What to do with surplus wealth is an issue that typically only the very wealthy face, a very small portion of the population. Most who accumulate this wealth do so late in their careers, typically after reaching their mid-50s. The number of individuals who face these issues has recently dramatically expanded due to the current gains in stock and home prices.

Giving away wealth while living should only be done when one is comfortable that one has enough to meet lifetime needs and possible contingencies. Financial advisors can help answer whether this is the case. This article assumes the individual considering this has determined that they have surplus wealth.

There are two options on the timing: it can be on death through their estate plan, or it can be done while living, a focus of this article. Most choose the estate plan as it is an easier decision to make and it is a safer bet that one is not giving away assets that perhaps they will need later. This article wants to make sure people are aware that there are benefits for doing this while living.

The options these wealthy people have on who to give their surplus wealth are three: government, family, or charity. Most want to minimize the amount going to the government, and want it to go family and charity, with family typically the first priority.

Money is a complicated topic. For most people, it is a private issue, and they find it hard to even begin a conversation with others. If they are able to have a conversation, most likely it is with family members or their financial advisor, but most, are not able to do even this.

Decisions are made more difficult because it is likely the dollar amount under consideration is much greater than the dollars involved in their daily decision making. (e.g. the gifting may entail hundreds of thousands or even millions of dollars). Most people are not used to making decisions of this magnitude.

One’s viewpoints on giving typically evolves over time—usually several years. Most people learn values from their families when growing up and this provides the foundation that they build upon later in life. Fortunately, giving away assets while living can be very self-rewarding, and a fun task; and may even lead to a new career.

The challenge is further compounded when one’s wealth grows faster than the adopted gifting program and they end up with an even larger balance sheet at the end of the year than they started with. The challenge of what to do with their surplus has been made even harder.

Many financial planners are not accustomed to providing advice on disposing of surplus wealth. Most provide their clients advice on how to accumulate wealth. For seniors, advisors recommend plans on how to use their assets so they never run out. To do this the advisors must be experts on Social Security, annuitization, Required Minimum Distributions, establishing appropriate portfolio risk, safe levels of portfolio distributions, cost of long-term care, and for some understanding and managing government aid. Advising what to do with surplus assets is a new and challenging conversation for many advisors.

Starting the thinking and the conversation on what to do with one’s surplus wealth is not easy, but if anything, it makes sense to start it sooner rather than later. There is no right or wrong on any of the points raised below.

So, let’s get started.

Suppose your clients and you have determined they need to have $1.0 M, $2.0 M, $10.0 or $100 M to live on for the rest of their lives, and their net worth is more than this. What do they with the surplus? It is a nice problem to have, but not an easy problem to solve. Multiple ways and programs exist that you can use to determine how much your clients need to meet their lifetime resources and whether they have a surplus. The purpose of this article is to deal with the question of what to do with their surplus, once you have determined one exists and they want to decide who (and when) should be the beneficiaries.

Their answer of what to do with their wealth will likely evolve over time. At some point they may want to bring in family members. This is so they can learn their plans, but also, they may provide positive contributions. Bringing family together and agreeing on a family vision can be very powerful.

In determining how much they need to have for lifetime make sure you:
1. Take into account the impact of inflation. Over 20 years, two percent inflation means they need almost $1.50 for every dollar today. Three percent inflation over 20 years requires $1.80. We are in a period of low inflation, but don’t count on it when planning for the next twenty years.

2. Make sure they have enough capital to deal with end-of-life expenses. This could be $300,000 to $500,000 per person. Long-term care insurance may cover these expenses, but in today’s world it may be difficult and expensive to purchase. Having extra capital reserved for long term care is critical.

3. Additional resources may be needed to take care of a handicapped family member or to maintain two households as many couples are separating in retirement years. This frequently is an unplanned event. 

4. Plan on having enough resources if they outlive their life expectancy. Life expectancy is for the average, and many will live a lot longer. Additionally, life expectancy will likely get longer, for many reasons.

So, your client has decided how much they need, and they have provided a significant cushion for themselves. As mentioned earlier, on the timing for disposing of their wealth, they have two options: 1. while living or 2. through their estate plans, which of course is on death. Besides spending it on themselves, there are only three possible beneficiaries: 1. government, 2. family, and 3. charity. What to do are tough decisions and probably one of the primary reasons many people are slow to make them.

Now on to the beneficiaries (government, family or charity) who will benefit from your clients’ surplus.

