Creating a legacy out of an estate always raises the nightmare scenario of Shakespeare’s King Lear. If you do not do it right, a lot of feathers will be ruffled in a big way.

To successfully lay a foundation for a solid legacy plan, you will need to take your time and consider a few options. There is no template that works for every family, but there is a systematic approach you can follow to help ensure your legacy goes exactly where you want it to go and will not crimp your retirement plans.

1. Do a cash-flow analysis
Before you even start on your legacy plan, you need to see how your money will be spent in retirement. How much money will you need to live on? Aside from Social Security, where will your retirement funds come from, and how long do you expect them to last? When will you dip into principal? A certified financial planner, chartered financial analyst, or certified public accountant can help you run the numbers. This step is essential because you will need to ensure that you will not outlive your money first, then get a sense for how much might be left over.

2. Will you be gifting?
For those who want to give away their money while they are still alive, this strategy can be satisfying and reduce the value of your estate. While that sounds counterproductive, a lower estate value can help your heirs avoid paying estate taxes. Individuals are permitted to gift up to $14,000 annually—$28,000 for joint filers—before getting hit with a gift tax. Be careful, though. If you exceed the annual limits, you could be subject to a 35% tax. Gifting is an effective way of helping out children or grandchildren, but keep in mind that gifting should be part of an overall estate plan.

3. Cover your estate planning basics
At the very least, you and your spouse/partner should have a will. Despite its importance, only one-third of Americans have a will, and less than half have any estate-planning documents, according to a poll from EZLaw. If your needs or estate are more complex—multiple properties, several portfolios—it is worth considering a living trust. This document, if assembled correctly, will help your heirs avoid probate, where a court decides who gets what after death. Probate is costly and can devour the assets of an estate, so it is best avoided.

You also will need to establish a living will, which gives your family directions on what to do if you are medically incapacitated, and a medical power of attorney, which gives a responsible person legal decision-making authority. Also consider a “limited power of attorney for finances,” which is a document that would give an individual control over your financial affairs. A competent estate planning attorney can help you draw up all of these documents, although many of the basic forms can be found online through sites like Nolo. This phase of your estate planning should also focus on how much to give to your family members.

4. What is your exposure to the estate tax?
Under current law, you will not be subject to the federal estate tax if the value of your estate is under $5.25 million—$10.5 million for couples. Part of your planning basics should be ensuring that your legacy planning is tax efficient, and there are myriad ways to do that. You can buy life insurance through an irrevocable life insurance trust, for example, to cover estate taxes upon your death. And there are many other planning techniques that you need to discuss with your estate planner.

“Most people will not have to deal with an estate tax,” says Howard S. Krooks, President of the National Academy of Elder Law Attorneys who practices in Boca Raton, Fla., and Westchester County, N.Y. “But for those who do, you could pay for anticipated estate tax expenses from the life insurance held by the trust. But if you need to do it, do it while you are healthy, because such policies are medically underwritten.”

5. Have you done your charitable planning?
You have probably established a list of favorite charities by now. If not, after taking care of your family, see what is left to donate to nonprofit organizations. Do you want to donate the bulk of your legacy to your college? Are there charities that you have been personally involved with that you would like to honor? Some donors decide to split money evenly between several groups such as colleges or service charities.

6. Are there special concerns?
All estate plans have to make provisions for special situations. Do you have a special needs child or grandchild? How much will they need to ensure that they receive quality care? What about children you think might immediately squander their inheritance? Several options are available. A supplemental needs trust, for example, can be set up for disabled children. Additionally, you can stagger distributions for some children so that they will not receive their inheritance until a certain age. Also consider the fact that you or your spouse may be disabled and require extensive rehabilitation or custodial care. It makes sense to do long-term care planning before your estate plan.

Once you have worked through this punchlist, you can decide how much to give each organization or individual. You may need to work with both an attorney and a financial planner to craft the plan you want. The lawyer you choose should have expertise in the kind of legacy planning you want to do. If you have a special needs child, the attorney should have experience in drafting trusts that provide ongoing funds for caregiving.

Considering a sophisticated charitable giving strategy? Then an attorney who deals with high net-worth clients is a good idea. It also gets complicated if you have properties in multiple states, which have their own estate laws. A comprehensive legacy plan works best when you understand where all of your assets are, how they may be taxed, and how they can be best donated.


©Morningstar 2013. All Rights Reserved. Used with permission.