Some terms are not very clear. Some rules need further explainations. I receive a great number of questions asking to clarify the rules. Here are the most common questions.

The Starter Sim
"Do I have to roll for my starter sim's aspiration?"
No, you can pick that yourself

"I have custom content for my starter sim, can I use it?"
Any custom content is fine.

"My sim moved out from another family, can I make him/her my starter
sim?"
No, your starter sim MUST be created in bodyshop or CAS

"Do I have to name my Legacy family 'Legacy'?"
No, you may name your family anything you like

"Over the course of the challenge my family's last name has
changed...does this mean the family line is broken?"
Nope, the family line is held by blood relation, not names.

"Does my starter sim count as generation 1, or are his/her children
generation 1?"
Your starter sim is "generation 1" any children they have are
"generation 2"

Moving Sims in
"Who are 'townies' and who are 'NPC's ? What is the difference between
the two?"
Townies are the Sims that come with each neighborhood. They act just
like normal Sims, have their own personality and hold jobs in the same
career fields that your Sims can hold. The only thing that is different
is that they do not appear on the neighborhood screen.
NPC’s are any sim that comes to your house with a specific purpose...
be it a maid to clean, a gardener to water or a burglar to rob you.
These Sims do NOT have jobs in the standard career fields, and when brought
into the family, start out as unemployed.

"Can I marry or move in any of the maxis-created Sims, like the Goth
family, or the curious brothers?"
No, they are player-Sims. Even though you did not create them yourself,
you can still play AS them, meaning they are not allowed to join your
household ever."

"What if I want to breed with one of my player-Sims?"
There IS a way to get the genes of a player-sim into your Legacy Family
line. You simply have an adult female sim who carries the family line
"try for baby" with a male player sim who is visiting. You can never
move the father in or marry him, but the baby can be born with his genes.

"I married/moved in an NPC, but they didn't actually bring me any
money!"
The game says that an NPC brings $1,000 to your family funds, but in
reality they don't contribute a cent. If you want to marry or move-in for
the money, do so with townies.

"Can I move in/marry a townie just for their money then move them back
out?"
Yes

"Can a sim I moved out later be moved back in?"
No, even if they were born in the Legacy House, once they leave they
can't come back.

"Are there ANY exceptions to this rule?"
If you have a sim who has become glitched badly, you may move them out
and back in, but NOT to the sim bin, move them out by having another
family invite them to move in...then have the legacy family invite them
to move back in. That should fix any glitches.

"May I move extra children out of the house?"
Yes, but they can't come back once they're gone

"My sim became a teen, what exactly do I do?"
Take a six sided die (stealing them from a monopoly game seems popular)
and roll. On a 1, make the teen wealth, on a 2 make them knowledge, on
a 3 make them Family, on a 4 make them romance and on a 5 make them
popularity. If you are lucky enough to roll a 6, pick any aspiration you
want for that sim.
"What if I don't have a six sided die?"
Try this website

Cheating

"Can I use any money, mood or aspiration cheats or hacks?"
NO!

"What cheats ARE you allowed to use?"
You may use Move_objects to fix bugged objects, decorate in ways you
normally couldn't and delete objects that have become too bugged to use.
You may use the new cheat (boolprop, intprop) only to do decorating.

"Is using aspiration rewards like the thinking cap cheating?"
Not at all. You earned the points for those objects so you may use them
as you like.

Custom Content

"What kind of custom content are we allowed to use?"
Any official content from maxis, plus any player made
clothing/skins/textures.

"What custom content is NOT allowed?"
Non-maxis made objects, like the mood painting.

Bugs!

"Help an object on my lot became bugged"
You may use move_objects to fix it

"Help, a sim on my lot became bugged"
If they're a housemate, you may use the "move out move in" fix that I
described above, but only as a last resort. If the bugged sim is a
visitor, you can delete them, they won't be gone forever.

"Help, my lot has become bugged!"
If you notice the bug before you save, you may quit without saving so
you don't lock the bug into the household.

"I goofed, I had a huge bug...and I saved the lot with it"
If your lot cannot be salvaged you may have to start again. However I
recommend that you regularly back up your household to thesims.com or to
files (or both). If you have a lot bug that cannot be fixed, you can
restart from your last backup point so you don't lose your entire family
or have to start again from scratch.

"My lot only runs at X1 speed, but no faster"
You may have too many objects. Try deleting a few and you might see the
speed pick back up.

