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Question: We’re 65 with $3.9 million saved and plan to retire in two years. Our 30-something children are struggling with daycare costs while trying to save for a home. Should we give them an advance on their inheritance?
Answer: In the next 20 years or so, roughly $124 trillion in assets is expected to change hands as part of the aptly dubbed “Great Wealth Transfer.”
If you’re gearing up to retire and have accumulated a sizable nest egg, it’s natural to hope and assume that there will be money left over for an inheritance for your children. But that may not be your only option for the portion of your savings you don’t expect to use yourself in your lifetime.
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Some parents are opting to give their children a portion of their inherited wealth sooner. And if you have grown kids in their 30s who are struggling with exorbitant childcare bills while trying to save for a home, you may be inclined to give them an advance on their inheritance rather than make them wait.
After all, if you’re 65 with $3.9 million saved, you hopefully have at least a couple more decades of life ahead of you, and you certainly have some wealth to share. The reality is that your kids could probably use the money you’re hoping to leave them now, as opposed to when they’re empty-nesters in their 50s or 60s.
It’s not a bad idea to give your kids an advance on their inheritance. But you need to do so carefully.
Make sure to do things fairly
Patrick Simasko, elder law attorney and financial advisor at Simasko Law, is a fan of helping struggling grown kids.
“Assuming you’re all set for retirement, helping your children now while they’re in their 30s can be very beneficial for them,” he says. “Financially assisting them with a first home purchase or daycare costs can have a greater impact on their lives now than an inheritance might decades from now.”
That said, Simasko cautions that when giving money to grown children, it’s crucial to keep things fair.
“You must be crystal clear on whether the money is a gift or just an advance on their inheritance,” he explains.
Simasko also says you can formalize this type of arrangement through what’s called a “lifetime advancement” provision in your will or trust.
“A lifetime advancement provision allows you to document the amount you’re giving and deduct it from that child’s share at your death,” he says.
To keep things fair, Simasko says to document everything with detailed precision.
“I recently had a client give his son approximately $250,000 toward a first home,” Simasko explains. “He signed a lifetime advancement form reflecting not only the cash given, but the full amount withdrawn from his 401(k), including the income taxes paid and even the temporary increase in Medicare premiums triggered by the withdrawal. That level of clarity avoids problems later.”
Take advantage of the gift tax exclusion
If you’re giving money to your children in the near term to help them cover their costs and make their lives easier, it pays to consider the gift tax exclusion, says Kerri Koen, estate planning attorney at Modern Legacy Law Group. If gifts to a person are under the annual limit, you don’t have to report them to the IRS.
This year, the limit is $19,000 per person. And Koen suggests being mindful of that.
“Gifting over the annual limit is generally not recommended because it will chip away at their estate tax exemption at death,” she explains. “This exemption is currently $15 million per person, so it is likely that they won’t incur any estate tax. But it is also possible that this exemption amount could be lowered during their lifetime, so it’s wise to protect it.”
That said, some U.S. states have much lower estate tax thresholds, so your gifting and estate planning should take that into consideration.
Make sure you’re putting your own needs first
While it’s generous to want to give your grown kids an advance on their inheritance, do recognize that an inheritance, by definition, is the transfer of assets from a deceased person to their heirs. If you start to give away money in your lifetime, it can be more rewarding. But it could put your financial stability at risk.
As Tyler Livingston, estate planning attorney at Coker, Robb, & Cannon, says, “I would advise anyone in this position to prioritize their own security. Helping someone at the expense of your own financial risk helps no one.”
Livingston says that a 65-year-old couple with plans to stop working in two years could have many years of retirement to fund.
“They need to consider the cost of long-term health care and work with a financial planner to stress-test their financial situation under various scenarios,” he says. “If they are confident that they are financially secure, then giving the gift of an early inheritance is certainly something they can do.”
Before you start giving away money, make sure you have a plan to tackle financial surprises, whether it’s home repairs, medical bills, or long-term care. And you may want to err on the side of giving annual gifts, as opposed to a giant lump sum you can’t claw back. That way, you can see what your retirement needs look like annually and how they’re evolving.
“Money given to a struggling young family is certainly impactful,” Livingston says. “The key is to give with intention and proper documentation without putting yourself in a position of financial risk.”
