It’s not often that you find someone who wants to take an unexpected windfall and give it away to those who need the money. It’s certainly a unique situation; however, the lessons learned and the tools available to this investor can be applied to nearly every set of financial circumstances.
A young investor recently came to us for help handling a substantial windfall she received from her father’s estate. She wanted to honor her father’s life passion of giving to charity by creating a plan for giving. She considered just stroking a check, but with such a sizeable amount, she wondered if there were ways to optimize the giving process.
The first step we wanted to do was to look at her financial plan. She had brushed off her own situation because her husband is successful, and they live comfortably. However, they are young, and at the point in their lives that laying out a financial plan would set a trajectory for their future. With so much of their life ahead of them, there was plenty of room for a lot of “what if” situations, and this windfall could put them in a position to be able to plan for a wide variety of outcomes.
We looked at how they were saving for retirement, the possibility of having children they’ll want to send to college, disability insurance should her or her husband become unable to work. With a few minor tweaks to their situation, they were able to create flexibility in their plan without using the inheritance to completely bankroll their lifestyle.
Next, we looked at ways to give that would benefit their current situation. We looked at transferring some of the highly appreciated assets she had in her own investments and investing some of the cash from the windfall. By donating her appreciated stocks, she was able to give the same dollar amount to the charity but was able to avoid the capital gains on her investment and reset their cost basis.
To create a long-term giving program, she had several options, including donor-advised funds, family foundations, revocable trusts, and charitable remainder trusts. A donor-advised fund would allow for a lump sum donation and respective tax deduction now but would then allow her to take time finding a charitable cause, as they do not have an annual minimum distribution requirement. Assets in the fund can be invested, making the gift more impactful. She could also continue to give to the fund each year, so she would not have to commit the entire inheritance at once. Annual donations to the donor-advised fund could allow her and her husband to control their tax situation.
A family foundation could exist in perpetuity and give her more control over the investment choices and grant decisions; however, they come with more tax stringent rules regarding investment style, reporting requirements, required annual distribution amounts, and an annual excise tax on net investment income.
A revocable trust would allow her to have access to the funds should she need it, while a charitable remainder trust would be an irrevocable gift that could be set up to provide her an income stream with the remaining assets going to charity when the trust ends.
In the end, her decision was influenced by the financial plan she and her husband had in place, their tax situation, and their estate plan wishes.
If you have questions regarding the charitable gifts you’d like to give, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the May 13, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
