Using Donor-Advised Funds for Multigenerational Estate Planning

An estate plan affects you, your children, your grandchildren and even your parents. How can you use a multigenerational estate plan to help everyone meet their financial goals?

Research shows that about 60% of wealthy families exhaust the greater part of their estate by the second generation. By the third generation, nine out of 10 family fortunes are mostly gone. The main culprit is estate tax; a levy that can halve a family’s wealth.

Your estate plan should focus on the most tax-advantaged ways to pass along wealth. It behooves the younger generation to educate themselves on potential windfalls and how to be prepared ahead of time.

Understand the ramifications of tax decisions on your trusts and other entities in order to take your personal tax situation into account. You want to manage taxes for the short and long terms.

One strategy is a donor-advised fund (DAF) in the family name. Bequests to a DAF avoid the 40% estate tax rate, allowing donors to save 40 cents for every dollar they give to charity. DAFs can be good options because they are simpler and less expensive to establish than private foundations.

If your goal is to pass on your wealth, try naming younger generations as successor grant advisers for the DAF. Besides the tax benefits, this will impart the importance of charitable giving to the next generation. Being appointed to a DAF can serve as a teaching moment for your children and grandchildren on learning how to manage and distribute money from a charitable account.

In the process, you can create a philanthropic legacy over multiple generations, engaging your family and benefiting the causes your family supports. From a tax perspective, the charitable contribution deduction continues to provide significant tax savings. Philanthropic giving, though, is about more than tax savings.

Keeping it in the family

Charitable planning not only manages income and estate taxes but also resolves personal concerns about transmitting family wealth and values. A multigenerational gift entirely structured by the senior generation is likely to fail; you cannot assume that family members will share your passions.

Engage your children in the process by encouraging them to use a portion of any financial gift received for birthdays, holidays or other events to support a charity that they care about. Encourage your children to think about their own causes and you will be creating a culture of giving, early on, that can extend through multiple generations.

DAFs can help ensure that your family’s charitable work continues in future generations. Families can appoint members to work with DAFs as advisers, collaborating on how funds are invested and granted to charities.

Community foundations are charities that often offer DAFs.

Some DAFs will allow donors to select their own investment adviser to manage the funds. Donors can contribute appreciated property, such as closely held stock, and receive a full fair market value deduction. DAFs, like private foundations, can accumulate assets and earn a return, tax-free, but they are not subject to many of the restrictions that apply to foundations.

By starting a DAF or endowing one during life, you can enjoy the benefits of a charitable deduction against income taxes today. By contributing non-cash assets, such as real estate, you can avoid incurring capital gains taxes.

DAFs are a good vehicle for donors to bunch deductions so that in some years they make such large gifts that they will be able to itemize deductions, while in other years, they will limit charitable gifts and take the standard deduction.

You can keep your charitable support working at a steady pace by making distributions from the DAF every year to the causes you support. While DAFs can be attractive for philanthropic families, they have some disadvantages:

• The donor and his or her family will be subject to the policies and procedures of the charity maintaining the fund, including its grant-making and investment policies.
• The opportunity to have family involved as advisers for multiple generations may vary from one DAF to the next.

To establish a long-term advisory vehicle, discuss the DAF’s policy in advance. Engage your family in the process and communicate regularly about what you hope to achieve through your DAF, so it doesn’t become a document in the drawer. For more guidance and advice, consult with your estate planning attorney.

Do you have questions?

Count on your experienced team at Ericson, Scalise & Mangan, PC to provide you with sound guidance for your Estate Planning, Elder Law, Real Estate, Probate, Trust & Estate Administration, and other legal needs. For assistance, contact us today at (860) 229-0369, or email us at info@esmlaw.com.