Managing your future wealth today - legacy capital

Part two of a three-part series.

The first installment of this series introduced an approach to managing family’s financial wealth and took a deep dive into independence capital.

This insight explores legacy capital, and how it affects the generations that follow you.

Passing on wealth

Legacy capital is the wealth you set aside for family, friends, and others you consider loved ones or wish to recognize with your lifetime of hard work. Legacy capital can be passed on during one’s lifetime, or on one’s passing. Think about these options when considering how your wealth will be managed, taking into account the time horizon of the gifts and the risks involved.

After establishing how much wealth you need to maintain your lifestyle in the future, you can decide on how much to allot to your beneficiaries, and to whom it will be allotted. This stage of decision making will involve more than basic tax calculations as it deals with people, expectations, and emotions.

Hard and soft considerations

Legacy capital is your total wealth projection available for individual beneficiaries after deducting your independence capital and social capital (money that goes back to society, either via taxes or charity).

When calculating your legacy capital, consider the following:

• Are your beneficiaries going to receive the funds as a lump sum?
• Will it form part of a trust to be disbursed over time or when they reach a specific age?
• Will your beneficiaries be entitled to only income or capital or both?
• Are the recipients capable of managing this gift you wish to leave? How much is too much?

When you’ve fully answered these questions, you can take further steps to ensuring your legacy is maintained, such as enrolling a beneficiary in financial literacy programs. Such information will be useful if they are young, the funds you’ve allotted are large, and you have concerns about beneficiaries’ ability to effectively manage the funds. You may also consider placing the funds in a trust.

Once you’ve set a course of action, the next set of components to analyze are diversification and risk.

Diversification

If your home forms a portion of your legacy capital, you probably still live in it, will continue to, and may have it sold upon your passing. Keep in mind market variations and how much other real estate you invest in. Consider if your home’s value is an appropriate amount of that particular asset class, and what are the varying types of assets and their sub-categories.

Risk

Consider different risk tolerance angles for your legacy capital, depending the number of years it will outlive you before it’s passed on to your beneficiaries. Something intended to be for your personal use over the next 20 years will be managed differently from something intended to be set aside for children or grandchildren for, say 40 or 50 years from now.

Conclusion

The ultimate success of any wealth management plan will depend on working with the right team of trusted advisors. Find an investment manager your beneficiaries can build a long-standing relationship with, and seamlessly communicate with. Ask relevant questions, put the right structure in place - the onus is on you to ensure the relationship between both parties is established and grounded while you’re still around.

In the final installment of the series, we will discuss the third type of capital in wealth management planning – social capital.