Wealthy families work for generations to build their wealth, but most do not invest the time to prepare for transferring it effectively. Planning for the transfer of assets can be a very daunting and sometimes emotionally challenging task that often leads to inaction. Most people think estate planning is something they will do in only one or two steps, or only in reaction to some event, perhaps when children are born or somebody gets married or dies. But a successful wealth transfer plan should actually live and breathe—it’s something that should be periodically reviewed and updated to meet the goals of the family.

The Great Recession of 2008 allowed many families to use their lifetime gift exemptions to transfer large amounts of their privately held businesses at a deeply discounted rate. Since that time, we have seen a significant increase in the value of these businesses, and as a result, taxable estates have grown to such levels that they are now vulnerable to estate taxes. So it should be on the priority list of many families to review their plans and evaluate strategies for tax-efficiently transferring these assets.

One strategy that doesn’t always get the appropriate attention is charitable giving, or what some may call “legacy planning.” People have often made charitable bequests at death. But we are seeing more people want to make an impact while they are still alive. This is where legacy planning takes on a new life—by providing families with the opportunity to see the impact of their hard-earned assets on the communities where they live and on the causes that matter to them.

Those with estates that have surged in growth since 2008 have an opportunity that is right under their noses: to shift toward philanthropy monies that would otherwise be lost to estate taxes when a client dies. The idea is to use these dollars to build a legacy.

Families can proactively take control of their planning now by thinking entrepreneurially about their balance sheets in the same way they do about growing their businesses. Every dollar that is set aside for charitable planning is one that is not estate taxed. So legacy planning can leave a family with a balance sheet that makes a much greater impact.

Consider a family that has already shifted much of its wealth to heirs but still has a $52 million taxable estate. Family members’ lifetime gift exemptions have already been used, so every dollar the elder generations have left when they die is exposed to estate taxes. The bottom line is that nearly $21 million is going to be lost (when the 40% maximum federal estate tax rate is applied), leaving the heirs with approximately $31 million.

The table shows the option of putting in place an additional wealth transfer strategy that allows the same $31 million to go to heirs but reduces estate tax liability and allows the family to make substantial philanthropic gifts.

The family took a series of steps. First, they designated $34 million for charitable giving, which is exempt from taxes. Their plan was to allocate this money to charitable gifts over a number of years.

In tandem, they loaned an $18 million, high-growth asset to a trust for nine years for the purpose of funding a $20 million life insurance policy. As this $18 million asset grows, it will be used to fund the premiums on the policy. The loaned $18 million returns to the estate after the ninth year, when the note is paid off, and remains in the estate. It has netted about $11 million for the heirs after estate taxes.
The $20 million life insurance policy makes up the rest to deliver the same $31 million amount to the heirs originally intended.

This plan allows the family to leave the same $31 million to the heirs, while also making charitable bequests of $34 million and reducing the estate tax liability substantially. When combined, the amount left to heirs and charity total $65 million, whereas it could have been just $31 million left to heirs and none to charity. This is just one combination of estate planning tactics that can accomplish a similar result.

The exciting part of this type of planning is the impact it can have beyond the financial benefits.

First, the elder generation gets the benefit of seeing the fruits of their hard work deployed to a worthy cause. Rather than having their children oversee a foundation created when they die, they can share their philanthropic interests with the next generations of the family and hopefully instill in them a desire to give back as well.

For many entrepreneurs who have built successful enterprises, the estate planning process can be frustrating. Rather than a proactive, creative process, it is often viewed as reactive, focused on reducing wealth erosion rather than on wealth creation. By deploying proactive strategies to leverage philanthropy, entrepreneurs can participate actively in their estate planning execution, and in a way create a new family business focused on giving back. And the business that is created can be open to future generations of the family to pursue.

While grandchildren may not be interested or qualified to come to work at the family business, they may be interested in participating in family service projects, visiting communities where money is given and developing philanthropic interests of their own. Philanthropy can become a rich part of your family’s “story,” defining its values and legacy into future generations.

Many wealth holders fear the impact that family wealth will have on future generations. They would rather avoid talking to younger family members about their wealth, perhaps because they worry it will foster a sense of entitlement in the children. Engaging the family in a conversation about the value of money and what good it can do in the world is a way to couch the discussion of wealth in a more productive manner. And it is a way to proactively demonstrate a family’s priorities and values.

That said, many clients we have worked with become frustrated with the time and effort required to orchestrate philanthropic giving. Some struggle with joint family giving. They are challenged to find common interests among family members that motivate them to give. To maximize the positive impact of family giving, consider making your philanthropic vehicle one through which all family members can pursue their personal giving interests, rather than execute on a family mandate defined by historical areas of giving.

One option is to give each family member access to a pot of money that he or she can give. This pot does not need to be specifically carved out. The family could simply reach an understanding that each member above a certain age has discretion over a set giving amount each year. In addition, a process could be established where individuals “pitch” their philanthropic giving idea to the broader family in the hopes of getting family membership to “co-invest” with them. In this scenario, family members learn about others’ interests, and individuals have the opportunity to expand the impact of giving to their favorite cause.

Another challenge is that it requires time to manage philanthropic work—to evaluate grant requests, research potential grant recipients, hold formal board meetings, file tax returns and oversee the investment allocation and performance. Families who have been in the philanthropy “business” for a long time know to make the structure and process as simple as possible. A private family foundation imposes minimum giving requirements every year, and the founders must create a formal board of trustees to oversee the grant process and the investment portfolio.

A donor-advised fund structure can be much less onerous. Here, the givers focus on grant requests, limiting the time and expense of filing tax returns, holding formal board meetings, administering grants, etc. Donor-advised funds do not require a minimum grant distribution each year (whereas the minimum is 5% of assets for private foundations) and the funds have other financial benefits as well (for example, there is a higher tax deductibility for gifts of stock, cash and other assets). Philanthropists can also simplify their charitable work by simply supporting certain organizations or by using charitable remainder trusts.

If a family hasn’t already established a giving vehicle, it can be rewarding for multiple generations to investigate options and develop their giving processes together. It allows them to build a new business together, too. And research shows that when family members are involved in decision-making, it increases their engagement. Those who get to participate from the start are more likely to remain involved over time.

Even if you already have a sophisticated estate plan in place, you may want to reconsider how your assets are allocated given the opportunity that philanthropic giving provides as a shelter to taxable assets. When you visit your advisory team with these ideas in hand, they may suggest some revisions to your current plan. 




Jennifer Pendergast, Ph.D., is a senior consultant with The Family Business Consulting Group Inc. To learn more, visit www.thefbcg.com.

Bo Wilkins, CLU, ChFC, CAP, is president and founder of Wilkins Insurance Group. To learn more, visit www.wilkinsinsurancegroup.com.