Government
The government wants to share in their assets, both estate as well as those they give away while living.

1. The government charges gift (living) and estate taxes, both federal and state.

2. Governments can modify gift and estate tax laws so the current rates may not be the same today as in the year the client will pay them; this is particularly true for estate taxes, which hopefully don’t become due for quite a few years. Not knowing what the rates will be when they are paid should influence the planning.

3. On the federal side, the rates are the best they have been in many years. Currently, clients do not pay on the first $11+million of combined estate and gift amounts. What clients don’t pay on is called the “exemption”. Husband and wife can combine theirs so the total exemption for a couple can be as high as $22+million. They currently are reduced in 2026. Under the current political climate, our politicians are likely to reduce them sooner. This is a reason for more aggressive planning today.

4. About 20 states have estate taxes. Only Connecticut currently has a gift tax. Like the federal side, the state legislators may change them before your clients pay them.

5. Another benefit (in addition to the exemption) to consider in estate planning is the “step-up-in basis”. The built-in capital gains of the deceased currently doesn’t get taxed. The cost basis of a capital asset goes to market (typically on the date of death or the date of filing). This can be a big benefit and the reason for mentioning this is the current politicians are talking about eliminating the step-up-in-basis and to tax the appreciation of a capital asset of the deceased.

6. There are many strategies to reduce the government’s share. These are while living or as part of your estate plan. The beneficiaries are your family or charities. Some strategies benefit both.

7. Aggressive planning can dramatically reduce or eliminate the government’s share. This will increase the amount going to family or charity. An individual must determine how aggressive they want to be to achieve this. It takes time, and there may be significant legal fees; but adopted strategies can be very effective to reduce or eliminate the government’s take.

The government is probably the least desirable of the three beneficiaries of your clients’ wealth. The other two are family and charity. Determining the amount, and timing, your clients want to go to each is a challenge, but can provide huge benefits, and of course is a personal choice.

Family
For many, passing assets on to family members is their number one priority. There are multiple things to consider:

1. How much do they want to go to their heirs?

2. What is the timing of the gift? Do they pass all on death or is some of the transfer done while living? If done while living, what is the time schedule? Staging gives the family member time to learn about wealth and perhaps adjust their lifestyle to get used to their increased wealth. Staging helps the donor determine how the beneficiary handles the wealth. Too much too soon can cause problems. I believe most individuals don’t “mature” until they are in their 30s. Large gifts at younger ages may result in spending for which your clients do not approve.

3. Which heirs: children, grandchildren, others, or perhaps non-family members? Some people don’t have any heirs.

4. How much to each? Treat all equally? I have argued the giver should determine what they think is fair (not necessarily equal) and be sure to let the heirs know their decisions in advance so as to reduce family discourse when they are not here. Your clients may want to be more generous to a handicapped relative or one with special needs. Discuss all this with the family in advance so they are not surprised.

5. It is quite possible that your clients and the receivers will have totally different values and viewpoints on how to use the wealth. Your client should understand the differences and be ok with it before making the gift.

6. Do they want to provide training to younger heirs on how to use the wealth? This can be a huge benefit for both the giver and the receiver. They can:
• Learn the difference between a credit card and a savings account. Learn the fundamental meaning of owning assets, something most kids don’t understand.
• Develop investment experience.
• Understand they may be different from their friends. They may leave college debt free, or actually have assets—what a huge benefit.
• Think about future uses of the assets such as buying a house or business.

7. Do your clients want to protect the assets from potential creditors for those receiving them? The more obvious risks for the recipients are: wild spending, lawsuits, and divorces.

8. There are multiple ways to structure the gift for the beneficiaries. They can be an outright gift to the individual. They also could be in a variety of trusts or partnerships, which contain protective measures for the beneficiaries. They can be simple or complex. They also can be designed to last for multiple generations and be free of estate taxes at each generation. Some of the tools include family limited partnerships and generation skipping trusts. Giving to family may also be combined with giving to charity using tools such as a charitable lead or donor trusts. These partially move some of the government’s share to charity.

Charity
1. Most people want to determine how much goes to family before beginning major charitable giving. Giving large amounts to charity is a big change for most and is one of the reasons many haven’t started.

2. One of the biggest challenges as your clients start major charitable giving is to determine which organizations to give large sums to. A simple way to start is to give to a community foundation as they already have in place an efficient mechanism for distributing the funds.

