Do Your Kids Need Their Inheritance Now? Some Things to Consider
When you work hard to build wealth over the years, you naturally expect to leave a decent inheritance for your children. Perhaps you’ve even worked with me or another estate planning attorney to set up well-crafted trust-based plan that provides well for their future. But…what if one or more of your adult children needs the money now rather than later? What if there is a pressing need? What if one of your kids has an opportunity to invest in fantastic business? Do you make them wait, or do you let them have the money now?
The idea of giving children an early inheritance is more common than you might think, and in today’s economy where more children receive financial assistance from parents well into adulthood, early inheritances are more common than ever. Some parents just don’t see the point of making the children wait for something that could help them now. Sometimes (not always), it’s actually a good idea, especially if your kids are responsible and can make the money grow. And with careful financial planning, you may even be able to release a portion of their inheritance without giving away their whole future.
If you are thinking of letting one or more of your children have an early inheritance, here are some things you need to know.
Giving too much at once can cause unnecessary tax burdens.
Technically speaking, a financial gift is considered income, so giving large sums of cash to your children can trigger sizable taxes. However, the first $15,000 of your cash giving is exempt from this tax, and you can give that amount each year to as many people as you like without triggering the tax. To maximize the benefit to your children, consider pacing your giving so each child receives $15,000 or less per year.
Utilize strategic giving to reduce estate taxes.
The lifetime estate tax exemption is currently $5.6 million per individual and $11.2 million per couple. Anything left in your estate over this amount at your death may be taxed by a large margin. By strategically releasing assets to your children sooner rather than later, you can actually reduce the size of your estate and therefore reduce the tax burden.
Give gifts that keep on giving.
Your children’s inheritance doesn’t necessarily have to be in the form of cash. Instead, consider giving them an asset that is set to appreciate over time—for example, a piece of real estate or shares of stock in a promising company. Another appreciable asset might be ownership in a business or startup capital for a business your child wants to buy or launch. This type of giving has the potential to continue growing in the same way that they would within a trust.
Save something for yourself.
Some straight talk here: You’re not dead yet, and you’re probably not going to die for a number of years. If you give away everything, including your own retirement, what happens when you find yourself out of money in your old age? Are you going to go back to your kids and ask for the money back? When planning for early inheritance, be sure to keep enough of your estate so you can live on it comfortably during your retirement years.
In the end, every situation is different, just as every child is different. One of your children might benefit greatly from an early inheritance, while another one might blow through it in a few years. Whatever the case, common sense and careful planning are your allies. Part of my job as an estate planning attorney is to work with my clients to make sure their money does the most good, both now and in the future.