by Mark Trewitt
Aside from individuals and couples who do not have children or grandchildren, who may find it easy to leave their estates to charity as opposed to nieces, nephews and other relatives, it is quite rare to see a couple leave everything to charity and disinherit their direct descendants. David Wills, president of the National Christian Foundation, tells the story of a couple that was blessed with the sale of a company they had built, resulting in net after-tax proceeds of over $18 million dollars. Their financial planner, knowing the couple’s heart for charity and the Kingdom, told them they had the ability to “give it all away,” which is what they decided to do—almost. The couple proceeded to call a family meeting to tell the children of their plan to give them their inheritance in advance while at the same time giving the bulk of their wealth away to charity.
Their plan was to give away $14 million to charity, keep a million dollars for themselves to provide for their modest lifestyle needs for the rest of their lives, and to give each of the three children one million dollars immediately. When they shared details of the plan with their children, the parents were surprised and shocked at the reaction. The kids who had been “trained up well” with a solid Christian education, solid in their own giving and faith—essentially told their parents that they felt they were stealing their inheritance. With zero gratitude and respect for what was a well-thought-out decision on the part of their parents to bless the causes their family had supported over the years, the children exhibited an entitlement mentality that whatever their parents had accumulated in their estate “belonged to them” when mom and dad passed away.
There are many high-profile wealthy individuals who have publicly indicated that they intend to leave the bulk of their wealth to charity when they pass away. The typical default strategy is to pass that portion of the state which is taxable to a private foundation at death, thus eliminating all estate tax due. In situations where the engine that built the wealth is a sizable enough business enterprise to become publicly traded, or at some point sold with proceeds professionally managed, governing the business is not much of an issue for subsequent generations. Whether publicly traded or privately held business enterprises, or whether through some role with family foundations or other family directed charitable entities, children and grandchildren of the super-rich are rarely left with nothing. They are typically left with more than enough, not only in financial terms, but also in terms of the best possible education and career opportunities as a result of the families to which they belong.
According to James Flanigan of the Los Angeles Times, in a 1990 article titled, “Malcolm Forbes’ Lesson on Estate Taxes”: In a more solemn era, Andrew Carnegie, the Scottish-born, 19th-Century steel magnate, said: “Never leave anything to your children. They won’t do anything worthwhile if they don’t work for it.” But Malcolm Forbes, whose Scottish-born father left him a business magazine, always boasted with tongue in cheek and a big smile that he earned his millions “the hard way—spelled i-n-h-e-r-i-t-a-n-c-e.”
In many instances, a private family foundation, such as the one Carnegie left behind, is the easy way out if there is a desire to make one’s heirs work for it and not do what is necessary to steward family wealth with efficient wealth transfer. Malcolm Forbes apparently took a different approach, as the Forbes publishing empire survives and thrives to this day as a privately held enterprise.
What is available at death, in the form of the lifetime exemption amount ($10.8 million in 2015), is often deemed to be enough for the children, and any excess above that amount is left as a charitable bequest to a private family foundation or other charitable endpoints. While this is a perfectly fine strategy that effectively eliminates estate taxes, it misses a huge opportunity—it does not maximize charitable giving during life. As indicated earlier, these lifetime charitable gifts can yield significant income tax savings, prior to the estate passing to the next generation. In one case that comes to mind, the parents spent more time planning their vacations than they did on their wealth transfer planning and took the “low road” of having anything taxable pass into a family foundation at the death of the surviving spouse. In their case—a $50 million estate presently—the result would be a ratio of $1 to family for every $4 to charity. This is not to say that there is anything wrong with that outcome, provided it is well communicated and consistent with the family objectives (which in this case it was not).
A more public example of this is the recent story of discord between Newman’s Own Foundation (a private family foundation established by Paul Newman during his lifetime) and his heirs. The division between the family and the CEO of the foundation is highlighted in a recent article in Vanity Fair titled “Inside the Family Battle for the Newman’s Own Brand Name.” According to the article, years and several rounds of family planning meetings had taken place, where the significant charitable works of the foundation were the focus. Newman’s Own Foundation received and was in charge of distributing 100% of the profits from the company that Mr. Newman had started in 1982. In and of itself, this is a significant charitable and philanthropic achievement.
While the daughters were to have had a role in the operations of the foundation after their father’s passing, as well as significant distributions in the tens of millions of dollars to their own foundations, these intentions changed course significantly by the time of Mr. Newman’s passing in 2008. The article indicates: The questions have come from some of Paul Newman’s daughters and friends, and also, according to sources, from Joanne Woodward, who, upon hearing the details of the disposition of her husband’s reported $600 million estate, allegedly exclaimed, “Oh, my God, that’s not what it was supposed to be.” Due to changes made by Mr. Newman prior to his death, the end result was the removal of his daughters from involvement in the foundation, in direct contradiction to what they had understood and expected would be the case.
The preceding is an excerpt from the book entitled Integrated Generosity by Mark Trewitt. To learn more about the book, please visit: http://integratedgenerosity.com/free-e-book--white-paper-series.html where you can also sign up to receive financial advice on charitable giving.