Performance

"My computer is slow, I'm not sure it can handle a 5X5 lot. Can I start
smaller?"
Go into your graphics menu and turn all the graphics settings down to
their minimum. If the computer still has trouble running an empty 5X5
lot, go ahead and start on a smaller lot, but you must build enough
useless walls to get your starting cash down to the level that a 5X5 lot
would cost a player
Scoring

"Does my starter sim give me a generation point?"
Yes, you start the game with 1 generation point right off the bat...
but it'll take time to get the other 9

"What is used to score the 'net worth' of my family?"
When you click on a family's house in the neighborhood selection
screen, it will list the family net worth. THAT is the number you use to
calculate your net worth score.

"What do you mean by 'round up to the nearest $100,000?"
You get 1 point for each $100,000 your family has in net worth. However
it is rare that a family will have a net worth that is exactly
divisible by $100,000. If you have, say, $130,204 in net worth, you round that
spare $30,204 up so your effective score becomes $200,000 and thus you
get 2 net worth points. The moment your family's net worth reaches
$200,001 you can round their net worth up to $300,000 and score yourself 3
net worth points, and so on.

"What is a platinum grave?"
A platinum grave or urn looks different from the other graves, it is
gold and has the sim's aspiration symbol on it.

"I got a gold grave...what does the platinum look like?"
The gold colored grave IS the platinum grave.

"How do you get a platinum grave?"
Your sim must be in platinum aspiration and die of old age. Dieing in
gold or lower, or dieing of causes other than old age will not produce a
platinum grave.

"Is there any limit to the number of platinum points you can score?"
Nope

"What is a "unique death" or "ghost color"?
Sims become ghosts when they die. These ghosts take on different colors
depending on HOW the sim died. The "ghost colors" bonus gives you
points for every different color ghost you have on your lot. Effectively
meaning how many different ways have Sims died on your lot? Bear in mind
you only get the point for the first sim to die that way. The first sim
to drown on your lot, for example, will earn you a ghost color point.
Any further drownings on your lot won't earn you any points, because you
already have the blue drowning ghost.

"Does the white old-age ghost count as a color?"
Sure does

"Explain to me the 'all colors collected' bonus
There are many different colors of ghosts out there, and if you manage
to get at least one of each, you can add 2 additional points to your
score above the points you normally score for having unique ghosts.

"What ARE all the ghost colors, and what methods of death produce
them?"
Red (Burned to death)
Blue (Drowned)
Yellow (Electrocution)
Transparent (Hunger)
White (Old Age)
Green (Disease)
Pink (Scared to death)
Purple (Death by flies)
Bright Green (Eaten by Cowplant)*
Pink (Scissors)**
Orange (Satellite)

*: If you don’t have University, you don’t need this ghost color to claim the 2 point bonus.
**: Because this is an optional download, you don’t need this ghost to claim the 2 point bonus.

"How exactly do you earn the "free roaming ghosts" bonus?"
There are ways to pen in ghosts so they cannot bother your Sims. Either
by surrounding them with a moat, or putting them in a room or basement
with no stairs. If ALL of your ghosts are able to wander everywhere on
your lot, you can claim these two points.

"Can't I just delete my ghost's graves?"
It is the graves themselves that earn you unique color and platinum
grave bonuses. In order to claim those points, that sim's grave must
remain on the lot. If you delete the urn or tombstone of a sim who's death
earned you points, you lose the points that they once added to your
score. You can delete the markers of Sims who don't add points to your
score with no penalty.

"A sim smashed my sim's marker"
As long as you keep the broken remains of the marker on your lot, you
can still claim the points for ghost. However you will have a furious
ghost on your hands, which can make things difficult and even deadly for
your living household members.

"How do I tell how many family friends I have for scoring purposes?"
Click on a sim who has a job, but isn't at the top of their career,
there should be a number below their job performance meter. THAT number is
what you use to calculate your family friends points.

"What is an impossible want?"
An impossible want is a want that is very hard to fulfill. Each aspiration has their own impossible wants. Your sim must be of that aspiration to claim a Legacy point for that want.
Do not confuse “Lifetime wants” with “Impossible wants”. Fulfilling a sim’s lifetime want does not earn you any points.

Here are the impossible wants by aspiration.

Family
“Have 10 children”
“Have 20 grandchildren”
“Send 10 children to college”

Wealth
“Earn $100,000”

Popularity
“Have 30 best friends”

Romance
“Have 30 loves at once”

Knowledge
“Max all skills”
“Meet aliens 10 times”

"My family sim just made $100,000. Can I claim that as an impossible want?"
No, You can only claim impossible want points for Sims whose
aspirations have it. Only wealth Sims can claim the impossible want point from
making $100,000, just as only knowledge Sims claim the point from maxing
all skills
"Do I need to take a screen shot of the want being fulfilled?"
You need no 'proof' after all; this challenge is scored on the honor
system. If you think your sim has scored an impossible want while you
weren’t looking, check their memories. Impossible wants always leave a
good memory.

