Do you want to create a legacy portfolio for your children? This is a portfolio that contains assets that you wish to transfer to your children after your lifetime.

In this article, we discuss how you can create a legacy portfolio. You should consult your tax advisor when you set-up a legacy portfolio, as changes in tax regulations can impact the value of the legacy assets.

Creating legacy You can create a legacy portfolio in the following ways: One, you can buy life insurance policies with your children as beneficiaries.

This should be in addition to the life insurance policies you buy to protect your family’s standard of living during your working life.

Remember, life insurance policies are meant to hedge your mortality risk (or human capital). That is, if an individual dies during his working life, the family should be compensated through the insurance policies for the loss of income due to the death of the individual.

But life insurance policies can also be used for intergenerational wealth-transfer (legacy).

This is especially true when the individual dies during his retired life, and has left enough money in the retirement income portfolio for his spouse. Then, the insurance claims paid to the children named as beneficiaries can be used as legacy money.

Two, you can set-up a legacy portfolio at 45 to align with the change in asset allocation in your retirement portfolio. Why? You should reduce the equity component in your retirement portfolio from 75 per cent to 30 per cent between age 45 and 55 and then maintain the same composition till you retire at 60.

Now, at 45, suppose you want to set-up a monthly SIP for ₹10,000 in an equity fund for your legacy portfolio. You should instead transfer ₹10,000 of equity investment every month from your retirement account to your legacy portfolio.

That way, you reduce your equity investment in your retirement account and build your legacy portfolio. The amount that you earmarked for your legacy portfolio can be used to buy bonds in your retirement account to increase its bond allocation.

That is, you should simply switch investments between your goal-based accounts to reduce transaction costs and, perhaps, taxes as well. You should have equity investments in your legacy portfolio because they have a longer time horizon. Even if an individual dies early, the individual’s children may not consume the inheritance money immediately.

The longer time horizon gives enough room for equity to earn significant returns. Finally, you can leave your house properties to your children. You should clearly mention in your will as how you want the real-estate investment to be divided among your children.

Inheritance vs debt You should not feel compelled to transfer the amount in the legacy portfolio to your children! What if due to poor health or bad investment choices, you have a shortfall in your retirement portfolio when you retire at, say, 60?

You would rather use the legacy portfolio to support yourself and your spouse during your retired life than borrow money and stress your children with high-cost debt after your lifetime.

Then, there is another issue. What if you live beyond your life expectancy?

For one, the insurance policies that you purchased naming your children as beneficiaries will lapse with zero value and no legacy asset!

For another, your retirement income portfolio may not have enough money to fund your lifestyle expenses. So, you will have to use the money in the legacy portfolio to fund your expenses.

It is for this reason that we refer to the legacy portfolio as contingent inter-generational wealth transfer account.

That is, the legacy portfolio will be transferred to your children only if you do not consume the portfolio during your retired life because of shortfall in your retirement income portfolio.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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