Should You Give Your Kids an Early Inheritance?
While the word “inheritance” typically conjures up images of a will being read after a loved one’s passing, Virginia Colin says she doesn’t want to wait that long to give money to her children.
“I plan to give my daughter about $20,000 soon—money that might have waited until I died, but I think now is a better time,” says Colin, age 63. The money, she says, will go toward the down payment on a home for her daughter’s growing family.
Colin says the experience of losing her own mom to Alzheimer’s led her to think twice about how she wanted to handle her own estate planning.
“My mom died in her 70s, and I got a nice inheritance from her,” says Colin, “but by then I didn’t need the money anymore, because I was remarried to a guy who earned a nice living.”
Colin says she would have really appreciated having the money earlier on in life, when she was struggling to support her children as a single mother. The experience, she says, has shaped her and her husband’s decisions when it comes to leaving her children their inheritance.
A recent study from U.S. Trust shows that the majority of wealthy individuals feel it’s important to leave an inheritance of some kind. In fact, 64% of those ages 49 to 67, and 72% of those 68 and older say they want to leave the next generation money. And at the same time, more than half say they have provided or are providing significant financial support to adult children—just like Colin plans to do.
Leaving money to family earlier than expected isn’t uncommon. But is it for you?
Who Is Giving Early Inheritances?
Estate planning attorney Kelly Gill, a partner at Boston-based firm Belcher Fitzgerald, LLP, says Colin’s desire to give to her family now—rather than wait until her death—is increasingly common.
“The stock market is coming back up, and the federal government has cleared up uncertainties regarding federal estate taxes, so it’s encouraged more gifting,” says Gill.
She says the recession that began in 2008 caused a temporary slowdown in early inheritances, as even the very wealthy grew concerned about their shrinking portfolios. But as the economy gains steam, wealthy, aging boomers are once again considering the best way to pass on money to their loved ones.
“The big trend I’m seeing now is grandparents paying for large family trips with children and grandchildren,” says Gill. “They want to enjoy their money now with their family, and they realize their children may not have the cash flow to take the 10-day cruise and go skiing as well,” she explains. “So they’re choosing to enjoy the funds now, with their family.” While a trip to Tahiti may not seem like a traditional inheritance, Gill says travel is one option many consider when viewing their estate-planning options.
Another major trend among her clients is paying for their grandchildren’s educations. “You can pay colleges directly,” explains Gill, “without incurring the gifting tax, which taxes gifts greater than $14,000.”
For those with grandchildren still too young for college, Gill says clients are opting to fund 529 accounts, which are used to pay for higher education. “You’re allowed to front-load a 529 account for up to five years. So each grandparent can deposit five times the gifting limit (five times $14,000) all at once,” she says.
If there are no specific big-ticket costs on the horizon, Gill says many clients will set up and fund trusts in the name of loved ones. This option can give you some measure of control over how the money is used: If you’re concerned about the spending habits of your kids, or want the money to be used in a certain way, Gill says you can create restrictions for the use of the trust—although, of course, it’s not always necessary.
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Should You Give Now or Later?
Though it may seem merely like a matter of preference, there are both financial and emotional pros and cons to early inheritances. Here, Gill shares both the good and bad when it comes to passing on money to your family while you’re still around to enjoy the experience.