Legacy Planning

There is an old Greek proverb that defines the true meaning of society:

"A society grows great when old men plant trees whose shade they know they shall never sit in."

This is the essence of Legacy Planning.

Throughout your life, you have been the farmer of your own fortune. You have tilled the soil, weathered the storms of market volatility and disciplined yourself to save rather than spend. As you get older your goals usually change.  

For many, it is about ensuring that the harvest you have cultivated is passed on to the next generation or the causes you care about - intact, purposeful and protected.

At Baxter & Associates, we believe that it is important to ensure your hard-earned assets go to your beneficiaries in the most tax-efficient manner. Without a deliberate strategy, the primary beneficiary of your life’s work often ends up being the Internal Revenue Service.

We work hand-in-hand with qualified Estate Planning Attorneys to assess your trust assets, estates and qualified accounts. Our shared mission is to decrease overall taxation upon your death and ensure your wishes are honored. 

It all starts with planting the seeds today.

The Silent Partner in Your Will

Most people assume that "Estate Planning" is simply about signing a Last Will and Testament. They believe that once they write down "I leave everything to my children," the job is done.

Unfortunately, it is rarely that simple.  While a Will provides legal instructions, it does not control the tax consequences of those instructions. You can direct an asset to a beneficiary, but you cannot legislate the tax consequences of that gift.

This is where the difference between an Estate Attorney and a Financial Advisor becomes critical.

The Attorney drafts the documents (The Will, The Trust, Powers of Attorney) to ensure the law is followed.
We (The Advisors) analyze the assets flowing through those documents to ensure the math works.

We act as the architect; the attorney acts as the engineer. We need both to build a structure that stands.

If we do not coordinate, you might accidentally leave your heirs a "tax bomb." This happens when you leave the wrong assets to the wrong people. For example, leaving a tax-free life insurance policy to a charity (which pays no taxes anyway) while leaving a fully taxable IRA to your high-income daughter is a mathematical mistake that could cost your family tens of thousands of dollars.

We look at your estate not just as a pile of money, but as a series of tax buckets. We want to pour from the right bucket at the right time.

The Great Disruptor: The SECURE Act and Your IRA

For decades, the "Stretch IRA" was the most powerful tool in legacy planning. You could leave a large IRA to your child and they could leave it invested, taking only tiny distributions over their entire lifetime. It allowed the money to compound tax-deferred for another 30 or 40 years.

That era is over.  With the passing of the SECURE Act, the rules for "Qualified Accounts" (IRAs and 401ks) changed dramatically. For most non-spouse beneficiaries, the "Stretch" is dead. Now, if you leave a traditional IRA to your children, they are generally required to drain the entire account within 10 years.

Why is this a problem? Consider the timing. If you pass away when your children are in their 40s or 50s, they are likely in their peak earning years. They are already in a high tax bracket. If they inherit a $500,000 IRA and are forced to withdraw it over 10 years, they are adding $50,000 of fully taxable income to their tax return every single year.

This could push them into a higher federal bracket, trigger state income taxes and even phase them out of college financial aid for their own children.

The Strategy: We assess these accounts now.

We might recommend:

Strategic Roth Conversions: You pay the tax now at your (potentially lower) rate, so your children inherit a tax-free Roth IRA. The 10-year rule still applies, but the withdrawals are tax-free.
Life Insurance Replacement: In some cases, it makes sense to use IRA distributions to fund a life insurance policy. The heirs receive the death benefit tax-free, bypassing the income tax problem entirely.
Charitable Bequests: Since charities pay no income tax, we often advise leaving the IRA assets to charity and the non-retirement assets (like the house or brokerage account) to the kids.

Assessing Trust Assets: Control from Beyond

A Trust is not just for the ultra-wealthy. It is simply a tool for control.

If you give money to a beneficiary directly via a Will, it is like handing them a bucket of water. They can drink it, spill it or someone can kick it over. Once they have it, it is theirs.

If you leave money via a Trust, it is like connecting a hose to a faucet that you control. You decide how fast the water flows and under what conditions.

When we work with your attorney to assess Trust assets, we are looking for Asset Protection.

1. Divorce Protection If you leave $500,000 directly to your son, and he deposits it into a joint bank account with his wife, that money is now marital property. If they divorce two years later, she may be entitled to half of your legacy. If that money remains in a properly drafted Trust, it generally stays with your son, isolated from the divorce proceedings.

2. Creditor Protection If your beneficiary is a surgeon, a business owner, or simply a bad driver, they carry liability risk. If they are sued, assets in their name are fair game. Assets held in a Trust for their benefit are often shielded from creditors.

3. Spendthrift Protection Sometimes, the risk isn't a lawsuit; it's the beneficiary's own habits. We can structure a Trust to distribute money based on incentives (e.g., matching their salary, paying for education) rather than handing over a lump sum that could be squandered.

We help you map out the intent of the money. We ask the questions you may not consider when making these choices that are tough to answer – but important to consider: "Are you concerned about your child’s marriage?" "Is your grandson ready to handle $100,000 at age 21?" The answers dictate the structure.

The "Silver Lining": Income Tax Planning and Step-Up in Basis

While Estate Taxes (the tax on your total net worth) only affect a small percentage of Americans, Income Taxes affect almost everyone. A massive part of our Legacy Planning focuses on the "Step-Up in Basis."

This is a critical concept to understand before you gift assets while you are alive.

The Scenario: Let’s look at a practical example. You hold a stock with an original cost basis of $10,000 acquired decades ago. Over time, it has appreciated to $110,000. This $100,000 difference represents a taxable gain waiting to be triggered.

If you sell it: You pay capital gains tax on the $100,000 profit.
If you give it to your son while you are alive: He assumes your "basis" of $10,000. If he sells it, he pays the tax on the $100,000 profit. You just transferred a tax bill.
If you leave it to him when you die: The tax code allows a "Step-Up." On the date of your death, the value of the stock is "stepped up" to current market value ($110,000). If your son sells it the next day for $110,000, he pays zero capital gains tax. The $100,000 of growth is tax-forgiven.

The Strategy: We carefully review your portfolio. We often advise clients not to sell highly appreciated assets late in life and not to gift them during their lifetime. These are the assets you want to hold until the end, to capture that step-up benefit.

Conversely, if you have assets that have lost value, we might sell them before death to capture the tax loss, because the "Step-Up" works both ways (assets can be "stepped down," erasing the tax loss benefit).

This is technical, detailed work. But for a portfolio with significant growth, it can save your heirs tens of thousands of dollars.

The Harvest: Why We Plant

Confronting the reality of our final chapter is a heavy task, often involving complex questions of family equity and responsibility. However, avoiding these discussions invites chaos rather than peace. Silence is not a plan.

Much like a farmer would never plant a vineyard without first analyzing the soil, we refuse to build a legacy plan on an unstable ground. By preparing the financial ground today, we aim to maximize the yield of your life’s work, ensuring it provides lasting support to those you care about instead of being diminished by preventable taxes.

We are not attorneys and we do not draft legal documents. But we are the strategic partners who sit at the table with you and your attorney. We bring the financial reality to the legal concepts. We ensure that the "Tax Bomb" is defused, the "Buckets" are positioned correctly, and the seeds are planted in fertile ground.

If you have a Will that hasn't been reviewed in five years, or if you are unsure how the new SECURE Act rules affect your IRAs, it is time for a review. 

Do you have a strategy to transfer your wealth, or just a document that distributes it?

There is a difference. Let us help you create a legacy that lasts. Contact Baxter & Associates to begin the conversation.