By CJ Orr, Chief Executive Officer of Orr Group, and Michael Mallick, CLU, President of Valley Forge Financial Group
In a world captivated by the enormous movement of wealth between generations, another important but often overlooked trend is happening — the “Great Value Transfer.” At the core of this change is a reevaluation of philanthropy's purpose. It is not just about the dollar value anymore, but rather the significance and continuation of the values it represents.
Integrating Values with Philanthropy and the Great Wealth Transfer
Today, many individuals aim to achieve more than just a traditional philanthropic transition. They are focused on integrating their philanthropic efforts with the values that define them. With the massive shift of wealth from Baby Boomers to younger generations, estimated at $84 trillion over the next 20 years, donors are starting to think more strategically about leveraging planned giving. This approach allows them to maximize their financial impact, minimize taxes and ensure a legacy of values that spans multiple generations. This transfer calls for the next generation to develop a proactive plan to maintain and grow the wealth and values being passed down.
Source: Cerulli Associates, “The Cerulli Report: U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2021.”
In navigating this significant transfer of wealth, donors are encountering pressing challenges, including the impending sunset of the Tax Cuts and Jobs Act, enacted in December 2017 under President Donald Trump (the “TCJA”) and concerns about passing on too much wealth. These issues highlight the complexity and urgency of strategic estate planning during this pivotal period.
The TCJA introduced extensive changes to the U.S. tax code. Two significant changes were the temporary allowance for 100% expensing of certain business assets and increased estate tax exemption limits. The pending expiration of these provisions at the end of 2025 creates a sense of urgency for high-net-worth individuals to plan their estates before then. This urgency underscores the importance of integrating philanthropic strategies into estate planning to maximize both financial and value-based legacies.
Additionally, the emotional and psychological challenges associated with the Great Wealth Transfer cannot be understated. Many families face emotional roadblocks that cause indecision and lack of action in proper planning. Approximately 76% of wealthy individuals worry about the smooth transfer of assets, and 68% are concerned about passing money to heirs in the most tax-optimized way possible. These concerns underscore the necessity of clear communication and thoughtful planning. By leveraging philanthropic tools, families can address both the financial and emotional complexities of wealth transfer, ensuring that their values are passed on alongside their wealth.
The “How” Behind Transferring Values
The mechanisms for transferring values through planned gifts are as diverse as the values they aim to perpetuate. Here are some of the most prevalent tools:
Bequests: A straightforward yet powerful tool, bequests allow individuals to designate a portion of their estate to a charity in their will, seamlessly integrating philanthropy into their legacy and ensuring their values are carried forward.
Charitable Lead Annuity Trusts (“CLATs”): CLATs serve as dual-purpose instruments, providing charities with immediate financial support while preserving the remainder of the trust for heirs in a tax-efficient manner. This tool allows donors to support causes they care about now while demonstrating to their heirs the importance of philanthropy, instilling charitable values that heirs may embrace when they receive the remainder of the trust.
Annuities: Charitable annuities offer donors a fixed income stream for life, with the remainder of the annuity benefiting a chosen charity, symbolizing a commitment to philanthropy that continues beyond a lifetime and perpetuates the donor’s values.
Premium Financed Life Insurance: This sophisticated strategy involves financing life insurance premiums to significantly amplify the future benefit to both heirs and charitable causes. By securing significant amounts of life insurance without affecting cash flow, donors can support their families and the charities they care about simultaneously. This demonstrates strategic philanthropy and generosity, instilling the importance of balancing family support with charitable giving in their heirs.
Endowments: Endowments allow donors to permanently invest in a charity of their choice, creating a lasting representation of their dedication to causes and principles, and ensuring their values live on in perpetuity through ongoing support for a charity’s mission.
Donor-Advised Funds (“DAFs”) and Private Foundations: These tools offer flexibility and control over charitable contributions, allowing donors to support multiple charities over time, involving family members in philanthropic decisions and teaching values through active engagement in charitable activities.
Tax Benefits of Charitable Contributions in Estate Planning
Philanthropic giving allows individuals to align their wealth with their values, and at the same time, it provides opportunities to maximize the financial impact of their charitable contributions. By integrating tax-efficient strategies into estate planning, donors can significantly enhance the scope of their philanthropic efforts while ensuring that their wealth benefits both their heirs and the causes about which they care.
Giving during retirement years through Qualified Charitable Distributions (“QCDs”): Starting at age 73, the IRS requires IRA owners to take annual income withdrawals (known as Required Minimum Distributions, or “RMDs”), subject to penalties if not compliant. These withdrawals are subject to ordinary income tax.
