Managing Your Wealth for the Next Generation
Baby boomers are expected to transfer more than $50 trillion in wealth during the next 20 years, with much of it going to Gen X and millennial children. But many don’t want to wait until they die to help their heirs and charities.
Legendary investor Warren Buffett has pledged to give away most of his fortune before he dies so he can make a difference during his lifetime. Other wealthy individuals, such as Bill Gates, have also adopted Buffett’s pledge.
These billionaires can give away most of their wealth without worrying about how they’ll pay the bills during the final years of their lives. However, boomers who don’t own yachts but have succeeded in building a good-sized retirement nest egg face a more difficult calculation. Many want to provide financial assistance to family members and their favorite charities but worry about jeopardizing their retirement security, particularly when it comes to paying for long-term care.
The Challenges of Long-Term Care
More than half of 65-year-old Americans will need long-term-care services of some kind, according to research by the U.S. Department of Health and Human Services, and one in five will develop a disability that will require care for more than five years. At the same time, only 8% of Americans have long-term-care insurance, so most seniors will have to rely on their savings and government assistance to pay for long-term care. (To estimate the cost of care in your area, go to www.genworth.com/aging-and-you/finances/cost-of-care.)
The Easiest Solution: Postponing Gifts
The easiest solution to this dilemma is to postpone gifts to family members and charities until you die, when you’ll no longer need funds for living expenses or long-term care. That’s the default option for many retirees: More than 60% of Americans say they plan to transfer their wealth when they die, according to a survey by RBC Wealth Management.
The Drawbacks of Waiting
But holding on to your wealth until you draw your last breath has its downsides, too. There’s a good chance you or your spouse will live into your nineties, which means your children will probably be in their sixties, or even seventies, when you die. That’s a long time to wait if they need money for a down payment on a home or are struggling to repay their student loans.
“Providing for heirs after life is wonderful, but if you help them while you are living, you get to see how your support impacts them,” says Abrin Berkemeyer, a certified financial planner with Goodman Financial in Houston. “This also applies to those who want to give to charity, as you can follow the work of the organization you are financially supporting.”
The Benefits of “Giving While Living”
Financial planners say that including “giving while living” in your estate plan provides a way to assist children and grandchildren in reaching important goals, such as paying for college and buying a house, while allowing you to gauge how they’ll manage their inheritance. Where charities are concerned, making significant donations while you’re alive can help you to determine whether your money is being used wisely — and provide some valuable tax benefits as well.
Creating a Financial Plan for Giving
Before you start writing checks to your kids or your favorite charity, it’s important to figure out how much you can afford to give away. That requires more intentional planning than simply spending what you need in retirement and leaving the rest in your estate.
Creating a Timeline of Income and Expenses
One strategy is to create a timeline of your income and expenses in retirement, which will help you determine how much you need to withdraw from your savings each year to pay for any expenses that you can’t cover with Social Security benefits (if you’ve filed for them), pension payments and other sources of income.
This exercise allows you to make adjustments as your circumstances change — once you’ve paid off your mortgage, for example. It will also help you get an idea of how much you can afford to give away. You may need professional guidance (or a retirement-planning software program) to get the most out of this strategy, because you’ll need to project your investment returns as well as taxes you’ll owe. A financial planner can help you avoid projecting overly optimistic investment returns or underestimating your taxes. You can find a CFP who specializes in retirement at www.letsmakeaplan.org.
Estimating Long-Term Care Costs
Laura Rhoades, a CFP with Savant Wealth Management in Birmingham, Ala., says she helps clients create a “live on” financial plan that allocates funds from savings, Social Security and other sources to cover their expenses throughout their lifetimes, including long-term care. To estimate long-term-care expenses, she factors in the possibility that her clients may need nursing home care for four to five years. “If anything, we want to overestimate what that cost will be,” she says.
Once clients have determined that there’s a high probability they’ll have enough money to meet those expenses, they can create a “leave on” portfolio made up of funds they want to give while they’re living to children or charities, she says.
Estimating how much you’ll need for long-term care is difficult when you’re in your sixties, and financial planners use different scenarios to help their clients figure out how much they should save for that expense. Berkemeyer recommends saving enough to pay for three years of in-home care for eight hours a day. While many people assume they’ll end up in a nursing home, he says, they’re more likely to use in-home care.
Factors to consider when estimating how much you’ll need for long-term care include your health, family medical history, marital status (single people are more likely to require care in a nursing home than married seniors) and other sources of funds, such as traditional long-term-care insurance or a life insurance policy that has a long-term-care component.
Home Equity and Reverse Mortgages
Home equity should also be part of the equation. Seniors held more than $13 trillion in home equity in the first quarter of 2024, according to the National Reverse Mortgage Lenders Association. Seniors often use proceeds from the sale of their homes to pay for care in an assisted-living facility or nursing home. If you prefer to age in place, you may be able to use a reverse mortgage to pay for in-home care.
