When Should You Give an Inheritance?

You’ve spent years learning how to be smart about your money: you’ve saved, invested, and planned for retirement. One of the best things about investing is that it can allow you to leave an inheritance for your children or even grandchildren to help them take care of their needs and families or even keep the cycle going and plan their own legacies. Now that you’re retired, maybe you notice that your grandkids could really use some financial assistance for college, or maybe your kids could afford a house if they had their portion of the inheritance now. So should you give that inheritance early, or should you wait? 

How Will Your Finances Be Affected?

You might be in a healthy financial position right now, but as we all know, sometimes life holds challenging surprises. Before you decide to give an early inheritance, you should make sure you have enough in your accounts and a longevity plan in place. Longevity planning is a bit different from retirement planning. It’s a holistic strategy to plan for everything that could affect you after retirement, including creating a plan for the possibility of exceeding the traditional length of retirement. Most people enjoy retirement for 15 years. What if you live longer than that? Do you have the financial resources to maintain your lifestyle? And, of course, what about your healthcare needs and long-term care facility options? It can be exciting to think about getting to gift your loved ones with much-needed financial assistance, but making sure your own needs are taken care of first can help you avoid needing financial assistance from your family down the road. Take a look at these resources if you want to learn more about making the most of your long-term care or understanding the cost of continuing care retirement facilities. You may also want to talk with your financial advisor to make sure you’ve covered all of the bases in your longevity plan before giving an early inheritance. 

Will It Have the Intended Impact?

If you want to positively impact your loved ones by giving an early inheritance, you should also consider whether receiving a windfall would be better for them now or later. How do your kids handle their money right now? If they can spend and save wisely, there’s no reason to think they would treat a lump sum any differently. If you think an early inheritance would possibly go to waste right now and leave room for regret down the road, maybe you should consider how to help them learn how to budget and save before gifting an inheritance. If you have children with special needs, establishing a third- or first-party special needs trust may be a great way to provide for your child without disqualifying them from government benefits. Establishing a trust like this during your lifetime can help provide you with peace of mind, knowing your child is taken care of.

Additionally, you can consider the specific needs of your kids and the season of life they’re in. For younger adult children starting a family or saving for their first house, an early inheritance could help them with a down payment or be put into 529 plans for their kids. If your children are middle-aged, they’re statistically within the highest-earning period of their life, and receiving a windfall right now might not provide enough benefits to justify the taxes or the impact on your finances.

What About the Taxes?

Giving an early inheritance may help with your taxes and reduce your estate, which may help your loved ones avoid the costly and time-consuming process of probate. There are a few other ways to be even more strategic about the tax implications of giving an early inheritance or waiting. Selling stocks and gifting the funds can leave you with capital gains taxes of up to 20%. Instead, consider gifting the stocks! If your loved ones are in the lowest two tax brackets when receiving those stocks, they may be able to sell them without owing capital gains taxes. If you decide not to give an early inheritance, leaving stocks and all capital assets in a non-retirement account creates a “step-up” in basis, so your heirs won’t pay any taxes on the gains those stocks accumulated during your lifetime. Talk to your tax preparer about how these strategies would work for you and your family.

If a loved one’s medical expenses or student loans motivate an early inheritance, giving a monetary gift may qualify as a non-taxable gift. Check with your tax professional to learn about your options.

If the Jury Is Still Out

There’s a lot to consider when planning your legacy. While the options and factors may seem overwhelming, we firmly believe that financial planning doesn’t have to be a big deal when you have the right tools and people to answer your questions and help you plan. Talk to your tax preparer and financial advisor to get answers. You can also keep up with us on Facebook for more ways to be smart about money. We’re always here to help!