"When exactly do I get the aspirational failure penalty?"
This is known as the sim shrink penalty. Every time the sim shrink
shows up, you lose 1 legacy point. A single sim getting multiple shrink
visits will lose you multiple points. Toddlers who drop into failure do
NOT get visited by the sim shrink, and thus do not cause your family to
suffer the penalty
"What is an inter-bred birth?"

Inbreeding looks bad in any family, even if two sims are distant relatives. If two sims can trace their family blood line back to the same sim, and they have children, you get a –2 penalty for every birth in that generation only. The children of those children do not continue to receive the penalty when they breed.
For example: Bob and Betty share a great great, great, grandfather. This makes Bob and Betty distantly related. Betty gets pregnant and has twins. The family gets –4 points for Betty’s two in-bred babies. Time passes and Betty’s children grow up and have kids of their own with partners outside the family. The family would not receive any penalty for Betty’s children having children.

"I've gotten 2 copies of all the career reward objects, can I claim
another 2 point bonus?"
No, you may only claim it once.

"I earned the police reward, but it disappeared, do I have to earn it
again to claim the points?
No, this is a bug. Once you've earned that object, it counts even if it
later disappears.

"For the visitor death penalty, who counts as a visitor?"
Any sim who is on your lot who you cannot directly control is a visitor

"How do the alien abduction points work?"
Every time an adult male sim gets abducted, he returns pregnant, and
gives birth to an alien baby. Every alien baby born this way will earn
your family 1 point. If that birth is twins, you can claim 2 points.

"Does the alien have to be born to a sim whose part of the main family
line?"
Not at all, any alien births on the lot score you points, regardless of
relation.

"I had an alien born on my lot, they grew up and has now had children
of their own. Their children look like aliens, can I claim the alien
birth bonus for them?"
No, the only time you can claim this bonus is when they are had by
abduction

"How DO I get a sim abducted?"
Any teen, adult or elder sim stargazing outdoors with the most
expensive telescope between the hours of 7 PM and 2 AM has a change of being
abducted. Only adult males who are more than 3 days away from elder will
come back pregnant.

"How do I get the social bunny romance bonus?"
When a sim reaches full red social, they'll make an imaginary friend:
the social bunny. This bunny can appear in pink, blue or yellow. Which
bunny appears is random. If pink and blue social bunnies find each
other, they will begin to romance. Snap a screen shot of this and the 2
points are yours. You can only claim this bonus once.

Family line and the NPC bonus

"How do I know if I can claim an NPC bonus?"
First off start with your starter sim. Trace a solid line down the
family tree all the way to the highest generation in the family. Along that
line, every time that line has been continued to the next generation by
an NPC, you can claim their point. Each NPC must be different in order
to claim the points. For example, if your 3rd generation sim married
the maid and continued the main family line with him/her... a 8th
generation sim who marries a different maid and continues the family would NOT
be able to claim the NPC point because the 'maid' NPC was already
included in the family.

"How can I tell if my Sims are connected by blood?"
Put your finger on your starter sim and trace it down the lines to the
10th generation sim. As long as that line remains solid, and does not
break or "..." then they are connected by blood.

"Can I adopt children?"
You sure can, but they won't carry the family line... so don't count on
them to do that.

“If I marry an NPC with a male heir and they have a child…but later father gets abducted and has an alien baby… if I make the alien the heir, do I still get to count the NPC point?”

No. The NPC’s genes are what actually score you the points. By making the alien the heir, the NPC’s genes stop with the one child. If you make the NPC’s child the heir, then you get to keep the NPC points. You get the point for having an alien baby regardless if they are the heir or not.

Endgame
"I finished with a score of X, is that any good?"

Here is a link to the endgame thread

Final Scoring:
Here is the scoring:
0- 9 points: Legacy Loser
10-19: Family Fumbler
20-29: Portrait Pusher
30-39: Ten-Gen Gem Miner
40-49: Legacy Llama
50-59: Outstanding Overseer
60-69: Dynasty Crafter
70-79: Legacy Lord/Lady
80-89: Power Patriarch/Magnificent Matriarch
90-99: Legacy Legend
100+: Quintessential Sim Deity

"Is there a prize?"
Pride and bragging rights.