Jul
28
Approximately 77 percent of retirees now prefer to give money to loved ones throughout their retirement rather than leave inheritances in estates after they pass away according to a recent study.[i]
This post will explore the potential benefits and risks of gifting inheritances early, and help you determine if this could be the right strategy for you.
What are Some Benefits of Gifting Inheritances Early?
- Avoiding inheritance and death taxes. When it comes to estate planning, the tax code can be complicated. Currently, twenty-one states and the District of Columbia have a death tax, inheritance tax, or both.[ii] These taxes can greatly reduce any remaining assets loved ones inherit. The IRS currently allows gifts of up to $14,000 per person each year[iii] that are not taxable for either party. Because of these taxes and the ability to annually distribute monetary gifts, many are looking to distribute their wealth to loved ones early rather than leave inheritances in wills.
- Providing financial assistance when loved ones need it. Gifting to loved ones now allows you to help them when they need the money the most, as opposed to waiting until after a death. This often includes assisting with the purchase a new home, unexpected medical expenses or paying off school loans. The flexibility to assist loved ones financially often makes sense for some when compared to willing assets at a later date.
What are Some Risks of Gifting Inheritances Early?
- Ensuring enough money is left for retirement and unexpected expenses. People are living longer; thus, retirement savings are being stretched further. It is important to determine your retirement lifestyle goals and financial needs first, and then look at remaining resources for loved ones. You don’t want to put yourself in a situation where you are not able to cover your living expenses or unexpected medical costs because you gifted loved ones too much, too soon.
- Not gifting all loved ones equally. Some people may feel pressure regarding how to gift inheritances early rather than leave gifts in their wills, especially if gifted amounts vary. Distributing gifts of varying amounts to family members and loved ones has the potential to create unintended consequences and strain relationships. It will be important to consider your loved ones’ financial needs, and determine when monies will best benefit them.
Next Steps to Consider
Now that we’ve explored some of the benefits and risks to gifting inheritances early, here are some next steps to help in your decision making:
- Consult with an estate planner and tax expert before you determine if the benefits outweigh the risks for you. Relying on experts can help you explore other gifting options that still reap tax benefits, including trusts.
- Work with your RGT wealth advisor to determine how much you can afford to give loved ones now and how much you should allocate into your estate planning.
[i] “Giving in Retirement: America’s Longevity Bonus.” Merrill Lynch and Age Wave. 2016. https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ML_AgeWave_Giving_in_Retirement_Report.pdf.
[ii] Drenkard, Scott. “Does Your State Have an Estate or Inheritance Tax?” Tax Foundation. May 2015. https://taxfoundation.org/does-your-state-have-estate-or-inheritance-tax/.
[iii] “Frequently Asked Questions on Gift Taxes.” Internal Revenue Service. https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.