I’ve been thinking a lot lately about philanthropy and its role in our financial planning practice. As more of our clients begin to contemplate retirement and estate tax planning, the questions that always arise are, do we have enough money to retire? How do we pass what’s left to our heirs? And sometimes, what are our philanthropic goals?
Often what is missed are the numerous planning opportunities available to benefit charity, create a current income flow, and reduce potential inheritance tax while we are alive.
Generational Wealth Transfer
Some of the more common generational wealth transfer techniques are to create a trust during your lifetime. These trusts are usually funded with appreciated assets being transferred to the trust. The trust sells the property and, in these instances, avoids any income tax. The grantor receives a current charitable income tax deduction and an income stream for life or for joint lives. Upon death, the remaining assets go to the charities you have designated. There are numerous types of trusts to facilitate this kind of planning.
Charitable Giving Reflects Your Values
For clients with heirs, the dilemma is to determine what is fair so the children and grandchildren are adequately taken care of and what should be left to charity. While some people prefer to leave their entire estate to their heirs, others believe leaving enormous sums of money to children and grandchildren can be a disservice.
Communicating Your Values
One item we would stress is to have as many of the family involved in the discussions as possible. It is critical for future generations to understand your philanthropic views so they can continue to respect your wishes. Formal family meetings, for example, may be scheduled so all the generations can have an understanding of what’s at stake, as well as getting to know the key family advisors: attorney, accountant and wealth manager. This gives the opportunity for parents to encourage giving without imposing their ideas on their children.
Immediate Tax Planning
For more immediate income tax planning, consider bunching deductions in one year and taking the standard deduction in the alternate year. This is especially beneficial in light of the significant increase to the standard deduction passed into law in the new tax bill effective 2018. This can partially be achieved by making donations to donor-advised funds. A donor-advised fund can be established by most custodians as well as community foundations. The amount contributed to the fund is allowed as a charitable deduction in the year contributed. The funds can be distributed in the current or future years to the respective charities at your direction, thus satisfying your tax planning and philanthropic goals.
Please call us to schedule an appointment to discuss any of your charitable questions.