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Financial planning helps strategically accumulate assets to accomplish three big goals:

  • Create Income to Enjoy Life – “Financial Independence”
  • Provide for Loved Ones – “Family”
  • Impact Causes You Care About – “Charity”

The first question for most is “Have we saved enough to retire…do we have to worry about running out of money?” It’s important to start here because, until this question is answered, you can’t shift focus to family or charity. But if you have accumulated far more than you’ll spend during your life, what should you do with the rest? Which assets should you spend to enjoy life, and which should be left to family and charity?

We’ll use a case study to illustrate. Assume you live in Washington state and have a $10,000,000 net worth divided into the following financial assets:

  • $2,000,000 home
  • $2,000,000 in a taxable brokerage account
  • $2,000,000 in pre-tax 401(k) and IRA retirement accounts
  • $2,000,000 in tax-free Roth 401(k) and Roth IRA retirement accounts
  • $2,000,000 in rental property

Creating income to enjoy life.

We need to start by looking at the income you need to enjoy life.

  • Assume you need $150,000 each year
  • Social security, pension and rental income provide $100,000 each year
  • This leaves a $50,000 gap to be filled from your other investments

If we can increase the investment income from your brokerage fund to 2.5% – a reasonable goal – you have the income you need without dipping into your principal. If you’re on the verge of crossing into a higher tax bracket, we may recommend filling the gap from your tax-free bucket. But in either case, your need is met – great news!

Providing for family and impacting causes you care about…strategically.

Now you can shift focus to providing for family and impacting causes you care about. Deciding what to spend, give to family, and donate to charity is really a tax management puzzle. Each kind of asset has a different income tax impact, so some are better suited for family and others for charity.

Home. You plan to live here for the rest of your life, but does the home pass well to family, charity, or both?

  • Family – YES. The kids receive a step up in cost basis when you pass the home to them, so they can sell without tax on the gain earned during your life. If the home is left in your estate, it will be subject to estate taxes, so consider using a Qualified Personal Residence Trust (QPRT).
  • Charity – YES. A charity can receive, sell, and reinvest proceeds tax-free, but, as with the kids, consider strategies to move the home out of your estate to reduce possible estate taxes.
  • Final answer? Both. The home can be left effectively to both family and charity with proper planning.

Brokerage investments. You plan to spend the portfolio income each year and leave the principal to family or charity. Should you consider family, charity, or both?

  • Family – YES. As with the home, the kids receive a step up in cost basis on your brokerage portfolio, eliminating taxes on the gain.
  • Charity – YES. A charity can receive, sell, and reinvest proceeds tax-free. If these are highly appreciated assets, consider using a Charitable Remainder Trust (CRT) to maximize income and impact on the charity by minimizing taxes.
  • Final answer? Both. Your brokerage investments can be left effectively to both family and charity with proper planning.

Pre-tax retirement accounts. You built this retirement nest egg with pre-tax dollars but aren’t likely to spend them. Should you leave to family, charity, or both?

  • Family – NO. Every dollar that comes out of this account is taxable to your kids. With changes in the SECURE Act, beneficiaries of these accounts must fully distribute them in 10 years, likely during their peak earning years. In high tax states, this could mean losing 50% or more to taxes. Consider slowly converting to a Roth or using required withdrawals to fund a Wealth Replacement Trust outside your estate to pass along instead.
  • Charity – YES. Because they are exempt from the income tax due on distributions, pre-tax retirement accounts are ideal assets to leave to charity.
  • Final answer? Charity. You had the benefit of the tax-deductible contributions during your life and your favorite cause will be able to skip the taxes you and your beneficiaries would have otherwise paid

Tax-free retirement accounts. You split your retirement funding and built a tax-free nest egg, as well, but like your pre-tax accounts, don’t expect to spend these funds either. So, are these best left to family, charity, or both?

  • Family – YES. Distributions come out income tax-free, so these are perfect to leave to family.
  • Charity – YES, though not the best use. Charities are exempt from most taxes already, so leaving them a tax-free account, while very generous, doesn’t increase the impact by minimizing taxes.
  • Final answer? Family. A tax-free inheritance is the best kind and multiplies the impact on their lives.

Rental property. You need the rental income during your life but won’t need to sell the properties. Should you leave to family, charity, or both?

  • Family – YES. As with the home, family receives a step up in cost basis on these properties, as well and will continue to benefit from the income you enjoyed.
  • Charity – YES. Again, as with the home, charities will be exempt from taxes on sale of the property.
  • Final answer? Both. The property can be left effectively to both family and charity with proper planning.

This provides a basic framework to shape decisions on what to spend, leave to family, and give to charity from your estate. By building these strategies into your overall financial plan, you can confidently enjoy your life knowing you’ve worked to maximize the impact for loved ones and causes you care about in your legacy!

The last step is applying these principles in real life – to see more, see Strategic Spending Case Studies.

Alterra Advisors - Josh Whelan

Zach Hamilton

Financial Advisor

About the Author

Zach graduated from Gonzaga University with degrees in Marketing and Finance. While growing up, Zach heard stories from his grandfather about his work as an insurance agent, and other stories from his dad who was an investment manager. They both spoke financial “languages” but had completely different dialects. Recognizing the breadth of the financial vocabulary ultimately led to Zach’s passion for financial planning. He credits his family for this enthusiasm. Zach sees his time with clients as an opportunity to translate all of the different – and often confusing – information they’ve heard and provide clear guidance for each unique situation.

Zach enjoys working with people – his clients – who also appreciate that their financial decisions have an impact not just on themselves, but also on their families, charities and their own life legacy. Many of Zach’s clients have a strong desire to “make a difference”, and they rely on his financial expertise to magnify their philanthropic goals.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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