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A Letter of Wishes is a Powerful Way to Leave a Legacy

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As we grow older, many of us begin to think about leaving a legacy for those dear to us. Leaving a legacy is about much more than simply the transfer of wealth. When we think about the legacy we want to leave behind, we also need to consider the deeper values and priorities we want our loved ones to understand and appreciate about us.

Legal documents are important, of course – up to a point. But even the most thorough of wills, trusts, and powers of attorney tend to focus more on the “who” and the “what” of inheritance, not the “why.”  That’s where a letter of wishes comes into the picture.

We recently came across this article on the subject, written for Kiplinger by financial adviser Steve Lockshin. Lockshin writes that a letter of wishes gives you the opportunity to explain, in plain language, your intent behind your estate documents. This is not only a way of telling your heirs what matters to you, but it can also potentially head off any misunderstandings or disputes that might arise after your death. Let’s take a look.

Leaving a Legacy Means Providing Guidance

Lockshin begins, “Over the years, I’ve seen many estate plans that have been well crafted and tax-optimized fail when it comes to the one thing that matters most: leaving heirs better off for their inheritance.”

He adds that poor or inadequate guidance for the trustees is a contributing factor for this, as well as little thought given to the damage that sudden wealth can cause. “You need not look further than the statistics of lottery winners to see the failures caused by unexpected and rapid access to money,” he adds.

And so, Lockshin poses: what do you want to achieve with what you leave behind? And how can you prepare your trustees and heirs for this responsibility?

Wealth Transfer Can Bring Out the Best and the Worst

Lockshin calls generational wealth a “magnifying glass”, amplifying and exaggerating both the best and worst traits in us, while also widening the “fault lines of misunderstanding” that can lead to resentment.

“Most parents want the same thing for their children: to be happy and healthy and to love one another,” Lockshin writes. “The problem is that your intentions are very hard to push through legal trust documents and emerge on the other side in a way that is clear for a trustee to interpret. These documents can be rigidly defined, costly to change and difficult for a layperson to understand.”

But Lockshin insists that it does not have to be this way. There is, as he puts it, a little-known “cheat code” that anyone can use to make estate planning more flexible and better communicate your hopes for your loved ones. It’s called a letter of wishes.

Leaving a Legacy with a Letter of Wishes

“In the simplest terms,” Lockshin explains, “a letter of wishes is a statement of the intention behind the decisions you make in your estate plans. It is not a legally binding document, but its power lies in its simplicity.”

He adds, “You can write, in plain language, the outcomes you want to see for your heirs. It allows you to speak to the ‘why’ behind your plan in a way that a document full of legalese might not be able to capture.”

As an example, Lockshin explains, your trust documents might say that a portion of your beneficiary’s funds are meant to be used for education. But in this case, the trustee must decide what counts as education: trade school? Art classes or music lessons? Study abroad programs?

“Your letter of wishes can answer these questions for them,” Lockshin writes. “Without it, the trustee has to make a judgment call, creating a potential trigger point for a bitter dispute over the use of your inheritance.”

In another example, dividing assets among your three children may seem fair to you, but what happens if there’s an uneven number of grandchildren, potentially by a large margin, such as ten to one?

“Are you comfortable with one grandchild inheriting 10 times what the other 10 grandchildren inherit?” Lockshin asks. “Or is your intent to treat them all equally, providing funds for the things important to you, such as education, some help with housing and enough to do something, but not so much that they can do nothing? Does a stipend make more sense for all of your heirs rather than making your estate planning problem their estate planning problem?”

Letter of Wishes: No Standardized Format

Lockshin says that there’s no standardized format for a letter of wishes, but there are a few common elements that he has seen with clients he’s worked with.

“You can state your overall intent for using trust funds and what is most important,” he writes. “You can explain the cadence of distribution to beneficiaries or offer guidance to trustees for large distributions meant for specific purposes, like starting a business or a buying a home. You can clarify whether certain beneficiaries should be considered priorities over others.”

Leaving a Legacy: Providing Context for Your Choices

But aside from these other elements, the most important thing, perhaps, is the ability to provide context to your legacy.

“If your beneficiaries are treated differently in your estate documents, they could perceive that as cruel or capricious. A letter of wishes lets you set the record straight,” Lockshin explains. “In a very real way, it may be your last opportunity to do so. After you’re gone, the only thing that your family and your trustee have to guide the discretionary matters of your estate is what you set in place while you still had time.”

Lockshin puts it another way: a trust document will tell your inheritors the terms and conditions of your estate. A letter of wishes will say to them, “Don’t forget where you came from.”

As an added bonus, a letter of wishes is not a legal document, so it is not subject to the same legal costs as the rest of your estate documentation. You can also update it far more quickly and with less hassle than you can a formal document.

“No matter how much or little we leave behind, we all want our beneficiaries to live well and be happy,” Lockshin concludes. “A letter of wishes is one of the best tools to prevent your estate from becoming the flashpoint of bitter disputes or lifelong divides among your heirs. It allows you to leave behind a purpose, not just assets.”

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(originally reported at www.kiplinger.com)

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