Most of our clients aspire to be financially self-sufficient. As those clients age, we notice some amount of transition into wanting to benefit others with accumulated resources. This giving can range from donations to charities of interest to paying for a grandchild’s education to helping a friend in need. We have been fortunate since the founding of our firm to work with very generous people. In some cases, this generosity can take on a life of its own and eventually erode a person’s financial self-sufficiency.
We consistently encourage giving to family and charity, but the rationale behind the recommendation is widely varied. For some clients, it could be tax planning and almost entirely based on the numbers. For other clients, it could be because we want the client to understand their ability to give and the positive impact they can afford to have on others. We have witnessed dramatic positive personal impact in clients who are now more active givers.
We have several clients who are active givers to family members. Often times, the client will make a dually important statement like “I want to provide for my children, but I also want to make sure I’m okay.” My typical response is “If you are doing well, your children will do well.” Point being, you must make sure your own financial picture is strong enough before embarking on a significant giving plan to children or grandchildren. I was referred to a client several years ago who had been advised to pay for all his grandchildren’s college education.
In hindsight, that was an ambitious plan and left my prospective client with inadequate resources for the remainder of his life. His generosity was undeniable, and he felt that not paying as promised would be letting his family down. Since working with us, he has had necessary conversations with family, limited his gifts to amounts he can afford, and his financial status is now much stronger. We do not universally recommend strict gifting percentages; the exact giving rate is a personal and often religious decision. When tithing is a primary goal for a client, we always prioritize that area of their budget. For those who have not developed a giving plan, we have however developed several guidelines and discussion points.
1. Never make a gifting plan perpetual, it should be reconsidered annually
We have clients that are both givers and recipients of annual gifting between family members. Currently, one can give $15,000 per year to anyone with no gift tax impact. For clients in the position to do so, this can be a very powerful way of reducing one’s estate. (Anecdotally, we see far less giving of this type than we used to due to individuals being able to pass over $11 million to heirs tax-free). One of the biggest issues with this type of giving is when recipients come to expect and rely on this gift. It has come to them for years, often at the same time per year, so why wouldn’t they become used to it? From the giver side, I have seen this create countless issues.
Much like the example above and making open-ended commitments to pay for a grandchild’s education, an open-ended commitment to an annual gift can be very difficult to undo once family members begin to rely on the gift. Instead, any gifts should be made with a disclaimer that “This is just for this year,” or “I had some uninvested cash I wanted to give away,” or “my advisor and CPA said I should give some money away this year.” These statements are fully intended to prevent training your family into expecting the gifts to go on forever.
2. Consider the tax impact on a gift
We encourage our clients to reach out to us for any important financial decision they are making. If we do not have or know the answer, we know someone who does. Our clients understand that we may look at a situation in a slightly different manner and come to a recommendation they never expected. We see this dynamic most often in planning around giving, both personal and charitable.
In personal giving cases where cash gifts are most common, we have analyzed situations and then recommended giving to 529 plans, direct tuition payments to schools, or even giving non-cash assets. In charitable cases, we have steered many away from giving cash to giving appreciated or low/no-basis stock to charitable endowments where tax benefits are plenty. An outright gift of cash may in fact be the best method, but you should always consider if there is a better strategy, that could more greatly benefit you or the recipient.
3. Create a budget around giving
We believe the most effective budget is one that liberates your spending, not limits it. When I tell people this concept, they often have a hard time accepting the idea that a word with a restrictive connotation could be liberating. An effective budget is most liberating when it limits or eliminates the month-to-month waste that happens when you have no grip on your expenses. By creating categories and a good understanding of where your monthly cash flow is going, we see clients able to budget in additional savings and, often, giving into their plan.
For retired clients, a budget can be just as useful as when they were working. It is quite common for our retired clients to have budgets that include annual expense categories like travel and gifting so that they have a firm understanding of their ability to afford such items. This is not to say we do not see people giving from the principal of their assets. If estate reduction is necessary, giving away principal is the only way to effectively reduce your estate size. We typically do not advocate this type of strategy until much later in life and prefer giving from income until someone reaches a more advanced age.
4. Consider the impact of giving now or giving later
Every one of our clients is slightly unique in how they see their financial independence. One would think that the amount of assets a person or family has is directly correlated to the amount of confidence a person has in their financial self-sufficiency. On the extremes of this spectrum, that is probably true. However, the vast majority of our clients do not fit either extreme and have widely varied levels of confidence in their financial picture.
First, much of this disparity is a by-product of the background of an individual. It goes without saying, an individual raised by parents who lived through the Great Depression might see financial security slightly different than a Millennial. We believe a huge part of our role is to empower people to have a realistic and objective view of their financial position. In doing so, we can set realistic and attainable goals. Through this conversation, we are able to promote action often far in advance of a person’s own belief.
In other cases, we have had to encourage less giving and more saving for a period. One needs to consider the impact that giving too much too soon could have. Similarly, when a client’s balance sheet is very strong, we have encouraged giving more during life while family and charities around them could benefit.
5. Do not underestimate the impact you can have on others and yourself
As a young kid, I remember thinking how strange (and unfortunate) it must be to be my parents around the holidays. They were buying gifts for my brother and I and we would do our best to reciprocate with something we made or purchased, undoubtedly with dollars our parents had given us. Today, with two growing children, I get it. Nothing gives me greater satisfaction than to give. That could be a gift to a child, a charity I am passionate about, or something of meaning to a co-worker or friend. So much of financial planning is based on the concepts of saving and accumulation. Rightfully so, if we don’t accumulate enough assets, we have larger issues to solve.
We have made a conscious effort as a firm to spend an equal amount of time talking about the distribution of assets. We see affluent prospects with very little understanding of what they can afford while retired. This lack of comfort often furthers their conservatism and lack of action (i.e. giving). When we are able to break through to such a client and empower them to give charitably and/or to family, the difference we see is significant. By focusing on the reality of their situation and pointing out true levels of affordable gifting, we have been able to liberate many clients from their worry. We have had grandparents who never saw themselves affording the education of a grandchild being able to do just that. We have had clients provide seed money to family members starting businesses.
And most common, we can empower clients to give charitably during their life long before they thought they could afford to do so. Our job as financial planners is not to help you die with the most amount of money in your name. Our job is to help empower you to get the most out of your resources, both now and after you are gone.
We believe any financial planner can tell you to save every penny; and savings is obviously a critical part of what we promote. However, we believe equal amounts of time should be spent planning on how your saved resources can benefit yourself and others over time. By having realistic, objective conversations with clients, we are able to empower our clients into action they may have not previously seen possible. At some point, when you have resources to give, the “tug of war” begins between your own needs and the needs of others you care for (personal or charitable). Let us walk you through this conversation so we can get to the bottom line of what you can afford.