Most financial advisors work with clients every day who are struggling to save money and prepare wisely for their future financial needs. This challenge of asset accumulation requires discipline and deliberate strategic planning.
Likewise, those clients who have entered the retirement years often need the counsel of their trusted advisors when it comes to how they choose to spend down their assets. Challenges such as sequence of return risk and other potential risk factors need to be mitigated.
What about the client who needs your help with neither accumulation nor spending, but actually giving away their assets? If you have a client who wants to share their financial resources with others, how can you advise them to do so in a manner that is fiscally prudent and emotionally sensitive to their family members?
(Related: Brace Your Baby Boomer Clients)
Naturally, estate planning attorneys are the most professionally qualified experts for more specific advice about how to give away assets. But, based on conversations with dozens of financial advisors and life insurance agents, here are five tips that might prove useful when working with a client who wants to give away some or all of their assets:
1. Set up a donor-advised fund.
Donor-advised funds (DAFs) are excellent vehicles for clients who have enough assets to benefit from the charitable deduction still available to them but perhaps not enough to warrant the establishment of a family foundation.
Your client can simply open a DAF with a non-profit sponsoring organization or a large investment firm, such as Fidelity or Vanguard, and fund the DAF with either cash or assets (e.g., stock, real estate, etc.).
The clients get an immediate tax deduction for any cash or appreciated stock put in the fund, then can take the time to direct their cash grants to the charities of their choice when they are ready.
2. Divide money to the kids equitably, not equally.
There is no legal or ethical obligation for your clients to give away assets to each of their children in equal amounts.
Sometimes, unique circumstances — such as a child with special needs or a child who received disproportionate support earlier in their lives — may cause a client to give different levels of money to their children, whether they are still alive or in their estate plan.
However, you have an opportunity to speak wisdom into your clients by pointing out to them that it’s important to be “equitable” about this unequal asset sharing, which means they should be fair to all children by spelling out their decision and the reasoning behind it with a clear letter and perhaps a video. This will reduce the risk of an ugly dispute within the family.
3. Create 529 plans for grandchildren.
A great way for your clients to give away assets is to set aside money that can be used to help pay college tuition bills for their grandchildren (or great-grandchildren).
With a 529 Plan, the money your client deposits will grow tax-free and can be withdrawn tax-free for educational expenses when the grandkids are ready to go to college. In fact, the new tax law enacted in 2018 allows for tax-free withdrawals of up to $10,000 annually to pay for K-12 education expenses as well.
For clients who wish to go this route, they can either create a 529 plan in the name of the grandchild or they can establish the account in the name of the child’s parent. It may be advantageous to use the latter approach as financial aid formulas will treat income from a grandparent’s 529 plan as student income, but not if it is held in a parent’s name.
4. Determine whether to keep or sell a life insurance policy
Many of your clients own a life insurance policy that has been sitting in a drawer for years, without. realizing that a life insurance policy is private property that has value, just like a house or a car. Meanwhile, many carriers have quietly raised the premiums on policy holders with significant increases to the cost of insurance.
If you have a client who no longer needs or can afford the premiums on their life insurance policy, they may want to think about whether it makes sense to keep it or liquidate that asset now and give away the proceeds while they are alive. Any qualified life settlement professional will be happy to review your client’s policy and provide you with a preliminary idea of whether your client might be able to sell the asset for an immediate cash payment. Please visit www.LISA.org to identify licensed life settlement providers and brokers who may be able to assist your client.
5. Get charitable with an IRA.
IRAs are one of the great tools in a financial advisor’s arsenal as they create a vehicle for your clients to save pre-tax money and invest it for decades on a completely tax-deferred basis.
When it comes time to start withdrawing that money in the retirement years, it’s important to be deliberate about those withdrawals in order to minimize the tax impact on the client since a higher tax bracket means higher Social Security benefit taxes and higher Medicare premiums.
One way for your clients to achieve their goals of giving assets away and do so in a way that creates a tax benefit is to donate money directly from their IRAs. If your client is 70 ½ or older, they can transfer up to $100,000 per year to a public charity they wish to support and that donation is completely excluded from income tax calculations.
With this “qualified charitable distribution” strategy, every dollar your client gives away counts against their required minimum distribution for the year, making it a win for the charity’s budget, the client’s conscience and the estate’s bottom line.
The client who needs your advice for how to give away assets is a good kind of a challenge for financial advisors — but a challenge all the same. By bringing to them these five simple ideas, you can help them achieve a truly honorable goal of sharing their financial resources with others in a fiscally responsible manner.
— Read Helping Your Clients Afford a More Expensive Retirement, on ThinkAdvisor.