“Retirees should secure themselves first, and if you’re all set there, then consider a few other things, such as the impact on the children and tax issues.”
The first question to ask before considering making gifts to heirs is similar to the advice heard on airplanes—“Make sure to secure your own oxygen mask before helping your kids.” But, first, make sure you secure yourself, advises a recent article titled “Leaving an Inheritance? Is It Better to Give to Kids Now or Later?” from Kiplinger.
The biggest unknown is long-term care expenses. Assuming you’ve done the correct planning for this, possibly with a Medicare Asset Protection Trust or another trust, and there are enough assets for your retirement, consider the impact of an early inheritance on your children.
Money can be a lifesaver or a murky bog, depending on the amount and the recipient. Consider what your children have done in the past with finances. If they received a gift in the past, did they use it to cover expenses, invest it, or show up at the next family gathering in a flashy luxury car? Reconsider an early inheritance, if a generous gift went to a $15,000 handbag.
The beneficiary of the funds often matters more than the amount or the type of gift. This is one reason trusts are popular estate planning tools. Trusts allow you to exercise a great deal of control over how and when the beneficiary spends their new money.
You should also consider the age and stage of the child you’re considering making a gift to. Let’s say you’re 65, and your children were born when you were 30. Your life expectancy is 85. The decision is about whether or not to give the children money in the next 20 years or at the end of 20 years. In 20 years, your children will be 55 and likely in their peak earning years. Your grandchildren will be graduating from college. Your children will be in a period where the gap between their earnings and expenses is the largest—in other words; it’s not a time when they’ll necessarily need the money.
The time they may need the money more is when their children are young. Childcare costs, or having only one spouse earning income, could be when your gift is most beneficial.
Taxes need to be considered as well. Because of the current large gift tax exemption, most of us don’t have to worry about gifting unless our estate is more than $12 million. However, capital gains, and income taxes need to be considered.
Some families prefer to leave stock to their children. You’ll likely pay 15% in capital gains taxes, if you sell stock. There's no tax if someone in the lowest two income brackets sells the stock. If you leave a stock at death in a non-retirement account, there is a step-up in basis—your child won’t pay taxes on the gains accumulated in your lifetime.
There are many different ways to approach this. However, the first step should be a talk with your estate planning attorney, who can help you determine when and how to distribute your wealth.
Reference: Kiplinger (March 7, 2023) “Leaving an Inheritance? Is It Better to Give to Kids Now or Later?”