However, a tax-smart strategy that individuals or couples can implement are QCDs. These transfers offer IRA owners of age 70½ or over to directly transfer up to $105,000 to one or more qualified charities per year. This donation is not reported as taxable income, providing greater tax savings than cash donations, because the taxpayer’s adjusted gross income is reduced.
To illustrate, it is possible to compare how withdrawing $100,000 from a traditional IRA account and donating half in cash versus making a QCD of $50,000 and withdrawing the rest. In the first case of withdrawing $100,000, the projected income tax will be calculated over the entire withdrawal, adding up to a payment of $17,000. After donating the desired $50,000 to the donor’s charity of preference, they will be left with $33,000 for personal use.
If, on the other hand, the donor wishes to implement the tax-efficient strategy to make the gift via a QCD, the entire amount will not be taxed, only the $50,000 withdrawal. This results in a payment of $8,500 in taxes, and a balance of $41,500 for personal use.
Source: Orr Group.
Earmarking IRAs for Charitable Giving: Traditional IRAs are particularly well-suited for charitable bequests because they are subject to income tax and estate tax when passed to heirs. By leaving an IRA directly to a non-profit organization, donors avoid this "double tax" completely. The charity will receive the full value of the IRA, while other, more tax-efficient assets—such as appreciated stock or other assets that benefit from a step-up in basis and Roth IRAs can be passed on to heirs. This method allows families to maximize the amount received by heirs while still fulfilling charitable goals.
Charitable remainder trusts (“CRT”): These are irrevocable trusts that allow a donor to contribute assets to a trust, receive an income stream during their lifetime (or to a designated beneficiary) for a set number of years and designate a charitable organization to receive the remaining assets upon the termination of the trust. The key benefits of a CRT include generating income while deferring capital gains tax on the sale of appreciated assets and providing a significant charitable gift upon the trust’s termination. In summary, CRTs combine income generation, significant tax savings and long-term philanthropy, making them ideal tools for balancing family support and charitable giving during the Great Wealth Transfer.
There are two main types of charitable remainder trusts, a Charitable Remainder Annuity Trust (“CRAT”) and a Charitable Remainder Unitrust (“CRUT”). We believe CRUTS are more flexible than CRATs, as they distribute a fixed percentage of the trust’s assets, revalued annually, and are the best option for assets that are expected to increase in value.
After evaluating some of the tools and strategies that allow individuals to transfer their wealth in accordance with their values and the utmost efficiency to maximize their contributions to charity and their heirs, we can create three scenarios for a couple with an estate value of $1,000,000, where non-taxable assets amount to $600,000:
Current Plan: The couple does not plan to donate to charity. They will transfer $840,000 of assets to heirs, while their estates will pay $160,000 in taxes, effectively transferring 84% of their estates’ value.
Option 1: The couple plan to donate 10% of their taxable assets to the charity of their preference through a bequest, reducing the amount of paid taxes to $120,000. Their heirs will receive a total of $780,000 and the non-profit will receive a gift of $100,000. The couple managed to transfer 88% of their estate value by integrating philanthropy into their legacy and making sure that they pass on their values.
Option 2: On top of donating 10% of their taxable assets to charity through the bequest, the couple created a CRUT of $300,000 with the rest of their taxable assets, with a 5% annual payout to heirs and a distribution of $350,000 to charity after 20 years. This results in a transfer of wealth to heirs of $845,000, a total to charity of $450,000 and approximately $80,000 in taxes. The couple managed to transfer a 100% of their assets, plus almost 30% of its value, through planned giving.
Source: Orr Group.
Please note that the above tax calculations are based on estimations from income and estate tax rates in Pennsylvania and New York, and as well as the estate value and types of assets, this should be taken only as an illustration of the discussion. Detailed amounts will vary depending on individual cases, financial assets and locations.
It is crucial for donors to carefully consider their specific financial situations, assets, tax liabilities, and variables through different estates to maximize the impact of their wealth to their philanthropic efforts and to their heirs. Different assets, such as real estate, stocks, or retirement accounts, have varying tax treatments, making professional guidance a must. Strategic planning can ensure tax-efficient solutions that result in an increase of the wealth passed to heirs and charities. With legal and tax regulations constantly changing, advisors help tailor strategies to each donor’s unique situation, ensuring compliance while aligning with personal and philanthropic goals.
Engaging the Next Generation
One of the most impactful aspects of the Great Wealth Transfer is the opportunity to engage the next generation in philanthropy. This values transfer starts now and involves the entire family in a collaborative and ongoing process. By actively involving the next generation early on, families can ensure that their philanthropic values are preserved and carried forward.
