The topic of estate planning frequently conjures up ideas about leaving money to heirs. However, recent statistics from the U.S. Census Bureau indicate that more than 16% of Americans do not have biological children. Additionally, there may be many more cases where people feel like they have already given their biological heirs plenty of assets and aren’t interested in further enriching them. Over the course of decades of working with wealthy families, Whittier Trust has seen the gamut of situations—people who want their families to keep every dime possible and others who feel that enough is enough at a certain point. This raises the question, What should I do with my money if I have no heirs? Common wisdom suggests there are three possible places for wealth to go upon death: family and friends, charity or the government.
If there are no family members, where should we look next? It’s common for people to want to make gifts to close friends. This raises questions about when to give the money, how to structure a gift and how much to give. Sometimes gifts during the donor’s lifetime are the most effective because we get to see the money help our friends. Lifetime giving is relatively easy, as it’s possible to give cash or potentially other assets. While a gift is not income taxable to the recipient, they do take the gift with the donor’s tax basis. This is something to consider when gifting assets other than cash.
Take for example, a tech entrepreneur who wants to give stock in their company to a friend. While the face value of the gift (and the amount reportable on a gift tax return) is the fair market value of the stock, the friend receives the gift with the donor’s tax cost basis. So if it’s the founder’s stock, for example, it may have a basis of $0 or close to $0. That means if and when the friend sells the stock, they will have to pay capital gains taxes on the proceeds. In such a case, while a gift is still generous, it’s likely a lower value than a cash gift might be.
If the same gift of stock is made at the donor’s death, the tax code permits a “step-up” in the cost basis to market value on the date of death. Any gift made at death passes free from any unrealized capital gain. So, it’s probably advisable to make lifetime gifts with cash rather than using appreciated assets.
What about a large gift to a friend? There will naturally be considerations of how this may affect the dynamic of the friendship, but aside from that, it’s important to consider whether the friend is capable of managing a large gift. The same concern might exist if it is a gift of complex property, either a portfolio of stocks and bonds or something like real estate. In such an instance, it may be advisable to consider making the gift to an irrevocable trust for the benefit of the friend. A professional trustee would be able to carefully manage the gift, while still making sure that funds are available to enhance the friend’s lifestyle or provide for necessities. Irrevocable trusts also confer asset protection benefits by protecting the assets from creditors of the friend.
No discussion of gifting beyond family and heirs would be complete without discussing gifts to charity. Direct gifts to charity are usually pretty straightforward. Gifts of cash and appreciated assets may be made to public charities quite easily. The main consideration when gifting to a public charity is one of structure. If the gift is particularly large, does the charity have the ability to properly manage and steward the gift or will it be overwhelmed? If the latter is a concern, spreading the gift out over a number of years may make sense. Alternatively, making the gift to a donor-advised fund (DAF) that will then parse the funds out over time is often an excellent solution.
Some donors want the recognition and flexibility of creating a private foundation, though there are administrative burdens and expenses that come with that approach. It’s easy to get tripped up by the rules, so expert advice is highly recommended. Also, private foundations are less attractive if the donation of assets such as appreciated real estate are contemplated since a donor can only deduct their basis in the property (which may be depreciated) rather than the full fair market value. An additional point for consideration is who will manage the private foundation down the line. Again, a donor-advised fund may solve some of these issues.
Many donors consider a split-interest trust — either a charitable remainder trust or a charitable lead trust—that will benefit friends and charity. Each of these tools are worthy of separate articles but should be on the table when thinking about planning for estate disposition beyond family members.
Gifts and bequests beyond family members are not as simple as one might think. This is particularly the case with assets other than marketable securities or with large gifts. Expert advice and counsel, in the form of good accountants and attorneys, are essential to maximizing the benefits of any gifting strategy.
For more information about your options, how to plan for the future and to connect with an advisor at Whittier Trust, visit whittiertrust.com.
