The Problem with Having More Than Enough

The decisions that determine where the money you’ll never spend ends up — and why most families have never been shown the answer.

Key Takeaways

What is the one question that changes how families think about surplus wealth?

If you could design it yourself, how would you divide what’s left between family, charity, and tax? Almost no one has been asked. Once they answer, we can show them what their current plan actually produces, and the gap between the two is where the planning lives.

How big is that gap in practice?

One family told us they wanted 100% to family, nothing to charity, nothing to tax. Their plan, as written, sent 82% to their children and 18%, about $1.3 million, to tax. After a few changes: 84% family, 9% charity, 7% tax, with the remaining tax funded from outside the estate.

What is the most overlooked lever?

The pre-tax bucket. Traditional IRAs and old retirement plans are among the most heavily taxed assets to leave to children and among the most efficient to leave to charity. For one client, redirecting pre-tax dollars projected out to roughly $4.2 million in tax savings.

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A client we sat down with recently has more money than she is going to spend. The dividends and interest alone exceed what she and her husband live on, and she hasn’t claimed Social Security yet, so more income is coming whether she wants it or not. She also inherited a sizable estate from her father, which left her with an Illinois estate tax situation her husband doesn’t have.

Nothing about that is a crisis. Which is exactly why it had gone unexamined for years.

So we asked her a question she’d never been asked: in an ideal world, where would all of this go? If you could design it yourself, how much to your family, how much to the causes you care about, and how much to tax?

She thought about it. Family, friends, charity.

Good answer. It just wasn’t the answer her plan was set up to produce.

That gap between what a family would choose and what their documents are currently going to do is where most of the real planning for surplus wealth happens. In our experience, almost no one has been shown it.

The Default Plan Is Still a Plan

When we work with a family who has clearly crossed the line into more than enough, we don’t open with portfolios. We project the likely end state.

Not the morbid version. Not what if you died today. The realistic one: you live a long life, you keep spending roughly the way you spend now, you never change a thing. Here is what is likely left. And here is how it gets divided.

Seeing that first number is usually the eye-opener. Careful savers are often startled to learn they are on track to die with $5 million or $10 million they never used. But the second number is the one that lands: here is how that gets split, given the beneficiary designations and documents you have in place today.

One family we worked with had roughly $11 million. Asked the design-it-yourself question, they were unusually clear: 100% to family, nothing to charity, nothing to tax. That is a common answer. Not every family sees itself as philanthropic, and we don’t try to talk anyone into it.

Their plan, as written, sent 82% to their three children and 18%, about $1.3 million, to tax.

Their kids were going to be fine either way. More than $9 million split three ways is a good outcome by any measure. But $1.3 million was headed to a destination the family had just told us they didn’t want. Not because anyone had made a mistake, but because no one had ever run the projection.

Here is what we notice about these families: most of them are not unadvised. They come to us from another advisor, or they have done a capable job themselves. It is good to have someone. The problem is that a lot of advisory relationships have a scope that is too short for the client’s actual life. The portfolio is handled. The retirement projection is handled. The twenty-year question of where it all lands never comes up. That tends to be the space where the work we do isn’t being covered by anyone else.

Closing the Gap: Three Levers

Once a family sees the gap, the work gets specific. Three levers do most of the lifting.

Give while you’re here to watch it matter. The couple we opened with has two nephews in their mid-twenties, one a surgical resident and one in medical school. Neither earns much yet. Both stand to inherit eventually. Those same dollars do something very different arriving now: annual gifts, tuition paid directly, help with a down payment. Moving assets out of a taxable estate is the technical benefit. Watching a resident stop worrying about rent is the actual one.

Reposition the most heavily taxed dollars. For clients in their early sixties with large pre-tax balances, we are often doing Roth conversions well before required minimum distributions begin, sometimes at a bracket that looks uncomfortable in isolation. There are three reasons. It starts the clock on the Roth. It shrinks future RMDs, which gives us far more control over cash flow in their seventies. And it builds a leave-on bucket that can pass to children income-tax-free.

One client is about to inherit a roughly $2 million share of her father’s retirement plan. Her own RMDs begin next year at about $130,000. Add a decade of distributions from the inherited account on top of a good salary, and her bracket is going up regardless of what she does. So, we are converting at 32%, not because 32% feels good, but because it may be the lowest rate she sees for ten years.

The math changes again at the top. We have a client who has been in the highest bracket the entire time we’ve worked together. Years ago, we converted $500,000 of his pre-tax money anyway. Sometimes the tax is simply the tax. Paying the conversion tax moves those dollars out of a taxable estate and pre-pays income tax on behalf of children who would otherwise owe it in their peak earning years. It is a gift that happens to look like a tax payment.

