Is it better to gift kids their inheritance now or deliver it at your death?
This dilemma faces millions of parents and grandparents as they prepare to pass an enormous amount of wealth—$73 trillion—to the next generation. There are pros and cons to both approaches, according to the article, “Give the Kids Their Inheritance Now or Make Them Wait? 3 Things to Keep in Mind,” from Barron’s.
Giving too much too early could put parents in an economic bind in their later years. Therefore, this needs to be considered in light of today’s longer life spans. However, if you can afford to make a generous gift and your children could use the money now for a good purpose, it’s hard to justify making them wait.
How much to gift kids their inheritance now is as critical as when to make the gift. The predominant concern is that if you give your children too much, they won’t be motivated to earn their wealth, or other family members will resent the gift. Estate planning attorneys and financial advisors routinely speak with families about these issues. These conversations always consider the values they want to instill in their children.
In some cases, parental support can help a child while working at an entry-level (i.e., low-paying) job in their dream career. Covering the cost of rent for a few years can offer young adults a support net until they achieve financial stability.
This is very different than paying the expenses of a young adult with no career goal whose primary focus is a robust social life.
When you gift kids their inheritance, you get a chance to help when they need the money most and see some of the benefits of the assistance you can provide.
Anyone can make a yearly gift to any other person of up to $17,000 tax-free or $34,000 per couple, but there are ways to make gifts without triggering gift taxes. Direct tuition payments to schools are tax-free. Unlike putting money into a 529 account, there is no limit to how much can be paid directly to a college or university. Parents and grandparents could also help with a downpayment on a child’s home without paying gift taxes.
Gifts don’t have to be large to have an impact. Some parents and grandparents give their children or grandchildren a small amount to start saving for retirement. A gift of a few thousand dollars during their 20s can grow into a nice sum over many decades. You can contribute to their IRA or Roth IRA accounts if the recipient has earned income.
If assets are limited, consider giving personal possessions, such as jewelry or family heirlooms, to younger generations. You’ll get to see them enjoy their gifts without putting your own financial situation at risk.
When you gift kids their inheritance, families should discuss their values and intentions around money.
If there are concerns about children losing an incentive to work because of the family’s wealth, a spendthrift trust might pass wealth along while controlling its distribution.
Remember that today’s generous federal estate tax rules expire in 2026. Currently, individuals can gift up to about $13 million ($26 million for couples) tax-free in their estate plans. If the exemptions expire, this amount will be cut by approximately half.
Reference: Barron’s (Nov. 4, 2023) “Give the Kids Their Inheritance Now or Make Them Wait? 3 Things to Keep in Mind”
