Should you give your kids an early inheritance?

Text size: aA aA aA
Should you consider gifting money to your children now rather than later in life?
Making financial gifts to your children now, instead of in your will, can be very satisfying. Here are things to consider.
REMINDER: Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

Key points

  • Giving financial gifts to your children now may provide assistance when they need it most
  • Consider how much you can afford to give now without jeopardizing your retirement and whether you'll treat all of your children the same way at the same time
  • The current $11.18 million tax exemption for giving can be split between gifts made during your lifetime and through your will
It turns out your son, the computer geek, hasn't been wasting all that time on the couch with his laptop after all. Now he's got a really cool mobile app and is working day and night to launch his own company. Your daughter is two years away from finishing her Ph.D. in microbiology — if only she could afford the tuition.
If you're in a position to help your children financially, you may have been thinking about leaving them gifts in your will. But what about assisting with real-life needs that pop up now? Would it be more satisfying to you — and helpful to your kids — if you were able to give during your lifetime?

Give now or later?

Giving now rather than later is the preferred approach for many financially comfortable people these days. According to a recent Merrill Lynch retirement study, Finances in Retirement: New Challenges, New Solutions,Footnote 1 77% of retirees now say it's better to pass on inheritances while still alive.

Questions to consider

"It's important to take the time and be deliberate in thinking through whether transferring some of your wealth makes sense now," says Stacy Allred, head of the Center for Family Wealth at Merrill Lynch. "Think about the potential rewards and risks not only from your standpoint, but also that of your family members," she adds. She recommends asking yourself some questions as you consider the best ways to share your wealth with family members.
Am I over-giving? "That's the top question, by far," Allred says. Before you give, try to determine what you need for the rest of your life — and make sure you've set those resources aside. Otherwise, you may shortchange not only yourself but the children you're trying to help, by putting them in a position to support you later.
If I give to one now, must I give to all? Some of your children may prefer to wait for their inheritance, while others could benefit greatly from having the assets today. "The most effective approach to giving may vary widely from one family to the next, with different individuals having different needs," says Allred.
The U.S. tax code makes it fairly easy to give your children money, stocks or other investments or a piece of the family business.
For instance, if your son's start-up requires seed money to beat the competition to market and other investors are hard to come by, giving him his entire inheritance early might make a lot of sense. You'll get the satisfaction of seeing him invest in his future. And he won't have to defer his dream.
But consider, too, how your other children may feel about your gift, and what their immediate needs are. Try to talk with everyone, and make it clear that giving now could affect how much they will receive later on, through your will.
"For some people, the best approach may be to give both now and later," Allred adds. "This provides you the flexibility to start small and refine your intent. Then, if you choose to leave an inheritance in your will as well, you can do so with added clarity, increasing the probability that your gift will be productive."

Give now or later: The IRS doesn't care

For tax purposes, the timing of your generosity makes little difference if your family is likely not to be subject to estate taxes.
The U.S. tax code may not have a reputation for being particularly family-friendly, but it does make it fairly easy to give your children money, stocks or other investments or a piece of the family business. In 2018, you can transfer up to $11.18 million ($22.36mm for married couples electing to split gifts) during life as a gift or at death through a will, free from gift and estate taxes (the $11.18 million is indexed to inflation, so it will likely rise in future years). This exemption is commonly referred to as your lifetime exemption.
In addition to the $11.18mm you can gift during your lifetime, each year you can also gift $15,000 ($30,000 for married couples) to as many people as you like without triggering gift taxes. This exemption is commonly referred to as the annual exclusion. The annual exclusion gifts have no bearing on your lifetime exemption, and won't reduce the $11.18 million exemption amount. A couple interested in maximizing their gifting opportunity may give $30,000 to each and every member of their immediate and extended family, and also gift $22.36mm in trust for their children and grandchildren to benefit from now and into the future.
But tax considerations are only one thing to factor into your decision about whether and when to give gifts to your children. Remember, you'll also want to weigh your children's needs, the impact giving would have on your own financial situation and how it may affect family harmony if you give now to one child and later to another. "In many cases, giving now may be especially satisfying, as long as you evaluate all of the implications," says Allred. "The more you're able to focus on what you want the assets to accomplish, the more your enjoyment is likely to increase."
Next steps

Footnote 1 Merrill Lynch Retirement Study, Finances in Retirement: New Challenges, New Solutions, conducted in partnership with Age Wave in August 2016 is based on a nationally representative survey of more than 4,854 respondents. Age Wave is not affiliated with Bank of America Corporation.