Retirement Weekly: The joys — and drawbacks — of a living inheritance
Many of my older clients ask me, “How much can I gift to my family today, while I am living?”
This is a strategy known as a living inheritance, and it can be a very powerful tool — as long as you carefully consider and prioritize protecting your own financial security.
With all the uncertainties around COVID-19, the economy, and potential tax hikes, people are starting to question the “old school” thinking of giving away all of one’s assets at death. A living inheritance allows you to give away money, securities, property, and even art while you’re living so you can see the benefits of these gifts to your family.
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Currently, everyone has a lifetime exemption of $11.7 million that they can gift tax-free. With skyrocketing house prices, crushing student loan debt, and an uncertain job market, a living inheritance can help your children and grandchildren surmount these challenges.
Protecting your estate from future tax hikes
Concerned about taxes going up in the future? A living inheritance will enable you to remove assets from your estate and potentially trim future tax liabilities. Here’s one of my favorite strategies: Everyone can give up to $15,000 tax-free to anyone under the current (2021) annual gift tax exclusion. This means that a married couple can give their kids, grandkids, and any other individual $30,000 a year ($15,000 per person) completely tax-free. Another benefit to this strategy is that it does not count against your $11.7 million lifetime estate tax exemption and can be done year after year.
This yearly gift can be a true living legacy that can help the people you care about now and provide helpful financial support in the years that are most critical to them. This strategy is also good for the donor — it removes not only the present value of the gift, but also the potential growth of those assets that have been removed from their taxable estate at death.
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Consider all the consequences
My clients frequently ask me about gifting strategies and how these will impact their financial lives now. The first thing I want to determine before any discussions on giving money to family members is if their financial plan is solid.
Another point to consider is if they can continue to live the retirement they’ve always dreamed of. If we can determine that the extra “expense” of helping the younger generation doesn’t impact their retirement, then we’ll have a deeper conversation on the most effective and effective way to do so.
I recently learned from a client that she was a new grandmother. Her daughter and grandson lived out of state and wanted to move closer to her, but couldn’t afford the higher cost of living. My client wanted to help. After updating her financial plan, we determined that she could give a very sizable, appreciated stock position to her daughter to help with the purchase of a nearby condo. Since she was in a very high tax bracket and her daughter was not, giving the appreciated security and passing along the tax consequences was the most tax-efficient gift she could give. She was ecstatic. This gift had a minimal effect on her own financial situation, yet she could provide significant help to her daughter and grandson in the present.
There are several things to be aware of before you start gifting assets during your lifetime.
First, as I mentioned earlier, it’s imperative to make sure these gifts are not putting your own financial goals in jeopardy. Many people don’t consider the long-term effects that of making significant gifts. That’s why we go into such detail and add this extra gifting strategy to their financial plan to make sure they are OK financially.
Second, you should try to envision how these gifts will affect the next generation(s). Will giving too much now demotivate or disempower them from future success? This question is not easy and the answer is different for each person, but it’s something that you should be clear about before you start the giving process.
The last few years have altered many things in our lives, and it appears that this is only going to continue. Not only has COVID-19 changed the way we live our lives — it has changed the way we look at our money and financial futures. Gifting during your life can be highly effective: it can reduce estate taxes, help your loved ones, and be highly gratifying. But don’t forget to look at living inheritances from all angles and truly understand how that gifting will not only impact your heirs, but your own long-term financial success.
Brett Gersack, CFP, AIF, is a senior wealth adviser at Halbert Hargrove, based in Bellevue, Wash. Halbert Hargrove is the creator of LifePhase Investing and headquartered in Long Beach, Calif.