Ethical Investing: Leaving An Ethical Legacy
You have two choices when it comes to how your assets will be distributed after you die. You can create a plan now, or someone else will create one after you're gone, leaving you no say in the process. Estate planning isn't fun, because no one wants to think about dying, but if you detach yourself from the process, a bit, and focus on the idea that your ethically invested assets can continue to make a difference in people's lives after you're gone, it may make the planning process easier.
Divvying Up Your Assets
What constitutes an ethical legacy is a highly personal decision. Leaving an ethical legacy doesn't have to mean leaving your entire nest egg to the Sierra Club. It could mean leaving it to your grandchildren for their college educations. It could also mean leaving some money to your family and some to a charity - it doesn't have to be an all-or-nothing decision. You can also choose between leaving specific dollar amounts or leaving percentage amounts to each beneficiary.
If you choose to leave money to individuals, and if you hope that your heirs will continue to invest your money in line with your beliefs, you may want to create an ethical will, an informational (not legal) document that will share your investment philosophy with your survivors. It will still be up to them how the money is handled, but you may be able to influence their behavior if you convey to them what's important to you. Of course, you could always establish an incentive trust if you want to make your beneficiaries fulfill certain requirements in order to receive your money. (For further reading, see Ethical Wills Share Final Thoughts With Heirs and Encouraging Good Habits With An Incentive Trust.)
Charitable Remainder Trusts and Charitable Lead Trusts
Charitable trusts allow you to provide for both individual beneficiaries and charities. You place your assets into the trust, and they are distributed, after your death, in the way you have designated. With a charitable remainder trust, money is first paid to your individual beneficiaries as an income stream, and the remainder goes to your favorite charities. With a charitable lead trust, money is first distributed to charities and then distributed to individual beneficiaries as an income stream. Both types of trusts reduce estate taxes. So, if your estate is large enough to be subject to taxation upon your death, and you want to have a say in where all of your money goes instead of letting the government decide, consider a charitable trust.
If you're young, making an estate plan involving wills and trusts doesn't seem to make sense right now, but you can still choose who would receive your investments if something were to end your life unexpectedly. By designating a beneficiary for each of your investment accounts, you can ensure that the assets will go to the person, or organization, of your choosing. You can designate different beneficiaries for different accounts, too, or leave percentages of each account to more than one beneficiary. People who are older and who have more assets can also use beneficiary designations to pass on their assets. All you need to do is get a beneficiary designation form from the company that holds your assets (e.g., a brokerage firm or bank), and fill it out. If you're married, you may need your spouse's permission to designate someone other than your spouse as the beneficiary, if the account in question is a retirement account. (For further reading, see Gifting Your Retirement Assets To Charity.)
When formulating your estate plan, it's a good idea to meet with an estate planning attorney or tax professional. Setting everything up, so that it works the way you want it to, can be complicated, and mistakes can mean that your money doesn't go where you intend to and your beneficiaries could pay taxes that could have been avoided.
Ethical investing is a highly personalized form of investing, based on an individual's beliefs about what business practices are good and should be encouraged, and what business practices are not so good and should be changed. Although ethical investing suffered from a poor reputation in the past, as a type of investing that earned subpar returns for the sake of a feel-good factor, its image and its performance has improved. This improvement makes sense: companies with good reputations are more likely to be profitable in the long run, because they're less likely to have their operations hindered by regulatory sanctions, lawsuits and negative publicity.
Ethical investing is a lot of work - it requires ongoing research and participation. Ethical investors must select their stocks and mutual funds based not only on performance criteria, but also on ethical criteria. Once they've selected their investments, they must watch to make sure that both financial and ethical performances are meeting expectations. Ethical investors read the company's investment materials, vote their proxies and submit shareholder resolutions.
Investors who don't actively pursue an ethical investing strategy are not necessarily unethical. However, explicitly investing in ways that meet social, environmental, humanitarian and governance goals has grown considerably and a sizeable percentage of total assets, under management, in the United States are being invested in socially responsible vehicles. (If you didn`t get enough here, check out Go Green With Socially Responsible Investing.)
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