Lifetime Giving
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Copyright 1992, 1998 - Thomas J. Keating, IV, All Rights Reserved
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Section Four - Barriers to Giving
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4.1 Psychological Barriers to Giving.
It is well known that most people have some aversion to making
substantial gifts. It is beyond the scope of this discussion
to speculate why this is so, but so it is.
There are two classes of reasons, those that the client will
express and those that he will not. Often it appears that the
reasons expressed may not be the real reasons. Perhaps the real
reasons are not consciously known or recognized by the client.
The advisor is put to the delicate test of making a recommendation
that he knows is likely to be resisted, and that, if he pushes
for the client's agreement, the relationship between advisor and
client may suffer. There is no easy answer to this one; it
requires the combined talents of lawyer, accountant, psychiatrist
and priest to be equal to the task, and failures are frequent.
Appeals to reason, standing alone, are inadequate. Appeals to
emotion likewise. In no other area of estate planning can the
client be as devious, and as indecisive, as in connection with
this question.
Sometimes the advisor finds the key and can unlock the door and
sometimes he does not.
4.2 The Aversion to Consumption.
Most well-to-do people, particularly the elderly, have an instinctive
aversion to over-spending their ordinary (e.g. not capital gains)
income, and this factor, probably as much as any other single
cause, is responsible for unwillingness to make substantial gifts.
The potential donor simply won't give away his capital because he
relies wholly on the dividend and interest income to support
himself. From the tax planning viewpoint, this can be very
counter-productive.
Assuming, in a particular case, that an elderly potential donor
feels he needs to retain not less than $1,500,000 in investments
(the amount needed, at an average return of 3.5%, to produce an
income of $52,500) and that he has another $200,000 in miscellaneous
non-income producing assets, his $1,700,000 estate will be taxed
at a marginal rate of 45%.
If he were willing to spend some of his capital each year to
supplement an income stream which was being depleted by a gift
program, it seems clear that, in doing so, he is really only
spending "55-cent dollars" because the other 45
cents, if he does not spend (or give or otherwise dispose of)
them, will simply disappear in death taxes.
Even assuming, in a worst case, that all of the capital expended
was first subjected to Federal and State capital gains tax, at an
aggregate rate of, say, 28%, the arithmetic still strongly favors
his making the expenditure.
If the donor absolutely rejects the idea of paying capital gains
taxes it may be feasible to borrow the needed amounts, on a
fully secured basis, at a moderate (and possibly even tax
deductible) interest expense. A post-mortem sale of assets to
repay the loan would not trigger any capital gains tax.
With today's elderly population, however, the reluctance to spend
capital is so strongly ingrained that it is only seldom overcome;
I have made the above argument many times and can recall very few
instances in which it was accepted.
4.3 The Unworthiness Problem. A
recurring client response, unfortunately not as rare a one as
you might think, is that the children or other natural objects
of the client's bounty are not worthy of economic assistance.
The stated reasons go all over the map, but the common thread
that runs through them is that the gift would be, in the client's
eyes, "wasted". The recipient, it is feared, would
indulge himself in expensive cars, travel or other luxuries,
would buy too big a house, would prop up an ill-conceived
business which is destined to fail anyway, or, worst of all,
would let his spouse get hold of it.
It is tough to figure out just what is going on here, but it
has been suggested to me that the real problem in many such
cases is that the client was neglectful or inept as a parent,
his children now remind him of his failings, and he knows it is
too late for him to do anything about it.
In the circumstances, he has only his worldly wealth to show
for his life's work, and he is not prepared to give it away to
the very people who are responsible for his discomfiture. In a
curious twist of causation, it might be that the strong
acquisitive instinct which led the client to become wealthy is
what resulted in the parental neglect in the first place.
Of course this is only a hypothesis, but I have not been able
to come up with a more plausible one, so I put it before you
for whatever it may be worth. The use of the masculine pronoun
in this Section is not inadvertent; experience suggests that
the phenomenon discussed here is far more likely to involve a
male than a female parent.
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