Did you know there’s a way to provide substantial financial support to your loved ones and witness your impact firsthand? It’s called a living inheritance, and it’s changing the way families think about passing on their wealth. However, like most financial planning strategies, it’s not as simple as it seems. Here’s what you need to know.
What Is a Living Inheritance?
Traditionally, an inheritance is left to beneficiaries after an individual’s death. With living inheritances, as the name suggests, individuals can start passing on assets while they are still alive. Also known as “accelerated inheritance,” a living inheritance allows people to financially support their loved ones when they need it most, whether it’s to purchase a home, start a business, fund education, or simply improve their quality of life.
What Are the Benefits?
Living inheritance is an increasingly popular estate planning strategy for a reason. Here are some key benefits it offers.
Immediate impact
Perhaps the most exciting advantage of a living inheritance is seeing the immediate positive impact on your loved ones’ lives. Imagine the joy of witnessing your children or grandchildren achieve their dreams, knowing you played a part in their success.
Tax efficiency
Gifting a living inheritance isn’t just fulfilling; it can be a smart financial move. The Internal Revenue Service (IRS) offers an annual gift tax exclusion, which allows you to give a certain amount each year ($18,000 per recipient in 2024) without incurring gift taxes. A living inheritance can also help shrink your estate and, in turn, future estate and inheritance taxes.
Transparency
Living inheritances encourage open communication and transparency. Distributing assets while you’re alive allows you to clearly explain your intentions and ensure everyone’s on the same page, reducing potential conflicts among family members.
Are There Cons to Consider?
Like with most financial decisions, there are potential drawbacks to keep in mind when choosing to implement a living inheritance.
Financial security risks
Giving away significant assets could impact your short- and long-term financial health. Will you be financially secure without the money you gift? How will gifting the money affect your retirement plans? Ensure you have enough resources to support your lifestyle and cover unexpected expenses now — and in the future.
Tax implications
Understanding applicable tax regulations is critical, as missteps can lead to unexpected liabilities. For example, if you gift above the annual exclusion amount, the excess will count toward the lifetime exclusion limit ($13.61 million for 2024), and you’ll need to file a gift tax return. Consider consulting with a professional to ensure you’re reaping the tax benefits without any unwanted surprises.
Beneficiaries should also be aware of potential tax consequences that can affect their financial situation. While cash gifts under the exclusion threshold are generally tax-free, beneficiaries may eventually owe capital gains taxes if you gift appreciated assets.
Potential dependency
There’s a risk that beneficiaries might become overly dependent on the gifted assets and not develop strong financial management skills. Providing financial education alongside the gifts can help address this issue.
Implementing a Living Inheritance Plan
A living inheritance can be an excellent way to gauge how beneficiaries would eventually handle a larger traditional inheritance. However, even living inheritances require careful consideration and forethought. Before gifting, evaluate your children’s financial literacy by having candid conversations about money management, budgeting, and investing, and consider introducing them to a financial advisor.
Additionally, establish clear boundaries for the living inheritance by defining the purpose of the gifts. This will help prevent any misunderstandings that could lead to conflicts or misuse of funds. Once you’ve passed over the assets, observe how your children manage them, as this can provide insight into their readiness for traditional inheritances and allow you to address any concerns before they become significant issues.
Unsure if a living inheritance is right for you and your family? With our comprehensive financial planning services, we’ll help you evaluate your options, create a customized plan, and ensure your family’s financial future is secure.
