The following is the first in a series of three articles to help you understand important options you may have regarding control of your personal wealth, including control over the use of money that is represented by income and death taxes that can be taken from your estate. These articles will tell you how to maintain control over that portion of your estate you now concede will be “lost to the government.”
Four powerful trends are occurring in our society today. Taken together, they are having a profound impact on the way in which people view their personal wealth. In many ways, this changing view is something of a revolution. And as with most revolutions, it offers a time of unprecedented opportunity for those who are prepared for it. This article is intended to help you understand and prepare for this opportunity in your own life.
The first trend is some $10 trillion in wealth passing down from the generation 60 years of age and older to the generation below it. This is the largest transfer of wealth in the history of the world, and it will last for about the next 30 years.
Second, there is a growing feeling among Americans of being incapable of directly influencing their lives and their world-a sense of alienation. Increasingly, ordinary people feel that they can have little impact on their own futures, communities and nation. More and More, people are seeking ways to recapture a sense of personal empowerment over their lives and their fortunes.
The third trend is the large and growing deficit that the federal government has created. This deficit—far larger than anyone could ever have imagined—has created real government spending constraints, and makes it increasingly difficult for the government to meet social needs of our citizens, needs that we have come to expect it to meet. Before the government was so deeply involved in our lives, other institutions met many of the needs, and that was called the private sector. Churches, foundations, public and private hospitals and individual gifts of both money and time met many of our communities’ needs. Today, with the government’s budget swollen and its ability to govern effectively in question, there is every reason to believe that charity and charitable organizations may once again play a vital role in our nation’s way of life.
A fourth trend is the ease with which we can obtain information. Computers and networks have made the most sophisticated information accessible to all who wish to have access. As a result, we are able to make complex decisions of all kinds, including financial ones, with much greater ease than ever before. While we may still wish to use advisers to guide us in this process, we are no longer totally dependent on them for such decision making, as in the past. The ease with which we can now make important decisions about our lives and fortunes is, in many ways, a new form of power.
If we put these four trends together, we can see a society of people who will soon be passing down a tremendous amount of wealth, who feel alienated, who are convinced that the government manages most of its resources poorly, and who are beginning to gain access to information that will help them directly shape their own future. These people are poised to become informed, active citizens. They are also poised to exert a powerful new role in their communities… all through creative use of all their wealth. Which brings us to you and your wealth.
The Tax System Forces Us to Part With Some of Our Wealth
Your total wealth consists of two parts: The part you keep and the part you can’t keep. You know what happens to the part you keep; you spend it or save it. The part you can’t keep is intended to be used for the social good. As Americans, we recognize serving the needs of society is a responsibility of our citizenship. What’s more, we have a long history of social generosity, from the days of neighbors building each other’s barns to today’s elaborate systems of “social safety nets.” This “giving private wealth to public good,” then, is an important American tradition that has endured for more than two centuries.
However, something else has changed: The role of government taxation in this process. Today our tax burden grows greater and greater, and our tax dollars support a vast government apparatus that would have been inconceivable to our forefathers. At the same time, as our government has grown, the role of philanthropy, once so vital in our nation, is in danger of becoming secondary.
This doesn’t have to happen, however. Once you understand and apply a powerful concept to your personal wealth, you can discover an untapped source of control over your wealth, even that part you must relinquish. That concept is called social capital.
As shown in the above diagram, “Two Kinds of Capital,” social capital is that part of your wealth that you cannot keep (government-directed as taxes) or choose not to keep (self-directed as charitable gifts). Social capital is but one part of your total capital. To understand how social capital can be successfully applied, first look at how it is derived. Your total capital consists of your personal financial capital (serving you and your families), and personal social capital (serving others).
Each of these parts is further divided into two parts. Personal financial capital consists of lifestyle (what you spend) and inheritance (what you save). Personal social capital consists of government-directed social capital (taxes) and self-directed social capital (charitable gifts).
As you can see from the last two boxes, all the personal social capital you possess goes either to taxes or to charitable gifts. Note, however, that under our current tax-paying process, all of your social capital is set to flow automatically into the tax box. That is, if you do nothing at all, your social capital goes to Washington and Sacramento.
Your social capital does not have to go to the government as taxes. By choosing to direct your social capital as charitable gifts, you can turn it to powerful new uses in our communities and nation – uses you and your family can define and control.
It is important to remember that taxes are the “default” setting for your social capital. Unless you choose otherwise, most or all of your social capital will go as taxes. This is a fate that many people accept. It is so common that we call it the conventional approach to wealth planning.
With the conventional approach to wealth planning, people seek to keep more of what they earn, leave more of what they keep… and ignore the part they can’t keep. This part you can’t keep is social capital. With conventional wealth planning, people accept the idea that their social capital will go to taxes, and give no thought to alternative strategies. Many do not know there is an alternative strategy. Most persons assume that they must give up ownership and control of that part of their wealth. There is a better approach to wealth planning.
The better approach is to take full advantage of the power of your social capital. With this approach, you keep more of what you earn and leave more of what you keep, just as in conventional planning. However, the part that conventional planning ignores or gives up as lost social capital is now yours to direct away from government and toward social, medical, educational and cultural needs as you may determine.
Directing your social capital in this way can also bring you and your family unexpected benefits. By choosing to direct your social capital as charitable gifts rather than give it up as taxes, you achieve many or all of these benefits: (1) Increased social benefits to others; (2) Increased income to you; (3) Increased inheritance to your children; (4) Reduced or eliminated capital gain tax; (5) Reduced income tax; (6) Reduced or eliminated estate tax; (7) Reduced estate settlement costs; and (8) Increased sense of purpose and achievement.
It is through this simple but important concept of social capital that you can first understand, then recapture, and finally redirect your “untapped” wealth in powerful and creative new ways.
The author wishes to acknowledge Renaissance Inc., for the illustration and some of the supporting information and concepts used in this article. All were used with permission of Renaissance Inc.