One of the things that give me the greatest joy as a financial planner is knowing that the work, I do has a bigger impact. The benefits of the plans that I help set in motion with my clients will extend well beyond just the individuals I meet with. The majority of investors I meet with are often less concerned about their own comfort. Their sole reason behind meeting with a planner and securing their financial future is to assure that their children or other dependents are taken care of.
As a parent, I understand this. I know that children can consume every waking thought of our day and that making sure you leave them a better world is a driving force. When it comes to financial planning for your children, there are a multitude of ways to help get them established for their best possible future. Plans like a 529 are a popular option for parents or grandparents wanting to help fund their children and grandchildren’s education.
For higher net worth individuals there is an option that can fulfill the desire to care for their children and also create some tax efficiencies in financial planning—an early inheritance. The idea of an early inheritance is appealing to individuals because it allows parents or grandparents to experience the personal joy and fulfillment in seeing their children benefit from the money.
Should I Give My Children an Early Inheritance?
Illinois investors with assets valued at $4 million or greater are assessed estate tax upon the passing of the investor. Tax law allows individuals to gift their beneficiaries an early inheritance to reduce their taxable assets. This strategy can provide several benefits for investors. In addition to moving taxable assets below the $4 million estate tax threshold, early inheritance gifting allows individuals to see their children enjoy the money. It’s an opportunity to see money’s purpose fulfilled.
First Things First
Investors who would like to utilize early inheritance gifting can gift each child up to $15,000 annually ($15k per parent, per child). In addition to the creation of some tax efficiencies by lowering an investor’s overall taxable income, gifting to beneficiaries can help teach life lessons. Releasing the benefits in these smaller annual amounts allows children to get acclimated to the additional money, as opposed to receiving a large inheritance in a lump sum upon the passing of a parent.
While an early inheritance can be a great opportunity to help educate children on wise financial planning, the greatest lesson you can teach your children is through the example you set in the handling of your own finances. Before you consider any of these options in your financial plan, make sure that you are taken care of first. The first step here is to understand your own needs and know that they can be met first with your existing plan before adding early inheritance gifting. This is an area where a financial advisor can be a great benefit. Parental instincts can easily kick in and the desire to sacrifice our own needs in favor of taking care of our children when it comes to finances. Your financial planner can help provide an objective third-party voice to align your desire to care for your children with your own financial needs.
A Word of Caution
While the idea of gifting an early inheritance can be extremely fulfilling to investors, it can also create some challenges. If family dynamics indicate an early inheritance can actually create more problems for your children, there are strategies that can be executed that can help. You want the benefit to be a benefit to your family, not something they become reliant on annually. To that end, never use early inheritance to encourage extravagant spending for your children. One of the ways we encourage investors to help their children learn is to begin with smaller annual gifts and increase the amount gradually. Other options for gifting include setting up a trust or charitable gift in your child’s name. Gifting can also be a great way to get children started on the right financial foot for a new phase in life. Some investors choose to use the gifting option to help their children reduce student debt, make a down payment on a home, or even start a new business.
One of my favorite examples of a client utilizing this tax efficiency strategy is an investor I worked with to fund a dream family vacation for her children and grandchildren. Through the strategy, I was able to help the investor get the greatest joy out of the finances they had worked so hard for. It is the perfect example of money fulfilling a purpose.
I would love to help you assign a purpose to your financial plan. Let’s talk about a way to help you be fulfilled through giving for your children and grandchildren. I only have one request to get started, bring lots of pictures!
Chris Perry, Wealth Advisor