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  • Writer's pictureMatthew Davis, CFP®

Should you give your kids an early inheritance?

Updated: Dec 8, 2022

As you settle into retirement, it is common to look forward to consider what you want your wealth to accomplish beyond your lifetime. You may be wondering what you can do now instead of waiting until you are gone. An early inheritance can allow you to watch your children and grandchildren enjoy your money while you are still alive.

Can you afford to give an early inheritance?

As with most financial questions, it is essential to start with a plan. Before you begin giving away money, make sure you have enough to be comfortable and accomplish your goals confidently. The last thing you want to do is give money to your kids only to have to ask them for financial help in the future if you run out. If you determine you can afford an early inheritance, the next step is to look at the pros and cons to make sure it works for your family.

Considerations before giving an early inheritance

There are many advantages and a few disadvantages as you consider gifting to your family while you are alive. The right legacy plan can magnify the impact of the inheritance for generations to come.

An early inheritance can impact the lives of heirs when they need your financial help the most. For many, the young adult years are the most financially constraining. In contrast, waiting until the end of life to give an inheritance likely means your children may be near retirement age. An early gift could represent the difference between owning a home or having to rent for another decade. An inheritance after you pass will more likely shore up retirement, whereas an early inheritance can significantly impact your loved ones' ability to build wealth.

There are potential positive estate tax impacts as well. Gifting during your lifetime can help reduce possible future inheritance taxes, especially for those with rapidly accumulating estates.

If you have a large family, gifting can be a complex and sometimes frustrating experience, even if you have the best of intentions. Clear communication is vital, especially when it comes to unequal and different timing of gifts between the heirs. Ultimately, it is your money, and you can do what you think is best, but it is a potential pitfall that can undermine the giving experience.

How to give an early inheritance

Once we have set the plan, you'll want to begin to lay out specific goals of helping out your heirs. Here are the most common ways of gifting during your lifetime:

Helping out with a down payment to buy a home

With home prices rapidly increasing over the last several years, it is becoming more and more difficult for homeowners to break into the market using a conventional loan. Putting down 20% for a down payment is out of reach for many. By enabling your children or grandchildren to afford a down payment, they receive a better loan rate and avoid PMI, which provides significant savings.

Much like housing, education prices have been climbing far more rapidly than inflation. Despite these costs, on average, income is still considerably higher and unemployment far lower for this with a bachelor's or higher. Helping out with existing student loans can also relieve a significant burden for your children or grandchildren and hopefully redirect them to get a mortgage or increase their savings towards retirement.

Increased travel budgets to be able to include additional family members

One of the goals we love to recommend is to travel early instead of later in life when the physical demands become a little too much. Instead of a direct transfer of wealth to heirs, simply including them as part of travel is an excellent way of giving during life. Especially for many young professionals/parents, travel is beyond their budgets and is an opportunity to enjoy the wealth together.

Starting a business or switching careers

Like helping with a college education, helping loved ones start a business or transition into a new career can be a big boost and another excellent investment into the next generation. This one can be a little more difficult as not every new venture is equal, but it can pay huge dividends over the long run for those who use it responsibly.

Leaving a legacy

Giving an early inheritance can be incredibly fulfilling and impactful. Having a legacy plan can help you give confidently and efficiently so your wealth can accomplish what you want it to. If you have any questions or would like a plan pulled together, contact us here.



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