Legacy Planning vs Estate Planning: What is the Difference?
Many terms are used interchangeably, and people treat them as synonyms, but they are actually different. Stationary/Stationery, Buyer/Consumer, Money/Wealth – they may all seem to mean the same thing, but they are not exactly the same. Even though you may find yourself using them interchangeably, their meaning remains distinct.
Estate and legacy planning are often used interchangeably too. People think they mean the same thing, and to an extent, you may see some similarities. However, when you get down to the planning involved for each, you will realize they are not, in fact, the same. Let’s understand what estate and legacy planning are, and how they differ.
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What is estate planning?
Estate planning, in simple terms, is about deciding how your financial assets will be distributed to your heirs, charities, friends, family, or acquaintances once you are no longer around to manage them yourself. It focuses on the financial side and ensures what you have worked hard to build doesn’t get tied up in unnecessary legal battles or squandered on taxes.
Estate planning involves a handful of important legal documents. These can include but are not limited to a last will and testament, healthcare directives, a power of attorney, and various types of trusts. Together, these documents lay out exactly how your assets should be managed and distributed in your absence. Estate planning also includes tax strategies to reduce beneficiaries’ tax burdens.
Estate planning can help families in several ways. Take tax planning, for instance. It plays a big role in ensuring as much of your wealth as possible transfers to the people or causes you care about, rather than being eaten up by unnecessary taxes. Through estate planning, you can take advantage of certain tax exemptions and deductions designed to help preserve your wealth for your beneficiaries. Other aspects of estate planning, like healthcare directives and powers of attorney, are equally important. These documents let you appoint someone you trust to make important medical or financial decisions on your behalf if you are ever unable to make them yourself.
The ultimate aim of estate planning is to leave little doubt or family disagreements down the line. Estate planning is about preparing for the future, even when that future feels far off. In fact, estate planning is something you should do when you are young. It may be easy to put it off until you are older or retired, but it pays to get your ducks in a row sooner rather than later. Estate planning is also a dynamic process you need to keep updating throughout your life. Marriage, divorce, the birth or adoption of children, financial setbacks like bankruptcy, or a rise in your net worth can call for updates to your estate plan. Revisiting it every so often ensures it still reflects your current wishes and circumstances and supports your family and friends today.
What is legacy planning?
While estate planning focuses on distributing your assets, legacy planning defines the why and how behind that process. It goes beyond the “who” gets your wealth to what made you give it to them and how you expect them to manage it. Legacy planning doesn’t really happen in lawyers’ offices or boardrooms. It happens in far more personal settings, around the dinner table, on a walk in the park, or during a quiet conversation on the porch. It is built through honest discussions with the people you care about, where you share what you would like them to do with what you leave behind, and why it matters to you.
Legacy planning is exactly what it sounds like. It is about leaving a legacy. It is about inspiring the people who come after you to build their own version of success, guided by the same values that helped you get where you are. This cannot necessarily be conveyed in a will or a trust. Legal documents, however detailed, can’t pass down wisdom. Legacy planning helps bridge that gap.
Legacy planning can include hands-on steps to prepare the next generation, especially for things like a family-run business. For example, if you plan to leave your business to your children, you can specify in a will the exact percentage each child receives. But before you do this paperwork, you need legacy planning. Legacy planning focuses on preparing, mentoring, and guiding them so they’re ready to carry the business forward. It might also involve setting aside personal accounts they can learn from, having honest conversations about the values you hold close, and passing down life lessons.
Legacy planning vs estate planning
Estate and legacy planning are not the same. They are not even substitutes. However, the two work closely together. Nevertheless, there are some differences. Let’s see what they are:
1. Both work together, and neither replaces the other
Estate planning is the process of determining what happens to your assets. Legacy planning does the same, but it is shaped by the values, morals, and beliefs you have had all your life. Legacy planning complements estate planning, but its role remains distinct.
2. Documents vs. values
Estate planning centers around legal documents. These can include:
- Living will
- Last will
- Revocable and irrevocable trusts
- Power of attorney
- Health directives
It also covers legal mandates and taxes. Legacy planning, on the other hand, centers around values, morals, and wisdom. That said, legacy planning does still involve documents like wills and trusts. It simply incorporates charitable giving and ethical wills to cover more than just asset distribution.
3. Numbers vs. mindfulness
Estate planning deals in numbers and figures. For example, a will can direct that 25% of your wealth goes to one child, 25% to another, and 50% to your spouse. Legacy planning, on the other hand, helps heirs use that wealth mindfully so it reflects your values, traditions, and long-term goals.
4. The “what” vs. the “why”
The biggest difference between estate and legacy planning lies in what they cover and why. Estate planning covers the “what” of asset distribution. It focuses on what happens to your assets after you pass away. Legacy planning is the more comprehensive of the two. It doesn’t just cover what assets are distributed and how; it also addresses why they’re distributed that way and, just as importantly, why you didn’t take a different approach.
