Our team has had the privilege of working with many well-read, thoughtful individuals who keep up with the news and pay close attention to their personal finances. They carefully monitor everything from when bills are paid and how taxes are withheld from various income sources to when CDs mature. For these individuals, every detail matters, and a detailed spreadsheet can provide confidence that nothing slips through the cracks.
Yet, when the conversation turns to giving money away, whether to family members, friends, or charitable causes, even the most meticulous individuals may find themselves without an intentional plan for how those assets will eventually be distributed. After diligently saving, investing, and spending throughout a lifetime, it seems only natural to be equally intentional about how those assets may eventually pass to the next generation or support other important causes.
To help clients think through these decisions and consider how their giving intentions fit within their broader estate plan, our team uses an illustration we call the “Three Rs” of Wealth Transfer, which we discuss in greater detail below. The “Three Rs” focus specifically on assets intended to be transferred at death, rather than assets given to family members, friends, or charitable organizations during the account owner's lifetime.
Of course, not every individual or family will find this exercise helpful. But for those who do, it can provide greater clarity around their giving intentions, offer additional peace of mind, and help them think more deliberately about how they would like to support family members, charitable organizations, or other causes that matter to them.
Waiting to transfer assets until after death introduces what we call the “Three Rs”:
1. Give Money or Assets at a Random Time
Unfortunately (or fortunately, depending on how you look at it), none of us knows when our time will come. If we did, certain planning considerations would be much easier, including knowing when an inheritance might pass to the next generation. Without that knowledge, wealth may ultimately transfer at a time that is largely unpredictable.
2. Give Money or Assets to Random People
Most individuals have a general idea of who they would like to inherit their wealth, with children, grandchildren, friends, or other family members often near the top of the list. However, it can be difficult to know with certainty whether every intended beneficiary will outlive the person leaving the inheritance, particularly when an estate plan may remain in place for decades.
3. Give a Random Amount of Money or Assets
The future value of an investment account is uncertain. Market cycles, economic conditions, spending needs, and investment performance can all influence account values over extended periods of time. Given these variables, it is nearly impossible to know the exact dollar amount a future generation will ultimately inherit. The eventual inheritance could be significantly more than a beneficiary needs to support their financial goals, or it could be less than originally anticipated.
For the meticulous planner who prefers to leave no stone unturned, thoughtfully considering these three factors, Random Time, Random Recipient, and Random Amount, can provide a useful framework for evaluating whether wealth transfer plans continue to reflect personal goals and values.
Giving During Life Versus Giving at Death
One conversation we often have with clients involves the potential advantages of giving assets to children or other beneficiaries while both generations are still alive.
Consider parents whose children are buying their first home or raising young families. Could a thoughtfully structured gift today create a more meaningful impact than an inheritance received decades later? By the time assets are ultimately transferred at death, those same children may be approaching retirement, have paid off their mortgages, or have children who are already out of the house. In some circumstances, dollars given during periods of greater financial need may have a more meaningful impact than dollars received later in life.
Projecting the Future Value of an Estate
Imagine a couple with a well-constructed financial plan and considerable net worth. One valuable planning exercise may be to estimate the potential future value of their estate under a range of reasonable assumptions.
For example, imagine their financial plan projects that their net worth could reach $15 million several decades from now. While any long-term projection is inherently uncertain and dependent on numerous assumptions, it can provide a useful starting point for a broader conversation: If this wealth ultimately remains, what do we want it to accomplish?
Part of that conversation involves considering how much wealth the couple ultimately wants to leave to future beneficiaries and how much they intend to use during their lifetime to accomplish the goals that matter to them today. While this article highlights some of the potential benefits of lifetime giving, those decisions should be made within the context of the donor's own financial plan.
Giving too much, too soon could negatively affect the donor's ability to meet future spending needs or accomplish other financial goals, potentially doing more harm than good. For this reason, projecting future estate values using a range of reasonable planning assumptions can be a helpful exercise when determining how much wealth may be available for lifetime giving.
Final Thought: Bringing the Financial Plan Full Circle
Ultimately, being intentional about giving, whether to family, friends, or charitable causes, can be just as important as being intentional about saving, investing, and spending. Our team believes the “Three Rs” can provide a useful framework for considering how wealth might ultimately be transferred and whether those plans reflect each client's individual goals and desires.
Our team also enjoys facilitating family conversations when appropriate and coordinating with CPAs and estate planning attorneys to help ensure the various aspects of a client's financial plan are considered together. These conversations can also provide an opportunity to educate future beneficiaries about the responsibilities and considerations that may come with inheriting wealth.
While a tremendous amount of planning rightly occurs during the wealth accumulation phase of life, we believe thoughtful and timely conversations surrounding wealth transfer, charitable giving, and philanthropic goals deserve attention as well. When incorporated into a comprehensive financial plan, these conversations can help bring the plan full circle, helping individuals and families think intentionally not only about how wealth is accumulated, but also how it may ultimately be used and transferred.