By Brett Gottlieb
As parents, we all want to provide for our children and set them up for the highest success. But what happens when we consider giving them money earlier than expected? Accelerated inheritance is a concept that is gaining popularity among families as a way to provide financial support or help with major life expenses. However, it’s important to approach this decision with careful consideration to make sure it aligns with your financial goals and family dynamics. Let’s discuss some key considerations and factors to keep in mind if you’re contemplating an accelerated inheritance for your kids.
An accelerated inheritance refers to an inheritance given during your lifetime, rather than at death. It is a way for parents to provide financial support to their children while they are still around to enjoy it, rather than leaving assets and money after they pass away.
An accelerated inheritance doesn’t have to look the same as a traditional inheritance. There are many ways to share your wealth with your children during your lifetime, including:
You don’t need to wait until you’ve passed away to give money and assets to your kids. In 2023, the annual gift exclusion is $17,000 per year per person. If you’re splitting the gift with a spouse, you can give up to $34,000. So that means a married couple with two kids can give $34,000 to each child for a total of $68,000 without filing a gift tax return.
Lifetime gifting can help you strike a balance between taking care of your kids and depleting your own retirement assets, and it can also help reduce the taxable portion of your estate.
It’s worth noting that once you gift more than the annual exclusion, the excess amount spills into the “lifetime exclusion bucket.” You must use this entire amount before the IRS requires you to pay gift tax. For 2023, the current lifetime exclusion is $12.92 million for individuals and $25.84 million for married couples.
Unless something changes, the lifetime exclusion amount is set to decrease starting in 2026. It will be reduced to $5 million per person and will only increase to account for inflation in subsequent years. If you think your estate is going to be subject to estate taxes once the exclusion amount resets, you may want to consider taking advantage of the current exclusion to make gifts.
Many parents wish to give large gifts to their adult children, usually in the form of a wedding gift or down payment for a house. There is a common belief that cash is the best way to give these gifts. In reality, any cash gift above the annual exclusion will trigger potential gift tax consequences. Gifting appreciated securities can be a way to give an accelerated inheritance to your kids while reducing your tax liability on capital gains and reducing the value of your taxable estate.
For those who are not eligible for the 0% capital gains tax rate due to income thresholds, consider gifting highly appreciated assets to an adult child instead of selling them yourself. Chances are your kids are in a lower tax bracket, which will result in a reduced or eliminated tax liability if they sell the investment themselves.
More and more, successful parents are thinking less about leaving money to their children and instead looking to enjoy the fruits of their lifelong labor through quality time with their family. Experiences shared as a family will often mean more than cold, hard cash. Rather than safeguarding your wealth to be left after you’re gone, consider buying a vacation home where everyone can gather. Or take your whole family on that trip you’ve always dreamed about. These experiences will produce lifelong memories that are likely more impactful than leaving a larger inheritance.
Another great way to transfer wealth to your children and grandchildren is through the use of a 529 college savings plan. There is a special provision that allows donors to contribute 5 years’ worth of gifts as a lump sum. This means an individual can gift up to $85,000 ($17,000 x 5) and a married couple can gift up to $170,000 without incurring gift taxes! The beneficiary can then withdraw the funds and investment growth tax-free to pay for qualified education expenses. If the child chooses not to go to college, the funds can be transferred to another beneficiary or withdrawn at the marginal tax rate and charged a 10% penalty.
If you have concerns about how gifted or inherited funds will be used by your kids, or you want to leave specific instructions on how the money should be spent, consider creating an irrevocable trust. Utilizing an irrevocable trust can be an effective tool to reduce your estate tax and provide guidance for your heirs on your desires for the inheritance. It is permanently binding and you cannot change the terms or beneficiaries. Depending on how the trust is structured, your beneficiaries can receive payments before you pass away, making this an effective vehicle for accelerated inheritance.
While it can be a valuable way to support your children and share your wealth, an accelerated inheritance is not a decision to make lightly. It is important to consider various factors, like:
- Retirement security: Before giving an accelerated inheritance, it is essential to assess your own financial situation and make sure you have enough savings to support your retirement goals. Remember, a well-planned and thoughtful accelerated inheritance can be a valuable way to support your children, but it should never come at the expense of your own financial stability.
- Level of financial responsibility: It’s important to assess your child’s level of financial responsibility before giving them an accelerated inheritance. Giving money to children who are not mature enough to handle it can lead to poor financial decisions, such as overspending, debt accumulation, or even becoming victims of scams.
- Taxes: When gifting money or assets to your children, there may be tax implications to consider, especially if the gifts are above the annual exclusion amount. Therefore, it is crucial to understand how an accelerated inheritance will impact your tax liability before making any decisions.
Before deciding to pursue an accelerated inheritance, it’s crucial to assess and evaluate your financial circumstances while considering the potential impact on your loved ones. Consulting with a financial advisor can offer valuable guidance and support as you weigh through this decision.
At Comprehensive Advisor, our aim is to empower you to feel confident about your financial strategy and the future you wish to create. We strive to assist you in exploring your accelerated inheritance choices while tailoring a plan to fit your unique situation. To learn more about how we can support you, please reach out to us by emailing info@ComprehensiveAdvisor.com or calling (760) 813-2125.
About Our Advisors
Brett Gottlieb is the founder of Comprehensive Advisor and a financial advisor with nearly two decades of industry experience. He graduated from California State University-Chico with two bachelor’s degrees, in business administration and economics, and is Life Insurance licensed in several states. He is passionate about guiding his clients on retirement income planning, helping each client pursue their specific retirement goals, and defending the assets his clients have worked so hard to achieve. Brett is a California native and currently resides in San Elijo Hills with his beautiful wife and three children.
Our team of qualified professionals have experience in the financial service industry, and our advisors hail from some of the largest independent broker/dealers and banking institutions in the country. They have dedicated their professional careers to creating personalized financial solutions for individuals and families who seek successful retirement planning and currently offer investment advisory services through AE Wealth Management, LLC. Our advisors take a common-sense approach to the planning process and work with clients to create a retirement road map to help ensure their assets are protected and they receive the income needed to enjoy their future. Based in Carlsbad, California, they work with clients throughout San Diego County and beyond. Learn more by connecting with Brett on LinkedIn or email them at info@ComprehensiveAdvisor.com.
Investment advisory services made available through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor are not affiliated companies. C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. This material is intended to provide general information and is believed to be reliable, but accuracy and completeness cannot be guaranteed. Neither the firm nor its representatives may give tax or legal advice. Investing involves risk, including the potential loss of principal. Any references to protection benefits, safety, security, lifetime income, etc., generally refer to fixed insurance products, never securities or investment products. Our firm is not affiliated with the U.S. government or any governmental agency. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 01790156 – 05/2023
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