5 Accounts Financial Advisors Use To Help Their Clients Create Legacy Wealth
Written by
Laura Bogart
Edited by
Kristen Mae
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Creating the kind of wealth that sustains generations might feel like mastering a puzzle box. You can envision the finished picture, but you’re not sure how to fit the pieces together. When it comes to personal finance, those pieces are the right accounts, strategically assembled to create a solid, stable network for building and preserving generational wealth.
Financial advisors excel at solving this puzzle for their clients — and for their own families — because they understand exactly which accounts to use and how to make them work in tandem.
While finding a trusted advisor of your own is one of the smartest ways to assemble the puzzle of your particular legacy plan, you can start exploring the foundational pieces today.
1. Individual Retirement Accounts
While you’re likely familiar with your 401(k) and how much is in it at any given moment, there are a variety of other retirement accounts, specifically individual retirement accounts (IRAs), that offer a different, and often more flexible, route to funding your retirement while laying the groundwork for legacy wealth.
In addition to helping you grow your nest egg with tax advantages, IRAs can be passed to heirs. Spouses can inherit an IRA and treat it as their own, essentially merging it with an existing IRA.
Other beneficiaries can also inherit your IRA, though they may be required to empty the account within 10 years, depending on current IRS rules, which can come with tax implications. Inherited IRAs are also subject to required minimum distributions (RMDs), which may impact your heirs’ tax burden.
A traditional IRA grows tax-deferred, meaning your beneficiaries will owe income tax on any withdrawals they take. A Roth IRA, however, grows tax-free, and withdrawals are generally tax-free too, making it an especially powerful legacy tool.
2. Life Insurance
A solid life insurance policy isn’t just about covering funeral costs — it’s also a wealth-preserving tool. It helps ensure that your loved ones won’t be forced to sell off assets or go into debt after your passing, protecting the legacy you’ve built.
Certain types of insurance, like whole life or universal life, also come with a cash value component that grows tax-deferred. This value can be accessed tax-free, if managed properly, to help fund big-picture goals that benefit your family’s future, as well as their earning potential, such as college tuition, a down payment on a home, or starting a business — all of which can boost your family’s long-term financial strength.
If you’re fortunate enough to have enough wealth that your death would trigger estate taxes, life insurance can also help cover that bill, preserving assets like real estate or family businesses. It can even be used to equalize inheritance among heirs, helping to avoid disputes and costly legal battles.
3. 529 College Savings Plans
Too many people think of college savings as tossing spare change into a giant diploma-shaped piggybank. But there’s a far more strategic way: a 529 plan. These tax-advantaged savings accounts are designed to help families put away money for education expenses, from kindergarten through graduate school.
What makes a 529 powerful for legacy planning is its triple tax advantage: contributions grow tax-deferred, withdrawals for qualified expenses are tax-free, and in many states, you may receive a state tax deduction or credit on contributions.
Saving for education isn’t just about ensuring your children earn a diploma. It’s about creating opportunities for your kids to reach their full potential and maximizing their future earning power, which plays a pivotal role in sustaining wealth across generations.
4. Trusts
Think of a trust as both a shield and a roadmap. It protects your assets and ensures they’re distributed according to your careful specifications, once you’re not around — whether that means gradually over time, at a certain age, or upon reaching key life milestones.
A revocable trust allows flexibility while you’re alive, while an irrevocable trust offers added protection from lawsuits and creditors. Trusts also sidestep probate, helping your heirs avoid court delays and legal fees.
Trusts can also help reduce estate and gift taxes. Working with a financial advisor and estate planning attorney, you can customize a trust according to your vision for your legacy.
5. Annuities
Financial advisors often turn to annuities to create reliable income streams that last throughout retirement. An annuity is a contract with an insurance company in which you pay a lump sum in exchange for regular payments — either for a set period or for life.
Annuities are typically suggested as a valuable source of income during your retirement years. This income can protect your other assets from being depleted in retirement. Some annuities also offer death benefits or riders that allow unused funds to be passed to beneficiaries, and survivorship annuities can continue payments to a spouse or child.
When structured carefully, annuities can provide income security for you and wealth preservation for your loved ones.
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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