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When giving, you want to make the most of your wealth. Understanding how to empower those who receive your gifts is just as important as clarifying your own goals and intentions.
Listen to this quick audio introduction to the topic by Michael Liersch, Head of Behavioral Finance.
Social media, reality television and Internet headlines sometimes seem to tell a story when it comes to giving wealth to the rising generation, and not necessarily a flattering one. Themes of overindulgence and narcissism can easily skew the public's perception of how wealthy families behave, but the reality is that many wealthy families strive to give with intention and work hard to prepare their children and grandchildren to deal with their wealth and its purpose.
According to "Approach to Strategies About Giving," a recent survey by the Merrill Lynch Private Banking and Investment Group, 91% of high-net-worth respondents anchor their giving strategies in family values, and put their families first when distributing assets.
Yet far fewer had discussed the specifics of the distribution that would make these ideas a reality—including taxes, risks-verses-rewards and whether to gift during life or at death. Developing a well-intentioned giving strategy and understanding the goals of gifting are essential for the wealthy to empower their family and rising generations.
What Are Your Family's Giving Priorities?
To start, click on the option below that you think best describes your focus for giving.
To help you better determine your personal giving priorities, we've outlined four giving and tax scenarios. Exploring each may help you assess your current situation, and where you'd like to go. You'll see the advantages and challenges associated with each approach, and some of the reasons families choose that approach. After considering some of these scenarios, you may want to speak with your advisor about how to create a giving strategy that best suits your needs.
Taxes and timing are always among the key concerns for giving within wealthy families. Survey respondents overwhelmingly want to minimize their estate taxes (86%). Of those worth over $10 million, 42% planned to distribute upon passing and only 27% had a plan to distribute in life, but giving during one's lifetime can be far less expensive than leaving an inheritance at death, when estate taxes are imposed.
Discussing family inheritance can be hard, and many respondents admitted to procrastinating. Some said it was for fear of upsetting family harmony (28%). Others lacked clarity about the intended purpose of their assets (26%). Still others hadn't thought much about it (37%). But communication is an essential part to gifting, and developing a decision-making model can help a gift have a lasting and positive impact. Consider these factors:
1. Make Values Explicit: Recipients will benefit from discussions about the family's history, work-ethic and assets. Awareness of values can lead to better money management.
2. Determine Recipients' Respect for Wealth: Include the rising generation in family discussions to build both financial literacy and respect for family wealth.
3. Assess Emotional Maturity: A recipient with a record of irresponsible spending may grow more dependent through an inheritance, while an accountable, informed recipient will grow more independent.
4. Define Fairness to Your Family:Every family has a different definition of "fair." A collective understanding about decisions behind distribution can give everyone a better understanding of the process and help avoid future conflicts. For instance, a larger gift might go to an education fund for one recipient and a travel and experience fund for another.
5. Account for Passion and Purpose: Individual discussions with recipients about realistic goals, planning and the future can help determine the level of support. A recipient who follows her passions by pursuing an advanced degree or funding a successful non-profit perhaps needs different support than one without defined purpose.
Understanding the process of gifting can help maintain wealth over generations, open lines of communication and help the rising generation to pursue their passions while maintaining respect for the stewardship of wealth.
For Merrill Lynch Private Banking and Investment Group's "Approach to Strategies About Giving" survey, 206 high-net-worth (HNW) individuals, with assets of $5 million or more, completed an online survey in October 2014 about their approach to giving. All respondents were at least 21 years old, had at least one child, and intended to distribute some of their assets to their children.