When it comes to gifting and giving money, especially to family members, people are oftentimes confused on when is the right time to pass over their inheritance. Should an inheritance be strictly an inheritance, to be left to children when their parents die? Or should parents use at least some of that money while they’re still alive to help out their adult children financially? And if parents give while they’re alive, how much should they give and when?

Of course, every family is different—both in terms of what they can afford and what brings them joy. But there are some things every family should consider when deciding how to pass wealth from one generation to the next.

If you’re in a position to help your children financially, you may have been thinking about leaving them gifts in your will. But what about assisting with real-life needs that pop up now? Would it be more satisfying to you — and helpful to your kids — if you were able to give during your lifetime?

Give now or later?

Giving now rather than later is the preferred approach for many financially comfortable people these days. According to a 2019 Merrill study, Leaving a Legacy: A Lasting Gift to Loved Ones, 65% of Americans 55 and older say it’s better to pass on at least part of their estate while they are still alive.

Questions to Consider

While every family person has a different financial situation and circumstance, if deciding whether to gift your money earlier or later, here are some questions to ask yourself. 

Am I over-giving?

Before you give to your children, make sure that you are not risking your own financial future. It’s common for parents to give without having set aside sufficient resources for themselves. The gift usually turns out to solve a short-term problem, but in the long run, they become financially dependent on their children.

If I give to one child now, must I give to all? 

Some of your children may prefer to wait for their inheritance, while others could benefit greatly from having the assets today. The most effective approach to giving may vary widely from one family to the next, with different individuals having different needs. If you can do so, having an open conversation with your children can help avoid longer term resentment or rifts. We recently recorded a podcast episode with David Pearl discussing money and financial traditions, explaining how to pass down money values and concepts. While the decision should be yours, getting input will clarify expectations and give you insight into the impact of your giving on your children.

The U.S. tax code makes it fairly easy to give your children money, stocks or other investments or a piece of the family business.

For tax purposes, the timing of your generosity makes little difference if your family is not likely to be subject to estate taxes. For those who are interested in education for their children or grandchildren, 529 plans may be a great place to start. For some people, the best approach may be to give both now and later.  This provides you the ability to start small, see what your children do with these gifts and adjust your giving as you go. Remember you can give up to $15,000 tax-free without it going against your gift exemption. For more information on the recent tax code proposal, check out our podcast episode with CPA, Shawn Donovan. If you choose to leave an inheritance in your will as well, you can do so with added clarity, increasing the probability that your gift will be productive. While this situation varies from person to person, it’s important to plan out your inheritance and set a will in place so that your hard-earned money is shared amongst your loved ones. Planning early and asking yourself these questions is a great strategy to help you make the right decisions when it comes to your inheritance. If you have any questions about your personal financial situation and what makes the most sense for you and your family, please email us at info@shermanwealth.com. 

529 plans are not only a great estate-planning tool  way to save for your children or grandchildren’s’  college tuition, but they have another added bonus too. Under a tax-law exception this year, clients can make a lump-sum 2021 gift of up to $75,000 to fund a 529 college savings account for a child or grandchild (or any other college-bound individual) and claim a federal gift tax exclusion for the full amount. Wealthy donors can use this tactic to sizably reduce an estate without using any of their lifetime exemption if they meet some conditions.

This accounts for five years’ worth of the standard $15,000 annual exclusion that normally applies to 2021 gifts. If you make a five-year gift of $150,000 per couple, for example, and report it on your gift tax return, it uses zero of your exemption. We have found that many people are not aware of the tax break and how they can take advantage of the tax-free growth. 

Income earned in and qualified distributions from a 529 are generally not taxed except under some states’ special rules. Non-qualified distributions are taxed and subject to a 10% penalty. 

The Tax Cuts and Jobs Act of 2017 also allowed for 529 money to be used for tuition for grades K-12, which is a potentially quicker accumulation of assets, and useful for those who decide to send their children to private school. 

There are conditions to be wary of in the current political climate. If a donor funds a plan with $75,000 for the benefit of an individual, for example, that donor could not give that individual any additional gifts over the five years without dipping into their lifetime exemption, which is currently $11.7 million per person. Also, there is another caveat to be aware about, that if the donor dies within the five years, the balance goes back to the deceased donor’s estate. 

It’s important to note that grandparents are a very great user of this program, as it removes assets from taxable estates in large sums and the money is invested to grow and earn income tax-free. If you are currently contributing to a 529 plan or are considering opening one, we are happy to discuss your situation and more of the benefits involved. If you have any questions or would like to discuss these plans, please feel free to contact us at info@shermanwealth.com or schedule a 30-minute complimentary meeting here.