They say timing is everything. And the best time to distribute an early inheritance might be right now. If you’ve accumulated substantial wealth over your lifetime, you’ve likely thought about how to distribute it to your children after you pass away. But have you thought about giving some of it to them early?
Deciding how to leave your financial legacy is an important element of estate planning. Here are some pros and cons to help you decide if giving an early inheritance is right for you and your family:
PROS:
Help When It’s Needed
Young adult children face many challenges, including repaying student loans, buying a home, or starting a business. A timely gift from you can make a huge difference in your children’s lives when they need it most.
If you’re worried about spendthrift children or those with special needs, you can establish an appropriate trust fund and oversee its management to ensure your instructions are followed properly. It’s also a good idea to look at ways to pass on your financial values so that any inheritance is used wisely.
Giving Early Can Reduce Estate Taxes
A posthumous bequest to your children can go through a lengthy court proceeding know as probate, and your money might be subject to estate taxes that reduce your children’s inheritance. By giving early, you reduce the size of your estate and may avoid probate proceedings. This can save your family taxes and prevent possible court challenges to your bequests.
→PRO TIP Do you know how much you can give this year to anyone without triggering the need to file the IRS Gift Tax Return form? Download my 2024 Important Numbers cheatsheet to see this year’s Gift Tax Annual Exclusion amount.
CONS:
You May Outlive Your Expectations
People are living longer today. After you retire, you might need to tap your savings and investments for 30 years or longer. You certainly don’t want to outlive your money and then depend on your children for help. Therefore, you need to carefully evaluate how much money to keep for your later years before gifting an early inheritance to your children.
Early Giving Can Create Family Drama
If you have more than one child, will early giving spur bad feelings? For example, you might want to give each child an equal share, but if their needs are unequal, those less well-off might resent “unneeded” money going to their wealthier siblings. Even more conflict might ensue if you don’t give equal allotments, or even cut one or more children out completely.
HOW TO BEGIN THE PROCESS
The first step is knowing how much you can comfortably afford to give. Can you count on a comfortable retirement even if you make early gifts? Contact me for a second opinion of your retirement and estate plans. Together, we can review how and when to distribute your wealth for maximum benefit and managed risk.
Laryssa Freeman CFP® is a member of the Fee-Only Network. She offers two options for new clients depending upon their needs:
1) Project-Based Financial Planning Service on a flat fee basis. The implementation of the plan is done by the client. The scope of work for the Project-Based Financial Planning Service may include the following topics based on the client’s needs: Retirement Planning, Estate Planning, Development of Financial Goals, Investment Analysis, Risk Management, College Planning and Tax Planning Strategies.
2) Comprehensive Financial Planning which includes all of the services above plus investment management and financial plan implementation by Meritage Wealth Management.
📍Available nationwide virtually or local for clients living in San Diego County, CA.
Please note: This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
