Give it to Your Heirs Now!

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Sharing your wealth with your heirs in the here and now has the advantage of allowing you to feel their gratitude while you’re still around to enjoy it.

If you take care to leave enough for your own expenses, there’s really no reason to wait until you’re gone to pass on portions of your estate. Just make sure you understand the rewards and risks for both you and your heirs.

Tax Considerations
In general, the IRS doesn’t care whether you pass on your money now in the form of a gift or later as an inheritance. Either way, the recipients of your generosity will not have to pay additional taxes. You also won’t owe taxes on either a gift or inheritance until you’re reached a lifetime limit, also referred to as a lifetime exclusion. The exclusion amount varies by year according to adjustments for inflation and tax law changes. In 2021, the lifetime exclusion was $11.7 million for single taxpayers and double that amount ($23.4 million) for married couples. For money and property inherited from a spouse, the exemption is unlimited.

The IRS doesn’t require you to pay taxes on your gifts to a child or other heir until your gifts to that individual surpass the lifetime exclusion. If you give less than the lifetime exclusion at the time of your death, your heirs can use the remaining amount to reduce or eliminate any estate taxes they may owe. Otherwise, they may end up paying up to 40 percent of their inheritance in estate taxes.

In addition to a lifetime exclusion, the IRS grants an annual exclusion of $15,000 per individual and $30,000 per married couple. You aren’t required to pay a gift tax on amounts less than the annual exclusion and these gifts do not count toward your lifetime exclusion for that person. This means a married couple could give $30,000 to each of their children and grandchildren without incurring any tax debt for the parties involved. Making payments for a family member’s school tuition or medical expenses is exempt from the gift tax, providing funds are transferred directly to the school or health care organization.

You may need to file a U.S. Gift Tax Return, IRS Form 709, to report your gifts even when no taxes are owed. It always pays to consult a tax professional if you’re planning to make a large gift of cash, real estate, investment properties or other valuables.

Benefits of Giving Now
If your estate is large enough to owe estate taxes, then it may make more sense financially to begin dividing your assets among your heirs during your lifetime. Even if this is not the case, making gifts to your children at a time in their lives when they need the money could make a big difference in their futures—a difference that you’ll be able to witness. Being able to finance a child’s first home purchase or a grandchild’s college education can provide you with immense satisfaction, provided you give strategically. You can also help your heirs build wealth earlier in their lifetimes.

Can You Afford to Give?
Taxes are important, but there are other factors to consider before you decide to disperse your wealth. Some other important questions to ask yourself and discuss with your financial advisor are: How will the gift impact your current and future financial situation? Giving your children too much money now could mean you’ll be financially dependent on them later in life.
Is it clearly understood by your heirs that giving now will reduce or eliminate the amount you leave for inheritance? Will the gift change your family dynamic? For example, you may cause problems if you give to one child now and wait to give to other children later.

Each family is different, requiring each to search for the best solution for sharing a large estate. Throughout the process, it’s important to support transparency and open communication about your plans to avoid future resentment and accusations of being unfair.

Flexible Giving Approach
According to a 2019 study conducted by Merrill, 65 percent of Americans over age 55 believe it’s better to pass on at least a portion of their estate during their lifetime. Instead of giving it all away as gifts, many financial experts recommend a flexible approach that combines annual gifts with an inheritance.

The current gift tax annual exemption is scheduled to expire in 2026; without additional legislation, it will be reduced by 50 percent. Changes in tax law could reduce it even sooner, which is a good reason to consider giving now instead of later. At the time of this writing, it is not known whether the exemption will be reduced in 2022.

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