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.
-
Need More Money for Retirement? You May Have Already Saved It.Over 29 million lost 401(k) accounts worth almost $1.65 trillion have been forgotten by their owners. Here are eight ways you can locate your account.
-
Five Ways to Save for Retirement in 2025If you did a poor job saving for retirement last year, don't despair. There are ways to build your nest egg in the new year.
-
The Wrong Money Question to Ask After Trump's ElectionIf you're wondering what moves to make with a new president moving into the White House, you're being dangerously shortsighted. Here's what to do instead.
-
An Investing Plan for This Year: Doing Less Can Lead to MoreAchieve more when investing in 2025 by planning to work smarter, not harder. These three strategies can help put you on the right track and keep you there.
-
All About Six Types of Auto Insurance CoverageDo you know what your auto insurance policy covers? Here's a primer on some coverage categories, along with examples of how each type of coverage works.
-
Social Security and Medicare Funding: Is the Sky Falling?Social Security and Medicare are slowly running out of money, but what does that mean for the retirees counting on them? Actually, it's not all bad news.
-
What We Need to Do to Protect Retirees' Financial SecurityCognitive decline and aging in general put older retirees at risk of losing their financial security when they're the most vulnerable. What can be done?
-
Financial Planning: Sisters Should Be Doin' It for ThemselvesMore and more women are ringin' on their own financial bells (with apologies to Aretha Franklin and Eurythmics) — but that demands a robust financial plan.
-
Is Money Messing Up Your Family's Life?Parents who discuss money and attitudes toward money with their children are more likely to raise financially successful and responsible adults.
-
Do You Know the Power of Whole Life Insurance in Retirement?Worried about legacy planning, market volatility or where to get cash to cover surprise medical or home repair bills? This little-known tool could help.
