Legacy Planning: Supporting Family and Causes

Ensuring the well-being of family and supporting causes you care about requires careful planning.

Leading a company is the apex of professional achievement. But for many executives, the primary motivation for decades of toil is rooted in deeply personal goals – the wish to ensure the long-term well-being of family and provide meaningful support to the causes they believe in.

To ensure your giving is effective, you will want to begin planning well before retirement. And there is no doubt that concentration of equity-linked compensation makes gifting complicated for many corporate executives. Articulating purpose and understanding the challenges are critical to identifying the strategies that will be most effective for you.

Determine Purpose

Whether you are mid-career or on the precipice of retirement, there are numerous questions to ask as you consider the people and causes you want to support and how you want to support them. These discussions should be ongoing and far-reaching. As a starting point, however, it can help to remember: 

Your legacy is more than financial.

Naturally, many view providing financial security to loved ones and philanthropic organizations as a first priority. But thinking about the question of financial gifts in tandem with personal goals and how you might contribute your time and talents can focus your giving.

Where have you had the most impact?

Throughout your career, it is likely you have been exposed to numerous organizations through community and board involvement. Consider where previous contributions have had the most impact and in which situations you have felt most fulfilled.

How do you want to be remembered?

It can be a useful exercise to consider – even write down – how you would like your relatives, friends and associates to remember you in the future.

For more on identifying motivations for giving, see Diversity of Giving: Philanthropic Motivations.

Understand the Challenges

Gifting presents complexities for executives for several reasons.

Heavy concentrations of options and other forms of equity-linked compensation make determining what, how much and when to give a challenge – in our experience, senior executives often have half-to-two-thirds of their net worth linked to company stock prior to retirement.

With compensation packages often weighted to illiquid assets such as deferred compensation, even the most senior executives can have relatively low levels of giftable assets.

Securities laws and company agreements commonly restrict equity transfers by company insiders. Even when transfers are permitted, the optics around an executive reducing company holdings can limit your gifting options.

Advantages of Lifetime Gifting

Lifetime gifting has many advantages. First and foremost, you are able to see the impact and experience the satisfaction of giving the gift. Additionally:

• A lifetime gift of an appreciating asset to a family member removes the value of the gift and any post-gift appreciation from your estate for estate tax purposes. (Be aware, however, that the beneficiary does not get any upward adjustment in basis for income tax purposes, as they do with gifts at death.)
• A lifetime gift to charity is typically income-tax deductible.
• A variety of gifting options exist in terms of identifying the appropriate assets for gifting, gift timing, value and beneficiaries. Additional factors include investment, tax and wealth transfer considerations.

Thoughtful planning as to the size and timing of gifts is essential, especially for executives. Over-gifting can and does happen. Engage in ongoing modeling with your advisors, taking into account the potential volatility in value of concentrated positions, to avoid unwelcome surprises.

Gifting to Family

There are many options for family gifting, from simple to complex:

• Make annual exclusion gifts – in 2020, $15,000 per individual per year (does not count against lifetime exclusion)
• Make direct payment of tuition and unreimbursed medical expenses for loved ones (does not count against lifetime exclusion)
• Use your lifetime exclusion – in 2020, $11.58 million per person/$23.16 million per couple
• Create trusts for immediate family and future generations

Funding Gifts to Family

Gifts to family typically can be funded with company stock or non-qualified stock options. Tax rules do not permit gifting of qualified incentive stock options. Prior to making any gifts, determine whether consent and/or reporting is required or recommended. Review the terms of employment, grant and option agreements prior to each gift.

Gifts of company interests have both upside and downside potential. The recipient’s portfolio may become heavily concentrated in the company. While this bodes well if values increase, a downturn is also possible. It is not uncommon for executives who have confidence in a company’s long-term performance to embrace the upside while underestimating the downside.

Common vehicles for gifting to family for executives include:

Grantor Retained Annuity Trust

A grantor retained annuity trust (GRAT) can be an effective wealth transfer vehicle to transfer assets expected to appreciate in value, with minimal, if any, gift tax. GRATs are particularly attractive for planning in advance of an IPO or private sale. Generally established for terms of 2-5 years, the trust pays a fixed annuity back to the grantor each year.

• A GRAT may be funded with non-qualified stock options or stock; additionally, it may be funded with units in an LLC that holds company interests, with the grantor as the manager to reserve the vote.
• If the assets in the trust outperform the IRS Section 7520 rate used to value the gift at the creation of the trust, any excess return passes to the beneficiary gift and estate tax-free at the end of the annuity term.
• A “successful” GRAT may be frozen prior to the end of the annuity term by substituting cash or fixed income assets for shares that have appreciated in the GRAT.

Intentionally Defective Grantor Trust

An intentionally defective grantor trust (IDGT) is a type of irrevocable gift trust designed to remove assets and any appreciation from your estate. The income, however, is taxed to you, allowing the assets to grow essentially tax-free for the beneficiary.

• A sale of assets to an IDGT is treated as a transfer by the grantor to her- or himself and not as a currently taxed sale or exchange.
• The grantor is able to reduce their estate by both the transfer of the assets to the trust and the income taxes paid on the income of the trust.
• Because of the continuing income tax obligation, IDGTs do not make sense unless and until the grantor has sufficient liquidity to meet the ongoing tax obligation (without having the ownership or income from the assets generating the tax liability).

Gifting to Charity

As with gifts to family, gifts to charity may be simple or complex.

• Cash gifts are simple to make and easy for a charity to accept.
• Gifts of appreciated marketable securities made by a non-insider are common.
• Gifts of stock in a public company by a working executive must be made in accordance with applicable securities laws.

Funding gifts to charity

Liquidity and transferability can complicate lifetime charitable giving for executives. Prior to making gifts of company interests to charity, determine all required permission, consent and disclosure, as company equity gifts to charity are more complex than to family, particularly for executives at public companies. Post-retirement, and once the executive is no longer an insider, the limitations abate.

Charitable gifting at death is in many respects the simplest technique of all, but clearly delays the benefit to charity as well as the ability of the donor to enjoy the satisfaction of the gift during life.

In addition to direct gifts, a donor advised fund is one example of a charitable giving vehicle that often provides meaningful wealth-planning advantages for corporate executives.

Donor advised fund

A donor advised fund (DAF) allows you to take an immediate tax deduction for an irrevocable gift of cash or assets, including appreciated stock, and distributions to charities may be made over multiple years. With this vehicle, you can maintain a degree of control over your giving, but without the administrative and financial demands of a family foundation.

• The assets in your DAF account can be invested and grow tax-free. While the transfer is a completed gift, you can make recommendations to the DAF advisor about the charities you would like to receive grants.
• For executives, this can be an efficient strategy in a high-income year, particularly if you are uncertain as to the selection of specific charities or prefer that charities receive a series of smaller distributions over an extended period.

Next Steps

• Consider what you have to give.
  The first step is to determine what you have to give after meeting core lifestyle goals. Due to the complexity of executive compensation, a multidimensional team that works holistically on your behalf is of particular value.
• Determine your giving goals.
  Executives have often built up lifetimes’ worth of relationships to charities in light of their high community profiles and involvement on boards. Deliberate and ongoing evaluation of purpose is useful.
• Think about a 10b5-1.
  This prearranged trading program is a strong diversification tool for executives and can be used as part of a wealth transfer plan incorporating techniques such as a GRAT.