Sam sat at the table holding his chin in his hand. “My kids are going to inherit my estate. Do I give it to them now or let them inherit it after I’m gone?”

 

That’s an estate planning question that’s been pondered ad infinitum. There is no black-and-white answer. Your decision will be based on your particular circumstance. But there are three things that have to be considered in making your decision:

  • Will giving an inheritance early have a positive or negative impact?
  • How old will your kids be when they receive the inheritance?
  • Taxes

 

Will an Early Inheritance Have a Positive Impact

We’re talking about adult children here. You’ve seen the way they handle money. Are they responsible with what they have or does money go through their hands like water through a screen door?

 

If a child can handle money and has proven themselves, then an early inheritance may be beneficial to help them buy a home or start a business. Or if they have a family of their own, an early inheritance can help with college expenses for your grandkids without putting undo pressure on the family budget.

 

If on the other hand you have a spendthrift child who is just a conduit for making money disappear, but you still want to give an early inheritance, a revocable trust may be the way to go. You can set restrictions for distribution of the money.

  • You can specify an age when your child gets the money.
  • Have the inheritance broken up into several distributions at different ages.
  • You can restrict distributions to income only without the principal ever being distributed.
  • You can specify that distributions can be made for specific purposes.

 

You can restrict distributions to your spendthrift child in any number of ways you think is in their best interest.

 

How Old Will Your Kids be When They Inherit

Yes, the anticipated age when your kids receive their inheritance can make a difference in your decision when to pass assets along.

 

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 during the next 20 years, or let them inherit the assets when you die, which could be 20 years or longer.

 

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 a period when expenses will be decreasing and earnings will be highest. In that case, they don’t need the money then.

 

But you may decide to give the inheritance now, while your kids have young families and the ratio between their income and expenses is razor thin.  This is most likely the time when financial need is highest.

 

Taxes

And then there’s the potential tax consequences of inheritance to both the giver and the recipient. CFP Evan T Beach says:

“Due to the large gift tax exemption, I would not worry about the gift tax when giving, unless your estate is larger than $15) million (the 2026 federal estate exemption). 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.

 

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. That’s especially important if you have very low-cost basis stocks.

 

The 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, once you’ve decided whether your kids can handle the money now or later, when they’ll potentially inherit the money, and the tax implications, put together an estate plan that will carry out your wishes the way you think is best.

 

 

Disclaimer:

This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors; all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investments at 1-888-777-0970 or email us at info@alhambrapartners.com.