When is the right time for an inheritance?
Harding’s advice to his 73-year-old client was to think about life 20 years from now, when she’s 93 years old. Her kids will be in their 60s and her grandson will be 33. By the time they inherit her money, “everyone is fairly settled into who they are and what they’ll become,” he says.
“Now compare that with a gift today. Your kids are at a place in their lives where a financial gift can have a trajectory-altering impact. Consider the ripple effects of removing a bit of financial stress from the parents of a 13-year-old.”
If your children are facing financial difficulties — and will inherit your money at some point anyway — it may make sense to gift it now (at least some of it). But every person’s situation is different, and there are pros and cons to each approach.
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Read MorePros and cons of a living legacy
In your 30s and 40s, you tend to have more expenses: getting married, having a baby, buying your first home, starting a business and/or saving for your kids’ post-secondary education — while also trying to set money aside for retirement. Add to that the rising cost of living, and it’s a recipe for financial stress.
Fast-tracking your children’s inheritance with a living legacy can be more meaningful when they’re younger and need the money most. It also means you can see your hard-earned cash put to good use while you’re still alive and reduce the stress of estate planning for your loved ones after your passing.
There could also be tax benefits: taxpayers are granted a lifetime basic exclusion of $13.61 million (as of 2024), and an annual gift tax exclusion of $18,000 (or $36,000 per couple). Gifting more than this amount automatically means you have to file a gift tax return, which counts towards your lifetime exclusion. If your estate exceeds this exemption amount, it may be worth gifting the annual $18,000 now so your heirs won’t be burdened with additional tax after your passing. But this is a complex undertaking, so it’s recommended you do this under the advice of a legal, tax or financial advisor.
On the other hand, your heirs may spend their inheritance on something you weren’t intending it for, which could cause family drama. Say, for example, they use it for a luxury vacation instead of a down payment on a home. If that’s a concern, you could gift them money via an annuity, which means they’ll receive regular guaranteed payments versus a lump sum payment. Or you could use a trust, which provides you with additional control over your money while you’re still alive.
Pros and cons of an inheritance
Harding’s 73-year-old client could go on to live another 20+ years — and she’ll want to ensure she doesn’t outlive her nest egg. Longevity is a legitimate concern. After all, you don’t want to write a big check to your kids when you retire and, 20 years later, find yourself unable to pay for unexpected medical care. You’ll want to budget for your retirement years and manage your nest egg wisely, which is where a trusted advisor could help.
Estate planning is also complex. Gifting your assets now could add to that complexity, especially if you have more than one child. For example, say one of your kids is a homeowner and the other can’t afford a home. Should you gift a down payment to the child who couldn’t otherwise buy a home and gift a lump sum to the other child, or do you simply ensure they receive more in your will? The answer isn’t always clear.
If you do want to leave an early inheritance, you’ll need to figure out how much you can afford to gift now so your golden years stay golden.
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