Should I Give My Kids an Early Inheritance?

Are you considering an early inheritance for your children or grandchildren? You’re not alone. A 2019 Merrill study found that 65% of Americans 55 or older would like to pass on a portion of their estate while still alive.

Although you may want to give an inheritance before you die, is it the best choice? Here are three pros and cons to help you decide.

Pros

Financial and tax benefits: Large estates may be subject to estate or inheritance taxes at the federal or state level. Early gifting can help reduce taxes so your heirs receive more of your legacy, rather than the government.

Federal gifting limits are generous. For 2022, you can give $16,000 ($32,000 as a married couple) per recipient without incurring gift taxes or having to file a 709 gift tax return. You also face a lifetime gift tax exclusion in 2022 of $12.06 million ($24.11 million for couples).

Passing on your estate before you die can also help your heirs avoid probate—a long, complicated, public, sometimes expensive process. And, of course, you aren’t limited to gifting money. You can give assets, such as real estate. Talk with a financial advisor or tax professional to determine the optimal legacy for your financial situation.

Help a child or grandchild in need: You may have a son starting a business that you believe will be profitable. Or you may have a granddaughter who got accepted into a premier—but expensive—university. You know that your financial gift will significantly impact their lives, so an early inheritance may be appropriate.

Enjoying the gift’s impact while you’re alive: The satisfaction you receive in seeing your granddaughter graduate with honors or your son forge a multimillion-dollar enterprise can make the early inheritance worthwhile. You may even use your money for other purposes, such as extended vacations that help strengthen family ties and build memories.

Cons

Affordability: You might decide against an early inheritance if it will destabilize your financial picture. You may like to help your daughter with a house down payment, but you want to be cautious if it means dipping into your retirement savings.

Emergencies happen: Related to the above point, it’s key to know you can afford potential crises before you bequeath an early legacy. Say you provide your daughter with the house down payment, but then you are diagnosed with a condition requiring long-term care. However, you can’t afford the care because you gave your daughter the money you would have used. Crises happen, and it’s important to have a financial cushion to sustain you.

Family dynamics: Even in the most functional of families, dynamics can get tricky regarding inheritance. Will you give an early inheritance to all your children? Or will you give it to just one? Will your other children feel hurt or angry about this? Will the child receiving an early gift inherit more after you pass, or is the early legacy everything they will receive? Will this fact cause family complications once you die?

Answering questions like these can help you decide the best course for the family’s harmony and your peace of mind. It may help you to sort through your feelings and fears with a counselor before deciding.

Final Thoughts

When it comes to an early legacy, take the time to decide the right course for you. You may be able to create stronger family bonds and help a child or grandchild succeed. But your gift shouldn’t come at your expense.

If you do decide to pass on assets early, consider communicating with other family members as necessary to maintain harmony. Also, consider talking with a financial advisor, CPA, or attorney to help ensure you minimize the impact on your finances and taxes and have the proper legal documentation executed.

Our wealth management firm in Roseville and Folsom, CA, and Lehi and Logan, UT, helps clients determine both early and traditional inheritances as part of their ongoing financial plan. Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.