your heirs will never owe taxes on their withdrawals as long as they take them after your Roth has been open and funded for at least 5 years. The 5-year clock begins on January 1 of the year you make the first deposit.

"If the parent can support extra taxability in the present, making that conversion to help the next generation is really the best planning tool ever," says Tammy Harrison, an IRA specialist with First Citizens.

As with gifting, the tax rules surrounding withdrawals from inherited accounts can be complicated, so consult with a tax professional before you move money out.

Consider using trusts to retain some control

Trusts can be a helpful tool in family estate planning, especially if you're concerned that your heirs might spend an inheritance in inappropriate or irresponsible ways. You can minimize this risk by establishing rules around when and how heirs can access money left to them in a trust.

Some trusts have the added benefit of protecting assets from future creditors or ex-spouses who have a claim against the trust's beneficiary.

Make a plan to achieve your philanthropic goals

Trusts can also help if you want your legacy planning to include charitable giving. A charitable remainder trust, or CRT, essentially works like an annuity that benefits a charity of your choice. You put assets into the CRT, which gives you or your noncharitable beneficiaries an income stream for a set period or until you pass away. When you die or the term ends, your designated charity receives the remainder in the trust.

Qualified charitable distributions, or QCDs, are another way to incorporate philanthropy within your legacy planning. QCDs allow you to donate to charity directly from your retirement accounts. The QCD counts toward your RMD for the year, but you don’t have to pay taxes on the withdrawal.

Reconsider your life insurance policy

If you want to leave more to your heirs than you think your estate will support, a life insurance policy may help bridge the gap. Assuming you can cover the monthly policy premiums, the payout after you pass away can bolster your heirs' inheritance.

Schedule regular legacy planning reviews

As your financial situation and goals—or those of your heirs—change over time, you may need to adjust your legacy plan. While thinking about death may not be the most pleasant topic, keeping your family estate planning current can ensure you've done the work that allows your wealth to provide for future generations.