By Daniel Staiger, CFP®, CRPC®
Being a parent means you’re continually striving to provide the best for your children. You put in the effort to offer them everything they need to thrive as they grow into adulthood. As many parents think about passing on their wealth to their kids, they now question the conventional approach to inheritance. Is waiting until your passing to share your inheritance the best route for you and your kids?
In this article, we dive into 5 strategies for accelerated inheritance to help you determine if this approach is the right one for you.
An accelerated inheritance refers to an inheritance given during your lifetime, rather than at death. It is a way for parents to provide financial support to their children while they are still around to enjoy it, rather than leaving assets and money after they pass away.
An accelerated inheritance doesn’t have to look the same as a traditional inheritance. There are many ways to share your wealth with your children during your lifetime, including:
You don’t need to wait until you’ve passed away to give money and assets to your kids. In 2023, the annual gift exclusion is $17,000 per year per person. If you’re splitting the gift with a spouse, you can give up to $34,000. So that means a married couple with two kids can give $34,000 to each child for a total of $68,000 without filing a gift tax return.
Lifetime gifting can help you strike a balance between taking care of your kids and depleting your own retirement assets, and it can also help reduce the taxable portion of your estate.
It’s worth noting that once you gift more than the annual exclusion, the excess amount spills into the “lifetime exclusion bucket.” You must use this entire amount before the IRS requires you to pay gift tax. For 2023, the current lifetime exclusion is $12.92 million for individuals and $25.84 million for married couples.
Unless something changes, the lifetime exclusion amount is set to decrease starting in 2026. It will be reduced to $5 million per person and will only increase to account for inflation in subsequent years. If you think your estate is going to be subject to estate taxes once the exclusion amount resets, you may want to consider taking advantage of the current exclusion to make gifts.
Many parents wish to give large gifts to their adult children, usually in the form of a wedding gift or down payment for a house. There is a common belief that cash is the best way to give these gifts. In reality, any cash gift above the annual exclusion will trigger potential gift tax consequences. Gifting appreciated securities can be a way to give an accelerated inheritance to your kids while reducing your tax liability on capital gains and reducing the value of your taxable estate.
For those who are not eligible for the 0% capital gains tax rate due to income thresholds, consider gifting highly appreciated assets to an adult child instead of selling them yourself. Chances are your kids are in a lower tax bracket, which will result in a reduced or eliminated tax liability if they sell the investment themselves.
More and more, successful parents are thinking less about leaving money to their children and instead looking to enjoy the fruits of their lifelong labor through quality time with their family. Experiences shared as a family will often mean more than cold, hard cash. Rather than safeguarding your wealth to be left after you’re gone, consider buying a vacation home where everyone can gather. Or take your whole family on that trip you’ve always dreamed about. These experiences will produce lifelong memories that are likely more impactful than leaving a larger inheritance.
Another great way to transfer wealth to your children and grandchildren is through the use of a 529 college savings plan. There is a special provision that allows donors to contribute 5 years’ worth of gifts as a lump sum. This means an individual can gift up to $85,000 ($17,000 x 5) and a married couple can gift up to $170,000 without incurring gift taxes! The beneficiary can then withdraw the funds and investment growth tax-free to pay for qualified education expenses. If the child chooses not to go to college, the funds can be transferred to another beneficiary or withdrawn at the marginal tax rate and charged a 10% penalty.
If you have concerns about how gifted or inherited funds will be used by your kids, or you want to leave specific instructions on how the money should be spent, consider creating an irrevocable trust. Utilizing an irrevocable trust can be an effective tool to reduce your estate tax and provide guidance for your heirs on your desires for the inheritance. It is permanently binding and you cannot change the terms or beneficiaries. Depending on how the trust is structured, your beneficiaries can receive payments before you pass away, making this an effective vehicle for accelerated inheritance.
While it can be a valuable way to support your children and share your wealth, an accelerated inheritance is not a decision to make lightly. It is important to consider various factors, like:
If you’re wondering about executing an accelerated inheritance, it’s vital to evaluate your overall financial picture to determine if it fits your family’s needs. Collaborating with a financial advisor can bring clarity to this process, as they can guide you through the complex factors while assisting you in making an educated choice.
We at Matarazzo Staiger Wealth Management understand that these decisions can be overwhelming. We specialize in working with people just like you, and commit to using all our resources to help you pursue your goals. We’re dedicated to supporting you through every decision on your financial journey, and we’re ready to help you explore your accelerated inheritance options.
To discover how we can assist through this process, please don’t hesitate to schedule a no-obligation introductory meeting by emailing me at daniel.staiger@raymondjames.comor calling (631) 319-6777.
Daniel Staiger is a partner at Matarazzo Staiger Wealth Management and Financial Advisor with Raymond James Financial Services. Matarazzo Staiger Wealth Management is an Independent Practice and our team is committed to helping families, pre-retirees, and union employees build a sense of security and confidence around their financial future. With more than 10 years of experience, Daniel is dedicated to providing trusted advice and tailored solutions that help his clients realize their financial potential. He is known for building relationships with his clients so he can better understand their values and the goals they want to pursue. As a CERTIFIED FINANCIAL PLANNER™ and Chartered Retirement Planning Counselor℠ professional, Daniel specializes in serving union employees, such as tradespeople and teachers, with well-thought-out guidance and a personal touch. When he’s not working, Daniel spends his time pursuing interests such as guitar, volleyball, golf, and cooking. He is also an active member of his church. To learn more about Daniel, connect with him on LinkedIn.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
