This is one of the more frequent questions we are asked by new clients. Many people know they can afford to make significant charitable contributions and gifts of money to loved ones. What they do not know is how much they can affrd to give away during their lifetime.

Part of this uncertainty can stem from living a great lifestyle without knowing one’s cash-flow limitations. Most people do not know what their lifestyles cost them. So, while many who think of themselves as being well-to-do or wealthy—particularly those who are financially independent—give money away or spend it on others, I find that a large number of financially independent people do not really know how much money can affordably be given away as gifts.

In order to answer how much wealth a person can afford to give away, my wealth management firm looks to answer two important questions first: Are you financially independent? If you are, what wealth do you require to remain financially independent? Once you know the answers to these questions a back of the napkin subtraction calculation will, generally speaking, give you the dollar answer to your query. But getting to that seemingly straightforward subtraction problem takes a bit more work.

At Traust Sollus, we define being financially independent as meaning that you have enough wealth to afford to live the lifestyle you wish for the rest of your life; and that while you may continue to work because you like to, you can retire at anytime because you do not require a paycheck.

When calculating whether a client has achieved financial independence, or how far one has to go to reach it, we begin with a tally and evaluation of the expenses to fund the current lifestyle. We also extrapolate possible future expenses as the client ages. This helps determine what baseline dollar amount of wealth our client needs to have to fund his or her lifestyle.

Next, we consider where money is taken from to finance lifestyle. How much accumulated wealth can one afford to spend down? What role does the investment portfolio’s returns need to play in funding lifestyle expenses? And is the current portfolio allocation most appropriate for meeting that need, in addition to growing wealth to preserve financial independence?

Having confirmed financial independence and calculated what it takes to maintain it, we can determine the dollar answer to your query.

Your wealth is likely spread out among a range of assets: taxable and tax-deferred investment portfolios, real estate, businesses, boats, artwork and more. What you give away or spend on others can take many forms. Also, tax implications differ depending on what you give away, when and how. These factors are why, in order to assure you give away what you can afford and still maintain financial independence, you should seek counsel from a team of experts: a wealth advisor who is also a CPA for financial planning and investment-related advice; a trust and estates attorney; and a CPA for tax planning. Then, you will know how much wealth you can comfortably afford to give to family or charity and still be able to sleep well at night.