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).