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Why Wait? Things You Need to Know About Giving an Inheritance While Living

By Sean Condon, CFP^®

While many people are dedicated to leaving an inheritance after they die, a new trend has emerged over the last few years: Accelerated inheritance. This might be the right option for you, but you need to fully understand it before you decide to utilize it.

What Is an Accelerated Inheritance?

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.

Accelerated Inheritance Strategies

An accelerated inheritance does not have to look the same as a traditional inheritance. There are many ways to share your wealth with your children during your lifetime, including:

Lifetime Gifting

You do not need to wait until you have passed away to give money and assets to your kids. In 2024, the annual gift exclusion is $18,000 per year per person. If you are splitting the gift with a spouse, you can give up to $36,000. So that means a married couple with two kids can give $36,000 to each child (or to any friend or relative) 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 is 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 2024, the current lifetime exclusion is $13.61 million for individuals and $24.22 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.

Gifting Appreciated Securities

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. But gifting appreciated securities can be the best strategy.  Gifting securities can reduce your tax liability on capital gains as well as 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.

Fund a Family Vacation

Increasingly, 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 from being left after you are gone, consider buying a vacation home where everyone can gather. Or take your whole family on that trip you have always dreamed about. These experiences will produce lifelong memories that are likely more impactful than leaving a larger inheritance.

Consider a 529 Plan

Another great way to transfer wealth to your children and grandchildren is with 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 $90,000 ($18,000 x 5) and a married couple can gift up to $180,000 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.  New rules also now allow unused 529 funds to be rolled over into a Roth IRA.

Create an Irrevocable Trust

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.

Making the Right Choice

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 several 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 is 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.

How We Help

An accelerated income is a great option, but it is not for everyone. In order to feel confident that it’s the right fit for you, we encourage you to partner with a financial advisor that can assess your situation and help you decide if it’s the right choice.

At Windgate Wealth Management, your best interest guides our decision-making process, and we want you to feel confident in your financial future as well as your children’s. You can reach us by calling (844) 377-4963 or emailing windgate@windgatewealth.com. You can also book an appointment online here.

Perritt Capital Management, Inc. is the registered investment advisor for Windgate Wealth Management accounts
All investments carry some level of risk, including the potential loss of principal invested.

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