Are you curious about the possibility of giving your kids money now versus later? The concept of accelerated inheritance opens up a realm of intriguing considerations. From empowering your children to pursue their dreams to minimizing tax burdens, there are various factors to explore as you decide if this financial strategy makes sense for you. In this guide, we delve into the world of accelerated inheritance, providing 5 insights to help you make an informed choice for your family’s financial future. Get ready to open up new possibilities and pave the way for a brighter financial outlook for your loved ones.
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 2023, the annual gift exclusion is $17,000 per year per person. If you are splitting the gift with a spouse, you can give up to $34,000. So that means a married couple with two kids can give $34,000 to each child 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 2023, the current lifetime exclusion is $12.92 million for individuals and $25.84 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. In reality, any cash gift above the annual exclusion will trigger potential gift tax consequences. Gifting appreciated securities can be a way to give an accelerated inheritance to your kids while reducing your tax liability on capital gains and 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
More and more, 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 to be 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 through the use of 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 $85,000 ($17,000 x 5) and a married couple can gift up to $170,000 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.
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 various 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.
We Can Guide Your Steps
If you are contemplating the idea of accelerating your inheritance, it is critical to evaluate your financial goals and determine if it aligns with the best interests of your family. We strongly recommend collaborating with a financial advisor you can trust who can assist you toward making a well-informed choice.
Here at Wellstone Wealth Management, we are dedicated to empowering our clients and igniting enthusiasm for their financial futures. Our team is well equipped to guide you in assessing your accelerated inheritance options to find the ideal path forward. To schedule a complimentary introductory meeting by contacting us at 503-594-1210 or info@wellstonewealth.com. Let us embark on this journey together toward a brighter financial future for both you and your loved ones.
About Greg
Greg Allen is a CERTIFIED FINANCIAL PLANNER™ professional, Life-Centered Financial Planner, Managing Member, and second-generation owner of Wellstone Wealth Management, a life-centered financial planning firm that takes a unique Return on Life (ROL) approach to help their clients live the best life possible with the money they have. With over 20 years of experience, Greg holds fast to his mission of helping clients plan their finances around their lives, instead of the other way around, resulting in fulfillment, confidence, and a meaningful life. Greg also provides a caring, trusted long-term relationship and life-centered financial behavioral counseling. He specializes in working with people who have recently retired or are close to it (typically five years or less) and relates well to corporate executives and upper-management couples who often have complicated financial pictures and need help maximizing their wealth, reducing their taxes, and preparing for retirement so they can maintain their ideal lifestyle.
When he is not helping his clients find meaning and purpose, you can find Greg spending time with his friends and family, especially his wife, Sandy, children, and grandchildren. As a native Oregonian, Greg loves the outdoors, visiting the Oregon Coast, and retreating to their family cabin in the mountains. He enjoys staying involved with his church, reading, watching sports, and anything to do with exercise and wellness. To learn more about Greg, connect with him on LinkedIn.
Information provided herein is provided by Wellstone Wealth Management, LLC. This information is for general informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Information was compiled from third-party sources believed to be reliable and accurate but cannot be guaranteed. Investment advisory services are offered through Oswego Wealth Advisors, Inc., an SEC Registered Investment Advisor. Neither Wellstone Wealth Management, LLC nor Oswego Wealth Advisors, Inc render any legal, accounting, or tax advice. All investments involve risk, are not guaranteed, and may lose value. We recommend that all investors consult with a qualified adviser to assess your personal situation before implementing any strategy.
Please remember to contact your advisor when your financial circumstances or objectives change. Your advisor may recommend adjustments to your financial planning and investment strategies to better suit your current situation.