How Much Can I Afford to Give Away During My Lifetime?

10.07.2021 - Jennifer McCarthy, Trust Counsel

Deciding how much of your wealth you can comfortably give away and how much you need to retain can be a complex calculation. Depending on where you are in life, you will need to factor in different variables and uncertainties.

The further away you are from retirement, the more judicious you may need to be because there are so many more unknowns. The older you are, the fewer variables you may need to worry about.

Whether your gifting goals are to support your children or grandchildren, fulfill charitable goals or as part of a tax or estate planning strategy, the following are some key considerations you’ll want to focus on based on your current life stage:

Gifting as an ‘accumulator’ (age 30 to 50)

When you’re a 40-year-old entrepreneur who’s worth $10 million and growing, how do you begin to think about gifting considering so much of the future is unknown? Like any life stage, it starts with a thoughtful financial plan that lines up your income, expenses, assets and liabilities.

Yet, at such a relatively young age, even a comprehensive plan isn’t going to be exact. Things will be in flux and inevitably change. Unanticipated windfalls. Unexpected expenses. And of course, your wealth will evolve, and your life circumstances will periodically shift.

  1. Add a healthy contingency to the assets you will need to meet your life goals. Round up your goals and projected expenses and round down your projected income so you’ll be prepared for a worst-case scenario. This will enable you to comfortably maintain your lifestyle even in the event of a major market correction or an unexpected income disruption (such as the loss of a job). And if children are still dependent on you, make sure you have added buffers for them.
  2. Be thoughtful in identifying which assets to gift. Often the easiest way to think about gifting is to focus on specific assets, such as extra shares in a start-up company that you would want to move out of your estate for tax purposes if the company turned into a unicorn. If gifting to an individual, you will want to think about assets with the greatest appreciation potential. You also will want to focus on the tax characteristics of your assets.  If you are giving to charity, using stock with a low cost basis can be ideal—providing you with a sizable charitable tax deduction without having to pay any capital gains taxes. 
  3. Use flexible gifting vehicles like trusts and donor advised funds (DAFs). It may make sense given the current favorable estate and gift tax exemptions to remove assets from your estate for the benefit of your spouse, children or other relatives. Making your gift in trust provides flexibility to tailor when assets are available to beneficiaries, how investments are handled and even when your beneficiaries find out about your gift.  In addition, you can add assets to a trust in the future, so you don’t feel like you need to do all your gifting in one fell swoop. For charitable giving, DAFs are both a convenient way to gift and a good way to instill philanthropic values to the next generation by involving the whole family in charitable giving. With a DAF, you can set aside assets for charity now, and later decide on final charitable grants when you are ready.

With so many years in front of you, focus on gifting from your excess—wealth you wouldn’t miss if it never materialized. Consider giving in smaller slices over time rather than all at once. But don’t forego gifting altogether. Your wealth will grow over time, and it can be advantageous over the long term to begin gifting often and early for estate tax purposes.

Gifting as a ‘consolidator’ (age 50 to 70)

We work with many clients in this life stage—individuals who are beginning to look toward retirement and starting to think more specifically about precisely what they’ll need versus what they can give away. They are considering how much it will cost to buy that second home in a warmer climate, more accurately estimating the assets they’ll need to generate enough income to maintain their desired lifestyle and assessing how much of their remaining wealth they can safely tap into for gifting.

Just like before, determining how much to gift begins with a careful analysis of your financial plan. But being closer to retirement age, these numbers will be more concrete. Therefore, digging into the details of what you really spend and what your lifestyle demands will be critical now to put an accurate gifting strategy in place.

  1. Clarify your financial picture. Track down all your assets and liabilities and understand your tax picture. Define your income and spending plan. How long will you work? how much social security benefit will you receive? What exactly are your goals? Update all your information to reflect this more realistic picture.  Resist the temptation to estimate numbers and not track down statement and other documents.  Now’s the time to understand what you have and where you would like to go from here.
  2. Tidy up your financial house. Use the effort you make to clarify your financial picture to explore ways to potentially consolidate your wealth, pay off debt, align your investment strategies and put appropriate asset protections in place (such as long-term care insurance). At this life stage, you should make sure you have an up-to-date estate plan before you engage in any gifting. This includes a will, a revocable trust, powers of attorney and health care directives, and beneficiary designations for any life insurance or retirement accounts. As you complete or update your estate plan, gifting strategies often will reveal themselves. There may be specific gifts you would like to make that you can afford to do today.  You may also set up a plan for annual gifting that can accomplish your goals over time.
  3. Define strategies for your ‘excess assets.’ Once you’ve determined your financial needs throughout retirement and the appropriate structures have all been created, don’t miss the chance to consider what you want to do with the excess. These assets or income flows may be where you can begin to make larger charitable gifts. It also may be that you splurge for an impromptu event or make a gift to someone outside your family that you want to support.

Don’t forget to carefully consider both the income and estate tax implications of your overall gifting strategy—whether it’s deciding on the optimal charitable giving structure (e.g., a donor advised fund, a family foundation, or a charitable trust), or the most tax-advantaged approach to gifting assets to your spouse, children and grandchildren.

Gifting as a ‘retiree’ (age 70+)

Later in retirement start shifting focus from ‘how much do I need’ to ‘what do I want to give away.’ And work with your advisor to meet those goals.

Rather than transferring assets to beneficiaries after you die, it may be more beneficial to transfer them during your lifetime. Not only will you be reducing your taxable estate and taking advantage of current tax laws, consider how much more rewarding it might be to see the benefits of your gifts help your family members and support the causes you’re passionate about during your lifetime.

As you progress into retirement (especially after the first few years are under your belt where spending typically spikes), you should have a much more accurate estimate of the budget you’ll need to cover lifetime expenses. Don’t forget, however, to consider and plan for healthcare and long-term care costs—the largest remaining significant variable on the chessboard.

Additional considerations you may want to investigate include:

  1. If you don’t need your required minimum distributions (RMDs) from retirement accounts for income, it may be beneficial from a tax perspective to gift those RMDs to charity. Remember if you’re gifting to charity, retirement accounts should be the first place you look to make those gifts, whether during lifetime or at death.
  2. Expand strategies for gifting your annual exclusion amount ($15,000 for 2021). If you are making annual exclusion gifts to your children (gifts you can make annually that don’t count against your estate tax exclusion amount), consider whether there are others you would like to include. This could involve grandchildren or spouses. Also, for minor children, consider front-loading 529 Plan accounts with five years of annual gifts ($75,000 per individual donor). These gifts can easily move a considerable amount out of your estate for estate tax purposes when you expand your donees.
  3. Strive to be more transparent with your heirs. Parents (even of adult children) often avoid having inheritance conversations with the next generation out of fear that it might act as a disincentive. But there comes a point where you need to have these discussions. If your family doesn’t know what you plan on leaving them (and when they’ll likely receive it), or what other provisions you’ve made for future generations, it complicates their own financial planning picture. You may have an adult child who dreams of starting their own business—a risk they might not take if they’re unaware of the support you would be willing to provide.

Remember, even though you may have a high net worth, that’s just one factor that will impact your gifting strategy. Depending on your projected expenses and income, your current life stage and the various contingencies and other variables you need to plan for, the assets you ultimately have available to comfortably gift may be either less or more than you imagined.

We recommend developing a gifting plan early and revising it often as your circumstances change and as you move through the different stages of your life. Having a thoughtful strategy in place can help you avoid unplanned decisions and provide a bigger benefit from your gifts along the way.

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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