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.