5 Strategies for an Accelerated Inheritance

As parents, we love giving gifts to our children. One of the best parts of Christmas for adults is seeing the joy and delight on our kids’ faces when they open their presents. Now that you are nearing or are in retirement, you have worked hard to provide for your children and want to continue doing so as they navigate adulthood and their own parenting journey. This is why many parents are wondering if a traditional inheritance still makes sense. Is it necessary to wait until you pass away to share your wealth with your kids? In this article, we look at some accelerated inheritance strategies and what you should consider before deciding if now is the right time to give your kids money.

What Is an Accelerated Inheritance?

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.

Accelerated Inheritance Strategies

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:

Lifetime Gifting

You don’t need to wait until you’ve passed away to give money and assets to your kids. In 2024, the annual gift exclusion is $18,000 per year per person. If you’re splitting the gift with a spouse, you can give up to $36,000. So that means a married couple with two kids can give $36,000 to each child for a total of $72,000 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 2024, the current lifetime exclusion is $13.61 million for individuals.

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.

Gifting Appreciated Securities

Many parents wish to give large gifts to their adult children, usually in the form of a wedding gift or a 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.

Fund a Family Vacation

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.

Consider a 529 Plan

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 $90,000 ($18,000 x 5) and a married couple can gift up to $180,000 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.

The individual who initiated the 529 plan (the plan owner) has the option to alter the beneficiary—and without incurring any penalties—provided that the new beneficiary qualifies as an “eligible family member.” Addressing concerns among families regarding the potential confinement of funds within a 529 plan due to limited beneficiary change options, SECURE 2.0 introduces a provision (starting in 2024), under which 529 plan beneficiaries can transfer some unused funds directly to a Roth IRA without facing penalties or triggering taxable income recognition.

Create an Irrevocable Trust

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.

Things to Consider:

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:

• Retirement security: Before giving an accelerated inheritance, it is essential to assess your own financial situation and make sure you have enough savings to support your retirement goals. Remember, a well-planned and thoughtful accelerated inheritance can be a valuable way to support your children, but it should never come at the expense of your own financial stability.

• Level of financial responsibility: It’s important to assess your child’s level of financial responsibility before giving them an accelerated inheritance. Giving money to children who are not mature enough to handle it can lead to poor financial decisions, such as overspending, debt accumulation, or even becoming victims of scams.

• Taxes: When gifting money or assets to your children, there may be tax implications to consider, especially if the gifts are above the annual exclusion amount. Therefore, it is crucial to understand how an accelerated inheritance will impact your tax liability before making any decisions.

Make the Right Decision

Now that you understand what an accelerated inheritance is, the various options available, and some important things to consider, you may still have questions. Maybe you are wondering if you will run out of money in retirement if you give too much away to your kids now. This is a valid concern and is one reason why we recommend you work with a financial advisor who can carefully assess your financial situation and decide whether it is the right choice for you and your family and how much you can afford to give away now.

At Infiniti Wealth Management, our mission is to help clients make smart choices about their money and finances so they can pursue their goals with confidence. If you are thinking about an accelerated inheritance, or have other retirement and financial goals, we can help. Call our office at 845-278-8638 or send us a message to set up a complimentary consultation.