The transfer of values happens through consistent, meaningful engagement rather than a single event. It begins with involving family members in philanthropic activities and decision-making processes during the donors' lifetimes and continues after their passing through planned gifts. This collaborative effort, supported by financial advisors who guide families in developing strategic philanthropic plans and non-profits that provide opportunities for engagement and education, creates a framework that fosters a sense of responsibility and commitment to the causes about which clients care.
To effectively create this organic transfer of values, families can take several practical steps:
Choosing the Charity: Involve family members in selecting charities, aligning personal values with philanthropic efforts.
Managing Investments: Teach the next generation about investment strategies related to philanthropy, ensuring alignment with long-term goals.
Annual Meetings: Hold regular family meetings to discuss charitable strategies and reinforce the family's commitment to their values.
Board Involvement: Encourage family members to serve on charity boards, gaining deeper insights into non-profit operations.
Active Participation: Get the family involved in charity events and volunteer opportunities to see the impact of their efforts firsthand.
Posthumous: Ensure ongoing engagement by having the family assist in managing the endowment or gift, staying involved in board activities and/or contributing personally.
Challenges for Nonprofits
While integrating philanthropy into estate planning and wealth transfers can result in tax efficiencies for donors, it also presents challenges for non-profits that must now prepare to receive these gifts.
Complexity: As the Baby Boomer generation begins to transfer wealth, non-profits must prepare for an influx of complex gifts, such as IRAs or other retirement accounts. Handling these types of donations often requires specific expertise in tax and legal matters, which may not be readily available within smaller organizations. It is crucial that non-profits establish relationships with financial advisors and estate planners to navigate these complexities and ensure they can efficiently manage the receipt of planned gifts.
Identifying Potential Donors and Respecting Their Legacies: Non-profits may struggle to identify potential donors for planned gifts and it could be difficult to start conversations about planned giving without feeling intrusive. Gaining a donor’s trust may be a challenge for younger organizations, and it is essential to clearly articulate their intentions to ensure that the donated assets are used in accordance with the donor’s wishes. This trust could be fostered through strategic partnerships with advisors who can help ensure that both the donor’s financial goals and personal values are respected. By working closely with donors and their advisors, non-profits can more clearly articulate how they will honor the donor's intentions, helping to solidify long-term relationships
Planning: To successfully navigate the Great Wealth Transfer, non-profits must invest time and resources into developing robust planned giving programs. Establishing ongoing partnerships with estate planners, tax professionals and financial advisors is crucial to building capacity in this area. These partnerships not only facilitate the technical aspects of receiving planned gifts, but also help non-profits create tailored engagement strategies that resonate with donors' values. By fostering these relationships, organizations can more effectively market and manage planned giving opportunities, ensuring that they are well-positioned to receive the complex gifts expected in the coming decades.
Preparation and building partnerships with donors are key to unlocking the full potential of the Great Wealth Transfer. By working collaboratively with donors and their advisors, non-profits can ensure that the philanthropic values underpinning these gifts are honored, while also gaining the expertise needed to manage increasingly complex donations. This synergy benefits both parties: a donor can be assured their legacy will live on, and the non-profit will have the resources to advance its mission in alignment with the donor’s values.
The Importance of Early and Active Engagement
Engaging the next generation in philanthropy early is crucial for a successful values transfer. Families can instill responsibility, gratitude and a commitment to giving back. With the support of financial advisors and non-profits, this proactive engagement approach along with incorporating strategic giving into estate plans ensures that heirs not only receive financial resources, but also a clear sense of the values that guided previous generations. The two-pronged approach may help to ensure the legacy of values and philanthropy continues to thrive for generations to come.
Ultimately, by integrating tax-efficient strategies and addressing the challenges that non-profits face, families and organizations can ensure that the Great Wealth Transfer becomes more than just a transfer of assets. It becomes a preservation of values, a continuity of generosity and a meaningful impact on future generations. As both wealth and values are transferred, families can rest assured that they are leaving behind not just financial resources but a legacy of giving that endures through time.
CJ Orr has broad experience in fundraising and development, executive leadership, strategic planning, campaigns, and event management. He has launched funds, designed and led strategic initiatives, and driven fundraising for large galas and campaigns ranging from $10M to $1B+ in revenue. As an expert project and relationship manager, he executes on the development of strategies and tactics to drive effective fundraising plans that meet or exceed targets.
Michael Mallick is the President of the Wealth Transfer practice at Valley Forge Financial Group. He specializes in estate planning, life insurance consulting, business succession and executive benefits.