Leaving an Inheritance? Is It Better to Give to Kids Now or Later?
Retirees should secure themselves first, and if you’re all set there, then consider a few other things, such as the impact on the kids and tax issues.
Flying off on a recent family vacation, I was sitting next to my 4-year-old and had my 8-month-old on my lap. Thank goodness it was a short flight! Before takeoff, as always, the flight attendant told us, “In the event of emergency, secure your own oxygen mask before helping your kids.” It’s a statement that we have become almost numb to, but my guess is, it would be hard to follow through on. When it comes to giving your kids their inheritance now or after you die, my advice is the same as the flight attendant’s: Make sure you secure yourself first. That is: Do you have enough money that you can afford to give it to your kids or anyone else?
The biggest unknown in this projection is undoubtedly long-term-care expenses. Most certified financial planners with a decent piece of software or calculator can answer this for you. Assuming you check this box, and there is enough to go around, consider the impact on your kids.
Will Giving an Inheritance Early Have a Positive Impact?
Money can be a rope or quicksand depending on the amount and the recipient. Think about what your kids have done in the past when they have received more money than they are used to. Did they use it to cover expenses? Did they invest it? Did they show up at the next family gathering in a nicer car? If your money went toward a flashy vehicle, you may want to reconsider.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In all seriousness, the beneficiary of the funds often matters more than the amount or vehicle for the gift. This is one reason revocable trusts are such a popular estate planning tool. They allow you to control how and when the beneficiary spends their new money.
Consider the Kid’s Age at the Time of the Gift
Let’s say you’re 65 years old and you had twins at the age of 30. Your life expectancy is about 85. So, you are essentially deciding whether you should give money to your kids in the next 20 years, or in 20 years. In 20 years, your Millennial kids will be 55 and likely in their peak earnings years. Their kids will be graduating from college. They will be entering the period where the gap between their earnings and expenses is largest. Said differently, they don’t need the money then.
On the opposite end of the spectrum, when expenses may actually be larger than expenses, is the period when the kids are young. Childcare expenses paired with the possibility of only one working spouse means this may be the period of greatest financial need.
What About Taxes?
While your kids may benefit from your funds most during this period, it may not be the optimal time to give from a tax perspective. Due to the large gift tax exclusion, I would not worry about the gift tax when giving, unless your estate is larger than about $12 million. You should, however, consider capital gains and income taxes.
Sometimes we recommend giving stock to kids when they are in school and have very little income. That’s because there is a tax arbitrage opportunity. If you sell the stock, you’re likely to pay 15% in capital gains taxes. If someone in the lowest two income tax brackets sells the stock, there is no tax.
I know, I know, I haven’t gotten to the negative part. If you leave a stock at death in a non-retirement account, there is a “step-up” in basis. That means your child won’t have to pay any taxes on the gains accumulated during your lifetime. So, if you’re one of the lucky (maybe smart) ones who bought Apple stock in the ’90s, it’s probably best to leave those funds at death.
This step-up in basis applies to all capital assets, including real estate. It can be a powerful way to avoid large tax bills on investment properties and your home.
So, capacity to give has to come first. A serious talk about the impact is next. Then, put together an efficient plan to execute your wishes.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
Want to Give Money to Your Adult Children? 10 Things You Should Know
It’s less taxing to give money to your adult children than you might think. A good plan can help you avoid certain pitfalls — and drama.
By Jeremy Greenfield Published
-
Potential Ripple Effects of Taxing Unrealized Capital Gains
The proposed tax on unrealized gains would be limited to those with a net worth above $100 million, but some see a broad impact on markets and businesses.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
-
Succession Musts: Thoughtful Planning and Frank Discussions
When it comes to passing on the family business, you don't want anyone to be surprised about who will control or inherit the business after the owner's death.
By David Handler, J.D. Published
-
Five Keys to Retirement Planning and Peace of Mind
Long, worry-free retirements don't just happen. You have to make them happen. The good news is that it may not be as hard as you think.
By Josh Leonard, Investment Adviser Published
-
Here's How to Find Your Way Out of the Inherited IRA Maze
To navigate complex rules on inherited IRAs and RMDs, start by breaking down key terms and common scenarios. A clearer picture of your next steps will emerge.
By Evan T. Beach, CFP®, AWMA® Published
-
Should You Move Your 401(k) to an IRA Once You Hit 59½?
Some 401(k)s allow for in-service withdrawals at age 59½, opening up greater investment options. Here are three reasons for taking the plunge.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
When It Comes to Insurance, How Much Risk Can You Take?
Either you or an insurance company takes on the risk of protecting your belongings from loss or damage. Can you afford to self-insure?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Five Ways to Minimize a Higher Capital Gains Tax Rate
With Harris’ proposal to raise the capital gains tax rate (which would require congressional approval), investors might want to consider tax-lowering options.
By Michael Aloi, CFP® Published
-
Collar Investing Strategy Can Help Protect Your Nest Egg
Here are some key considerations for using the collar strategy of put options and covered calls to safeguard your wealth in retirement.
By Matt Amberson Published