Annuities for Guaranteed Income
Many retirees don’t have a traditional pension, but you can create a do-it-yourself pension by annuitizing a portion of your nest egg. The most straightforward annuity is a single premium immediate annuity, or SPIA. With this annuity, you give an insurance company a lump sum in exchange for a regular payment — usually monthly — for the rest of your life (or, in the case of a joint-and-survivor annuity, as long as the surviving spouse lives) or for a specific period.
With the calculator at www.immediateannuities.com, you can enter the amount you’d like to invest and your age to get an idea of how much income your money will buy. Some annuities include a provision that will increase your payout if you need long-term care.
Another option that could serve double duty — providing a source of guaranteed income while fulfilling your charitable goals — is a charitable gift annuity, discussed below.
Making Gifts to Family Members
A financial gift could make a huge difference in your children’s lives, enabling them to buy a home, pay off debts or adopt a child. Making these gifts will also shrink the size of your estate, reducing the risk that it will be subject to federal or state estate taxes.
Gift Tax Exclusions and Strategies
But even if you think you can afford a large contribution, consider starting small, says Thomas Brandt, a financial adviser with RBC Wealth Management. By making modest annual gifts, you can assess how your children are using the money, which will help you decide how much to give going forward. If you’re not comfortable with the way they manage the money, you may want to consider setting up a trust in your estate that protects how your assets are distributed.
In 2024, you can give up to $18,000 per person to as many individuals as you want without filing a gift tax return (together, married couples can give up to $36,000 to as many people as they want). Gifts that exceed the limit, which is adjusted every year to account for inflation, must be disclosed on IRS Form 709. The amount will be applied against your lifetime exclusion from estate taxes.
The current federal lifetime estate tax exclusion is $13.61 million, or $27.22 million for a married couple. So even if you give away more than the annual limit, it’s unlikely your estate will be subject to federal estate taxes, Berkemeyer says. If, say, you want to help a child put a large down payment on a home, making a gift that exceeds the yearly cap may be worthwhile.
Still, staying within the annual limits when possible is a prudent strategy. If the Tax Cuts and Jobs Act isn’t extended when it expires at the end of 2025, the federal estate tax exemption will decline to about $7 million, or $14 million for a married couple. These gifts will also reduce the risk that you’ll have to pay state estate or inheritance taxes if you live in one of the 18 states, plus Washington, D.C., that impose them. Oregon, for example, taxes estates that exceed $1 million.
Tax-Efficient Strategies for Larger Gifts
If you want to be more generous but you’re worried about state and federal estate taxes, there are tax-efficient strategies you can use to increase your gifts. Paying tuition bills for a grandchild (or anyone else) won’t count toward the annual exclusion as long as you make payments directly to the educational institution, and this exception applies to preschool through graduate school. Likewise, if you pay the bills for someone’s medical care directly to the health care provider, the money won’t count toward your annual exclusion.
Another strategy is to take advantage of a special provision that allows you to front-load contributions to a 529 college-savings plan for a grandchild (or anyone else you want to help save for college). You can contribute five years’ worth of the annual gift exclusion in one year without filing a gift tax return. In 2024, that means you can fund a 529 with up to $90,000 per beneficiary, or $180,000 if you’re married.
If you make the maximum contribution within those limits, any additional gifts to the individual during the five-year period would count against your lifetime gift tax exemption. But front-loading contributions will give the funds invested more time to compound and grow, creating an even greater pot of money for the beneficiary’s education.
Choosing Gifts for Family Members
What to give. While most family members will happily accept gifts of cash, that’s not the only way to provide them with financial support. If you own investment securities that have increased significantly in value since you purchased them, transferring them to your adult children will reduce the size of your estate — important if you’re concerned about federal or state estate taxes — and could result in lower taxes on capital gains, says Rachel Betzwieser, a CFP with Compass Financial Group in Raleigh.
Financial planners often recommend waiting until you die to leave appreciated securities to your heirs because they’ll receive what’s known as a step-up in basis, which occurs when the cost basis for taxable assets, such as stocks and mutual funds, is “stepped up” to the investment’s value on the day of the original owner’s death. If the recipient turns around and sells those securities right away, he or she won’t owe capital gains taxes on the proceeds.
There’s no step-up for securities given to an adult child (or anyone else) while you’ve alive — in that case, the recipient assumes the cost basis, which is the amount you paid for the stock. For example, if you give a child shares of Apple stock you purchased for $40 a share, the child will pay taxes on the difference between $40 and the stock’s current value when he or she sells.
But as is the case with other gifts, waiting to take advantage of the step-up means your heirs won’t receive the funds until you die, which could be many years away. “When folks are in their early-to-middle retirement years, their kids are usually in their mid twenties to early forties, and that’s often when they need the most financial help,” Betzwieser says.
In addition, if your children are in a low tax bracket, they may not owe capital gains tax on the securities when they sell them, she notes. In 2024, single taxpayers with taxable income of up to $47,025 are eligible for a 0% rate on long-term capital gains; married couples with taxable income of up to $94,050 qualify for the 0% rate. Taxpayers with taxable income that exceeds those thresholds pay long-term capital gains rates of 15% or 20%.
