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How to Create a Legacy and Save for the Next Generation

May 13, 2021 4 min read Hank Gilman

Key takeaways

  • Before you take care of the kids, take care of retirement first.
  • Living on savings income is the best way to leave behind a cash hoard.
  • With a little planning, you and your children can avoid an upfront tax hit.


Want to leave a financial legacy to your family, or perhaps support a cherished cause? The good news: You don’t have to be rich to do it. But you do need to be thoughtful and systematic.



Julie and Mark (not their real names) worked hard to make sure their three kids wouldn’t grow up feeling “entitled”—insisting, among other things, that they get summer jobs in their teens.

Nevertheless, the couple is saving up to give the kids a financial boost. The reason? Even with two of them now launched on promising careers and the third in college, Julie and Mark realize their own steady career paths—she’s an educational therapist, he’s a hospital administrator—are increasingly rare. Jobs come and go in today’s “gig” economy. Industries get disrupted.

And if, years or even decades down the road, one of their children wants to start a business or struggles to put his own kids through college, Julie and Mark plan to help—even if they aren’t around to do so directly.

In short, they’re building a financial legacy.

Want to do something similar for your own family? Here’s how you can do it.


Choose a strategy

Many anticipate leaving money to their kids, but may end up doing the opposite, such as burdening them with accumulated debts or late-in-life medical expenses. Do your offspring a huge favor and consider focusing first on ensuring a comfortable retirement for you and your spouse.

If you’re on track to cover your own needs, and you still have financial bandwidth to spare for a legacy, weigh your options:

  • Guarantee income. Maybe you want to be certain of leaving behind financial assets. (Parents of kids with special needs often feel that urgency.) In that case, consider if purchasing a life insurance or an annuity—either of which can be structured to generate a lump sum or income stream to your survivors when you die, may be right for you, says Brandon Buckingham, director of Prudential Annuities’ Advanced Planning Group.

    Taking no chances can come with costs. For example, these products can be complex, they come in a variety of flavors, and their prices can vary. Also, your money’s growth potential can be limited, so your beneficiaries may find they’d have been better off if you’d invested in stocks instead. (But remember, peace of mind has its advantages—like avoiding the market’s roller coaster ride.)
  • Be flexible. Retirees typically draw down their savings over the course of their lives, aiming merely not to run out early. (A 4% annual draw on principal is one traditional strategy.) But as a legacy builder, you may want to live off only the income generated by your savings, and leave the principal untouched for the next generation. That requires more savings in advance, of course, but ensures that you’ll have money left to pass on regardless of market conditions (or for emergencies).
  • Divide and conquer. Another approach is to split your financial and nonfinancial assets, living on one and keeping the other in reserve for your heirs. Some retirees, for example, live off their savings and plan to leave a home or a vacation home to their kids. That can be effective—but keep in mind that many Americans end up tapping their home equity to cover retirement expenses. So if you hope to leave your home free and clear for your kids, you should consider excluding it when you project the size of your retirement nest egg.
  • Invest for the long haul. As savers approach retirement, many financial professionals suggest that they consider beginning to shift the asset allocation of their investment portfolio from one weighted heavily toward stocks, which tend to carry more risk, to one more weighted toward cash, bonds, and other fixed income assets. The reason: Stocks tend to be more volatile than bonds, and you may want to decrease the odds of cashing out during a stock market downturn to pay your living expenses—thereby locking in investment losses.

    Legacy builders may want to consider another approach, however: With money you expect to pass on to the next generation, you may not need to limit your exposure as much, and may be better off leaving more of the assets in stocks; while there is more risk, stocks have higher expected returns over the long term than bonds. And your kids should have more time to ride out short-term market volatility.
    If you have a family business, a trust may help you pass it on without triggering a giant tax bill.

    Whatever strategy you decide remember investing involves risk and it is possible to lose money when investing. Asset allocation does not assure a profit or prevent a loss in declining markets. You should consider a variety of factors when deciding how to invest to meet your financial goals; such as your time horizon and risk tolerance.


Be tax savvy

Take it from Ben Franklin: The two things we can’t avoid are death and…you know the rest.

  • Give from a big estate. Under current rules, your financial legacy won’t be subject to federal estate taxes unless it tops $23.4 million for couples who file jointly ($11.7 million for singles). These are the amounts for 2021. (Note that some states have lower thresholds.) If you hope to pass on more than that, you can temper the tax hit by gifting money to your kids and grandkids during your life, either directly or via 529 college savings accounts, where it can grow tax free if used for education expenses. You can gift $15,000 to each in 2021 ($30,000 from a married couple) without touching the consolidated gift and estate tax exclusion. This gift tax exclusion is also indexed for inflation.
  • Look for alternatives with lesser legacies. If you pass on traditional tax-deferred retirement accounts like IRAs, your children will owe federal income taxes on distributions they take. One solution is to convert some or all of your regular IRA savings into a Roth IRA. You’ll have to pay taxes up front on the amount you convert to a Roth IRA, but your heirs won’t owe taxes when they take required minimum distributions (RMDs), which individual heirs generally have to deplete the account by December 31 of the year of the tenth anniversary of the owner’s death.
  • Stretch your IRA muscles. An alternative approach is a “stretch IRA,” which allows specific eligible designated beneficiaries to benefit from extra years—even decades—of tax-sheltered growth, notes Deerfield, Ill., independent financial advisor Michael Resnick. The idea is to avoid a big upfront tax hit to your kids and instead string the RMDs from your accounts over the course of their lifetimes. Keep in mind that, due to the SECURE Act, most non-spousal beneficiaries must completely withdraw their inherited accounts within 10 years. These withdrawals are taxed at high rates, since many inheriting IRA accounts are likely of working age. Spouses are an exception to this rule. This and other tax strategies involve fairly complex IRS rules, so make sure to work with an experienced estate-planning attorney.


Consider a trust

Trusts—entities that hold assets for the benefit of other people or entities—generally don’t have to go through the legal process known as probate, potentially saving your heirs time and money. They can be designed to pass assets according to specific instructions—if, say, you want to limit how or when the money is distributed. Also, if you have a family business, a trust can help you pass it on without triggering a giant tax bill.

There are many types of trusts, but a key distinction is whether the trust is revocable or irrevocable.

  • Putty in your hands. A revocable trust lets you maintain control over the assets during your life, or even dissolve the trust if you choose. The downside: The assets remain part of your estate for tax purposes.
  • Set in stone. An irrevocable trust typically passes out of your control as soon as it’s set up—so it’s usually not counted as personal assets at tax time.


Which kind of trust should you put your faith in? The choice is complicated and, for most of us, requires professional help. Don’t try it without supervision!


What you can do next

If you’re considering buying an annuity or a life insurance product, visit a financial professional who can provide you with complete details. Life insurance or annuities can be very useful when it comes to leaving a lump sum—or income stream—to your heirs. But each situation can be very different. In other words: Good advice is absolutely essential—and arguably your very first step.


Hank Gilman is a long-time business news editor and a former personal finance columnist for the Boston Globe.


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