In the wake of Donald Trump’s election as U.S. president, those of us in the financial and estate planning world are waiting to learn more about the fate of the estate tax. Changes over the last several years, including increases in the estate tax exemption amount and the addition of spousal portability, have already significantly reduced the number of families affected by estate and gift taxes. So for many families, the need for estate tax reduction is already in the rearview mirror.

That means greater attention should now be paid to those who should receive the wealth, how much they should receive and the reasons for both.

Most of my clients want to provide a significant amount of financial support for their children to help them achieve their goals. They want to fully support their children’s lifestyles, provide capital the children might need for home purchases or help with the grandchildren’s private school or college education. But in many cases, clients are also concerned that their children will receive too much money—so much it would keep them from developing their own careers and initiative.

Additionally, many of my clients have been strong supporters of a variety of charitable organizations, often donating tens, even hundreds, of thousands of dollars to charities annually. They have experienced the joy of giving. They want their children to share in that joy, but also exhibit a level of responsibility and selflessness with their wealth that philanthropy can bring when done well.
As a result, most people make a provision for charitable contributions in their estate planning.

With fewer taxes, by default clients are faced with leaving more to their heirs. For some people, this can be problematic. What is the right mix of a comfortable inheritance and charity funding? In my experience, finding that balance is one of the biggest issues facing people today as they develop estate plans.

A few years ago, I started working with several clients to find a solution. I’ve come up with a concept that blends the two, one I refer to as “charitable inheritance.”

First, we address the usual issues regarding the amount of inheritance for family members, including children and grandchildren.
Next, we address the issue of how much money to donate to charities. But here is where the strategy differs from others.

We set up donor-advised funds (DAFs) that my clients use to set aside “inheritance dollars”—money earmarked for charity after a client’s death to be administered by the children.

For clients struggling with decisions about how much money to leave to their children, this concept offers a solution. Rather than feeling like they have left too much to nonprofit organizations—often those they don’t know well—they are leaving the funds in the control of their heirs to continue the parents’ legacies and also build the children’s own.

Here’s a good example of how it works. After one of my clients recently retired, he and his wife began to focus their attention on the second phase of their lives, and philanthropy played a major role. But after deciding to engage their family in this effort, they realized they had not taught their adult children how to do charitable giving.

At the same time, they wanted to re-evaluate their estate plan. The original plan for their $20 million estate was to split a large amount among their three children. They wanted to leave each child a maximum of $2 million. However, they didn’t know how to develop a plan for the approximately $14 million that would go to charity.

I introduced the charitable inheritance concept to them, and they fully embraced it. Instead of leaving $14 million directly to charities at their deaths, they decided to leave $5 million directly to charitable organizations and split the remaining $9 million equally to three donor-advised funds. They’ve named their three adult children as the successor advisors to these accounts.

The estate plan calls for each child to receive $2 million outright and $3 million indirectly through the DAFs to continue their family philanthropy. Now my clients are looking forward to the joy of spending their remaining years training their family how to be responsible with their wealth and their giving.

Since I introduced the charitable inheritance concept, at least 10 of my clients have adopted some version of it. As a result, a significant sum—potentially millions of dollars—has been set aside in DAFs for the children of these clients to administer after their deaths.

My firm has always encouraged our clients to include charitable giving as part of their overall wealth management plan, and we’re finding that the charitable inheritance concept provides even more incentive for them to do so. It helps introduce the importance of charitable giving to a new generation and allows them to carry on their parents’ generous distribution of their wealth.

My hope is that the heirs will develop a lifelong interest in philanthropy that gives them years of personal satisfaction while providing an enormous benefit to the communities where they live and work.

Charlie Jordan is a partner and wealth advisor at Brightworth, an Atlanta wealth management firm.