It’s a really good problem to have: too much money in your later years. There are three categories that are the most likely recipients of your good fortune after you pass away: your family, the government and if you are of a giving nature, charities. A lot of effort goes into leaving most of your money to family members and less to the government. But you don’t have to wait until you pass to support the charities and causes that matter to you. In fact, it’s better do that while you are still alive, and there’s an easy way to make it happen.
A recent article in The Houston Chronicle, “Dying with a surplus: Thoughts on donor-advised funds and estate planning,” suggests charitable donations and a tax-efficient, low-cost way to do it.
Those facing a wealth surplus worry about passing on their assets only after their deaths, rather than while they're alive, and they worry about the potential negative effects of inherited wealth on their children. But these worries conflict with two well-known estate-planning principles. One is the fact that giving away money during your lifetime instead of at your death is the most efficient way to minimize taxes on transferring your wealth. And second, the key to lowering stress in estate planning is to place your personal values in the middle of the plan.
If it's all about your kids, let them have the money. On the other hand, if you have other values you want to express in addition, you should consider donor-advised funds. DAFs offer some advantages in a simpler and inexpensive way for those whose estate won’t need complex intergenerational wealth planning.
Most major brokerages and investment firms offer DAFs, which can be an economical way to accomplish an expression of your values in your lifetime and beyond, without a legal structure like a foundation or trust. When you contribute to a DAF:
- You get to enjoy a charitable gift tax benefit in the year of your gift.
- Assets will continue to grow in value, tax free, over time.
- You don't need to designate all of your charitable beneficiaries now because your appointed trustees can designate gifts to charities over time.
- Giving takes just a call to the brokerage firm, which then confirms the recipient charity is legitimate.
The beauty of the Donor Advised Fund is that you are able to be an active participant in how these funds are distributed to charities and you get to see how your gift makes a difference in the lives of others. There will be ample opportunity to discuss future decisions about values with your children. And the tax advantages of your Donor Advised Fund will benefit you and your family members.
Reference: Houston Chronicle (October 1, 2016) “Dying with a surplus: Thoughts on donor-advised funds and estate planning”