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.
Whether your gifting goals are to support your children or grandchildren, fulfill charitable goals or are 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 when so much of the future is unknown? As with 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. Your wealth will evolve, and your life circumstances will periodically shift.
Focus on:
Adding a healthy buffer 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).
If children are dependent on you, make sure you have added buffers for their needs.
Being 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 should be moved out of your estate before the company turns into a unicorn. If gifting to an individual, 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 charitable tax deduction without having to pay any capital gains taxes.
Using flexible gifting vehicles like trusts and donor-advised funds (DAFs). It may make sense given the current favorable estate tax and gift tax exemptions to transfer assets from your estate for the benefit of your spouse, children or other relatives. Making your gift in trust allows you 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, instead of doing 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 in the next generation. With a DAF, you can set aside assets for charitable giving and obtain a tax deduction now and finalize the charitable grants in the future 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. Your wealth will grow over the long term, and it can be advantageous to begin gifting early and often.
Gifting as a ‘consolidator’ (age 50 to 70)
At this stage, you are beginning to look toward retirement and starting to think more specifically about precisely what you’ll need vs what you can give away. An understanding of what you really spend and what your lifestyle demands is a critical part of your gifting strategy.
Focus on:
Clarifying 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 in Social Security benefits will you receive? What exactly are your goals? Update all of this information to reflect the most realistic picture.
Tidying up your financial house. As part of clarifying your financial picture, 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).
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.
Defining strategies for your “excess assets.” Once you’ve determined your financial needs throughout retirement, consider what you want to do with the excess assets or income flows, which may allow you to make larger gifts.
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 DAF, 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-plus)
This is the time to shift your focus from “how much do I need” to “what do I want to give away,” and work with your adviser to meet those goals.
Consider transferring assets to beneficiaries during your lifetime to help reduce your taxable estate and take advantage of current tax laws. Perhaps more important, consider how much more rewarding it might be to see your gifts help your family members and support the causes you’re passionate about during your lifetime.
In addition to planning for health care and long-term care costs, consider the following:
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 your lifetime or at death.
Expand strategies for gifting your annual exclusion amount ($18,000 for 2024). 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 other people who might benefit from these gifts. For minor children, consider front-loading 529 plan accounts with five years of annual exclusion gifts ($90,000 per individual donor).
Strive to be more transparent with your heirs. 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.
Depending on your projected income and expenses, 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. Having a thoughtful strategy in place can help you avoid unplanned decisions and provide the most benefit from your gifts along the way.