Why is estate planning important?
Estate planning is important for the following reasons:
1. It helps you plan for the future
A well-thought-out estate plan ensures the people you love are looked after. It ensures your assets go to your loved ones so they can live comfortably in your absence. It also helps with tax planning. Your beneficiaries may face tax consequences when they inherit your wealth in the future. Estate planning helps to account for such events.
If you skip this step, your heirs could be looking at a hefty tax bill down the road. Get it right, though, and you can lean on tax exemptions and deductions to shrink that liability.
2. It allows you to speak even when you can’t
Incapacitation is a reality you need to prepare for. Having your wishes written down ahead of time ensures that your family knows what to do during uncertain medical situations, such as during cognitive decline, coma due to an accident, etc. They can make decisions about life support, organ donation, or others on your behalf. Estate planning can be your voice in such situations, guiding them through a moment that’s hard enough as it is.
3. It allows you to be at peace, knowing you have taken measures to protect your wealth and loved ones
Having all your bases covered offers you peace of mind. And, part of that comes down to picking the right people to serve as your executors and trustees. Estate planning allows you to choose the right people for your plan who can handle potential legal or financial issues in your absence.
4. It protects minor dependents
For parents of minor children, estate planning can involve putting a guardianship plan or a dedicated trust in place, so your kids are cared for no matter what happens to you. Trusts, in particular, are a go-to tool for exactly this reason. They let you retain some control even in your absence, giving you a say in how and when your children use the funds and helping ensure their well-being.
5. It helps avoid probate
Probate is a slow, costly process in which the court oversees the distribution of your assets. For your beneficiaries, this can involve delays, stress, and unnecessary legal fees. Proper estate planning can help reduce or avoid these. Keep in mind that probate and estate taxes are two separate issues; avoiding probate does not by itself lower an estate’s tax bill, which requires its own planning.
Why is legacy planning important?
1. It lowers the chances of conflicts and feuds within the family
Legacy planning is built around communication, which can prevent family conflicts down the line. When you take the time to explain your decisions and the reasoning behind them, your loved ones understand why you chose what you chose. This eliminates misunderstandings and resentment.
2. It keeps your legacy alive
Unlike a legal will, legacy planning involves using an ethical will. This can include your personal values and life lessons. For many families, this kind of legacy means as much as, if not more than, any financial inheritance.
3. It helps you combine money with values
Another reason legacy planning matters is that you pass down more than money. Your dreams, your values, the wisdom you have earned along the way matter too. Legacy planning gives you a way to leave behind who you actually were and what you valued as an individual.
4. It helps you cover your philanthropic goals
Legacy planning lets you support causes close to your heart and fulfill your charitable goals after you’re gone, leaving a piece of you to do good in the world.
Estate and legacy planning – how do you choose the right one?
The truth is, you do not have to choose between the two. Both estate and legacy planning matter, and each plays a different role in financial planning.
Estate planning focuses on the practical side, like numbers, legal requirements, and taxes. Legacy planning adds some emotional depth. When you concentrate on the two together, you get the best of both worlds. Your assets are distributed as you intend, and your loved ones feel at peace with your decisions. However, both processes can be complicated and may require professional assistance. Our advisor directory can point you to the right professional for estate and legacy planning.
Frequently Asked Questions (FAQs) about estate and legacy planning
1. Can I plan my estate on my own?
Yes, you can. Ultimately, it is entirely your decision. That said, doing this on your own can get complicated, and having some help along the way can make the process simpler.
Hiring a financial advisor can be advisable, since the legal and tax implications can be tricky to understand on your own.
2. Why is legacy planning important?
Legacy planning is important because it puts your wishes and values into motion, rather than leaving them unsaid. It helps you leave behind a legacy that keeps your presence alive after you are gone. It can also reduce family conflict and bring a genuine sense of peace to the people you leave behind.
3. What is the difference between estate and legacy planning?
Estate and legacy planning differ in scope and focus. To simplify, estate planning focuses on transferring assets through legal documents such as wills, trusts, and powers of attorney. Legacy planning builds on this by focusing on family values, charitable giving, and leaving a legacy that goes beyond finances.
To learn more about the most suitable tax-saving strategies for your specific financial requirements, visit Dash Investments or email me directly at dash@dashinvestments.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm that manages private client accounts for individuals and families across America. As an SEC-registered investment advisor (RIA), they are fiduciaries who put clients’ interests first.
Dash Investments offers a full range of investment advisory and financial services tailored to each client’s unique needs, providing institutional-caliber money management services based on a solid, proven research approach. Each client also receives comprehensive financial planning to help them move toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been featured in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as an investment industry leader with a track record of creating value for his firm’s clients.
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