3. Your clients may want to target money for a specific organization for a specific purpose and to meet a passion they have. It can be to an existing organization or they can establish a new one. Becoming involved in the organization is a common practice, self-rewarding to the donor, and hopefully benefits the organization. A separate issue in making this gift is whether the funds are to be used for annual expenses, or to endow the charity and over time the charity manages the funds.

4. Your clients need to decide whether in their gifting they want name recognition (for themselves or a loved one), or whether they want to do their giving anonymously. This is entirely a personal choice. For some, name recognition is the primary driver of the donation. 

5. Stepping back, it is quite common for an individual’s charitable giving strategies to evolve over time. Initially it may start with giving with a personal check or their personal time, such as to a soup kitchen. Larger gifts frequently use more advanced strategies such as charitable donor funds, giving appreciated assets, and for those over age 72 (70½ if born before July 1, 1949) giving up to $100,000 directly from their IRAs (Qualified Charitable Distributions). For larger donations options include setting up a family foundation or using tax strategies such as a charitable lead trusts or charitable remainder trusts. These strategies have different tax saving benefits. However, in most cases the potential tax savings should not be the determining factor. Meeting personal goals should drive the decision.

6. Charitable lead or remainder trusts are a way to achieve multiple objectives. They benefit both charity and family while reducing the amount going to the government.

Additional Ideas
Other factors your clients should consider as they determine their giving strategies to family and charity:

1. In deciding how much should go to each area, think both in dollar numbers and percents. Dollars are useful when deciding how much to go to family members. Your clients probably have a feel for how much they need and can handle. Do they want to give $5000 or $10,000? Using a percent of their assets may be more useful when considering how much to go to charitable causes as the amount they give may be a much higher dollar number than what they are accustomed. Do they want to give away 10% of their assets, which could be a substantial number? They also need to think whether the charitable organization can handle the size of the gift they are considering.

2. Spreading giving over multiple years gives them the option of adjusting their giving if their portfolio value changes and/or their own wants and needs make unexpected changes.

Developing a process for giving away these large sums is useful but can be a challenge. These are big decisions, and the questions are different than most have faced. Getting started is frequently the biggest challenge. Talking with family members or you, their advisor, can be very useful. You can play a major role in making this happen

Perhaps it is helpful to see how one couple’s plan might look.
1. They have determined they need $5 million of assets to meet all their possible future expenses. This number contains a buffer in case things go wrong. Their total assets are $8 million, so they have a $3 million surplus. They have two children, and their current thinking is to give or leave them $1 million each.

2. To keep things simple, we will assume their estate expenses are close to zero with the remainder, after giving to children, is $1 million, and they want this to go for charitable purposes.

3. They have questions of when to do their giving to the children and to charity. It is logical there are two different timelines. For the gift to the children, the questions are when do they need it, how well will they use it, and how will this likely change as the mature? Our couple decides to give $15,000 now and see how the children react to the gift before deciding the next steps. There are no federal gift tax consequences (or reporting) as there currently exists a $15,000 personal annual exclusion. They also are considering giving college funds to their grandkids but plan to do more research on this.

4. The couple basis on the timeline for the charitable $1 million gift is totally different. Their plans evolve over time as they face issues they have not dealt with before. Giving $10,000, $100,000 or $500,000 is totally different then writing $100 or $1000 checks. Taking time is ok. One approach is to move the $1 million to a separate account (could be a charitable donor fund) and then over time as they better define their objectives, designate who is to receive the charitable donations.

5. Another question is what to do if/when their $8 million of assets grow. The giving strategy needs to be dynamic. Should the couple increase the amount going to children or should they increase the amount going to charity. Should the surplus be given away while living, or just distributed as part of their estates. They decide to deal with this good problem in the future if it happens. Flexibility has advantages.

Summary
This article’s mission is to provide guidance to financial planners so they can help a person with excess wealth decide what to do with it. One important issue to decide is the timing of the distribution—while living or through the client’s estate plan. Another important question is the beneficiaries—government, family, and charity. Deciding what to do with surplus assets is not easy and is probably the reason most people just default to their estate plans. This article raises the many questions a person needs to consider in deciding who will benefit from their surplus.

Robert Kreitler has been a financial advisor since 1985. Robert founded the wealth management firm, Kreitler Financial in New Haven, Conn., which is now being run by his son Charles Kreitler. He works with clients to help them define and achieve their lifetime goals and assists in running the practice. Robert is the author of the book Getting Started in Global Investing (Wiley, 2000).