Redirect what was already headed to tax. A traditional IRA is one of the most expensive assets to leave to your children and one of the most efficient to leave to charity. Naming a donor-advised fund as the beneficiary of pre-tax assets can strip out both the income tax the children would have paid and, potentially, estate tax exposure. For one client, that single change projected out to roughly $4.2 million in tax savings under current law and funded something like a $2 million donor-advised fund for each of their children. The kids still inherit the business interests, the Roth assets, and the taxable accounts. What changes is that the most heavily taxed dollars go somewhere they aren’t taxed, and the children become the grant makers.

Another family is midway through this work now. They hold about $11 million of life insurance inside a taxable estate. As we finish updating contingent beneficiaries, somewhere between $15 and $20 million is on track to land in a donor-advised fund their children will direct.

And when the tax genuinely cannot be avoided, the question becomes where the cash to pay it comes from. Illinois has its own estate tax with a threshold well below the federal one, which catches a lot of Chicago-area families by surprise. One approach is a second-to-die life insurance policy owned by an irrevocable trust, so the liquidity to pay the bill sits outside the estate rather than inside it. That requires an estate attorney to draft and medical underwriting to qualify, so it belongs early in a plan, not late.

For one of our families, those changes moved the picture from 82% family, 0% charity, 18% tax to 84% family, 9% charity, 7% tax, with the remaining tax funded by insurance held outside the estate. Same family. Same money. A destination they chose.

When Charity Was Never the Point

It’s worth noting the shift toward charitable giving when the family originally decided to leave nothing to charity. What changed?

We shared two options side by side, both of which weren’t their ideal, and let them choose. Option one: $1.3 million goes to the government, and the government decides where. Option two: a charitable fund in your family’s name, administered by your children, supporting causes they choose.

Given that choice, most people pick the second one. Almost no one, when the alternative is named out loud, would rather hand the money over and let someone else allocate it.

That’s the part worth considering more closely. A charitable legacy that did not exist in this family’s plan, or in how they thought about themselves, now exists. And it cost them nothing they wanted to keep.

Values First, Then Dollars

None of the technical work holds if the family isn’t talking. And in our experience, these conversations are the exception, not the rule.

The hesitation is reasonable. Parents worry that a twenty-two-year-old who knows he will inherit millions loses some of the drive to build something himself. So, the subject goes in a box, and the box stays closed until someone is in their eighties or in a hospital bed.

Our honest view is that we over-index on how important money is. Families talk openly about how much they love each other, about character and integrity, about the future they want together. Then money becomes the one subject too dangerous to name, which is precisely what makes it feel enormous.

So, the order matters. Get the values conversation right first. If a family doesn’t have clarity on what the money is for, they shouldn’t have the money conversation yet, because all they’ll talk about is the money. Talk about it in view of what it enables, providing for family, creating opportunity, being generous to people who couldn’t otherwise afford something, and the dollar amounts become a detail rather than the headline.

The specifics can come later, in pieces, as kids get older. What you share with a college sophomore is not what you share with a forty-year-old.

One approach we like: families with large estates can do big things with small numbers. Gift $50,000 to each of three adult children and put some governors around it. As an example, spend 30 to 40% of it. Save 30 to 40%. Give away 30 to 40%. The percentages should reflect what your family cares about. The dollar amount is immaterial to an estate of this size. The point is that the family gets to practice being a family with money before it is handed a great deal of it.

And sometimes you get to watch it work. One client set up a charitable fund and simply let his children make the decisions. They used it to endow a scholarship in the family’s name at the school every one of his kids and grandkids attended. He’s still here to see it.

Where TNLPG Comes In

Most of this work happens before anything gets signed. We build the projection that shows a family what their current plan produces, then sit with them while they decide what they’d rather it produced. That conversation touches tax, estate documents, beneficiary designations, gifting, and insurance at the same time, which is exactly why it tends to fall through the cracks when those pieces are handled by four separate professionals who don’t talk to each other.

We work alongside their CPA and estate attorney, so the strategy and the paperwork agree with each other. And we revisit it, because tax law changes, family circumstances change, and the answer you gave five years ago may not be the answer you’d give today.

Where to Start This Month

You don’t need a spreadsheet this week. You need one conversation with your spouse, and it’s a short one: if we could design it ourselves, how would we want what’s left divided between family, charity, and tax?

Write down three percentages. Then ask whoever handles your planning to show you what your plan currently produces. If no one can show you, that answers a different question.

The families who get this right are not the wealthiest ones. They’re the ones who decided, on purpose, where it was going.

Curious where your surplus is actually headed? Let’s run the numbers together.

Schedule a complimentary SWOT Session.