Giving to Charity
Naming your favorite charities as beneficiaries in your will or trust is one way to fulfill your philanthropic goals, but you won’t be able to see the impact of your contributions — or redirect them if you’re not satisfied with how your money has been used. Plus, making charitable contributions while you’re alive could deliver some valuable tax benefits.
Strategies for Tax-Efficient Charitable Giving
Some strategies to consider:
Qualified Charitable Distributions
Qualified charitable distributions provide a way to help charities while you’re still alive while lowering taxes on required minimum distributions from your IRA. A QCD is a direct transfer from your IRA to a qualified charity (or to multiple charities). You can make a QCD as early as age 70½, but when you reach the age at which you’re required to start taking distributions — currently 73 — the charitable distribution will count toward your RMD.
Although a QCD isn’t deductible, it will reduce your adjusted gross income, which could lower taxes on your Social Security benefits and enable you to avoid the high-income surcharge on Medicare Part B premiums. In 2024, you can donate up to $105,000 directly from your IRA to a qualified charity.
Donor-Advised Funds
If you sell appreciated securities and give the proceeds to charity, you’ll have to pay capital gains tax, typically at long-term rates of 15% or 20%. A more tax-efficient option is contributing the securities to a donor-advised fund.
These funds, offered by most major financial-services firms, allow you to donate cash, securities or other assets to an investment account and decide later how to distribute the funds to charity. Even if you don’t itemize deductions on your tax return, donating an appreciated asset to a donor-advised fund provides a tax benefit because you don’t have to pay taxes on capital gains you’ve accumulated.
Some major donor-advised funds, such as Schwab Charitable and Fidelity Charitable, have no minimum contribution requirement, and you can donate to your fund as often as you like. Most donor-advised funds offer a broad range of investment portfolios, allowing your contributions to compound and grow until you distribute the money to charity. (Kiplinger readers who use donor-advised funds rated Fidelity Charitable mostly highly in our 2024 Readers’ Choice Awards.) While cash and appreciated securities are the most common contributions to donor-advised funds, many will accept non-cash assets, such as cryptocurrency, real estate, art and collectibles, life insurance, and restricted stock.
Keep in mind that you can’t direct a qualified charitable distribution to a donor-advised fund; these funds, along with private foundations, are ineligible for QCDs.
Charitable Gift Annuities
A charitable gift annuity is a contract between you and a charity. You can donate cash, securities or other assets to the charity and get a charitable tax deduction up front. The institution invests the money and returns some of it to you — and up to one beneficiary, such as a family member, if you wish — in fixed monthly payments for the rest of your life. Any funds remaining after you die will go to the charity.
Retirees who are 70½ or older have the option of making a one-time donation of up to $50,000 from their traditional IRAs to a charitable gift annuity. In that case, the donation isn’t tax-deductible, but the distribution will be excluded from taxable income. If you’ve reached the age at which you’re required to take minimum distributions from your IRA, the contribution counts toward that RMD, which would otherwise be taxed as ordinary income.
Because of the significant financial obligations required, charitable gift annuities are typically offered by sizable, well-funded organizations–colleges and universities, for example, and large national charities, such as the American Cancer Society. As is the case with donor-advised funds, some charitable gift annuities can accept non-cash assets, such as appreciated securities or even real estate, says Johnne Syverson, vice president of gift annuity services for the National Gift Annuity Foundation, which provides services to charities that want to offer the annuities.
Most charities use a payout rate calculated by the American Council on Gift Annuities, which is reset periodically based on rates for the 10-year Treasury note. According to the University of California-Los Angeles Gift Planning calculator, which uses the ACGA payout rate, an investment of $100,000 in a charitable gift annuity for a 65-year-old male would generate an annual payout of $5,700, or $475 a month. (You can run your own calculations at https://legacy.ucla.edu/?pageID=50.) By comparison, the same investment in an immediate annuity would provide $7,620 a year, or $635 a month, according to ImmediateAnnuities.com.
Because the charity will receive the main portion of your contribution after you die, you won’t be around to see the impact of your donation. Still, the guaranteed income you receive from a charitable gift annuity could make it easier for you to contribute to charity in other ways or make gifts to family members. And unlike donations included in your estate, contributions to a charitable gift annuity provide a tax break while you’re alive.
Charitable Remainder Trusts
Another option for retirees who want to generate income and assist their favorite charities is a charitable remainder trust, which provides income to you for a specified number of years or for the rest of your life (you can also have the income go to a family member or other individual).
Between 5% and 50% of the trust’s assets must be distributed at least annually, but 10% or more of the trust’s initial value must eventually go to charity. Charitable remainder trusts are more complex than charitable gift annuities and donor-advised funds, so it’s wise to consult an estate-planning attorney with experience in setting them up.
Conclusion: The Gift of Giving
Giving while living can be a deeply rewarding experience, allowing you to see the positive impact of your generosity on your loved ones and your favorite causes. With careful planning and the right strategies, you can make a meaningful difference in the lives of those who matter most to you — and enjoy the satisfaction of giving while you’re still here to appreciate it.
