Deciding whether to pass on your wealth ultimately impacts your retirement planning. If you choose to leave a financial inheritance to your loved ones, you need an estate plan in place to determine when and how to pass on your assets.
About $30 trillion. That’s the amount of money boomer parents — i.e., you and me — are expected to leave to our millennial offspring over the next 30 to 40 years, according to consulting firm Accenture. As a retiree, one of the important decisions you may have to make is whether or not to leave an inheritance to your children and grandchildren. If you do decide to leave an inheritance, the question then becomes: is it better to give to kids now or later?
There are pros and cons to each approach, and ultimately the decision will depend on your personal financial situation, your relationship with your children, and your own priorities and values. But first, let’s cover how estate planning and retirement planning go hand-in-hand.
Estate Planning Vs. Retirement Planning
Estate planning and retirement planning are closely related. No wonder many people are unable to differentiate between the two. Estate planning is related to the time when a person dies or becomes physically or mentally incapacitated; whereas retirement planning is related to the time when a person exits the workforce after reaching a certain (retirement) age.
A person’s estate consists of all the assets they control or own. An estate plan includes a will that provides specific instructions on how the person’s property must be divided among their beneficiaries and heirs. Many plans also include living trusts.
Your estate plan dictates when your assets will be distributed and to whom. If you’re still unsure of how to make the right decision, here’s a few pros and cons of giving now vs. giving later.
Giving to Your Children Now
Pros:
1. Enjoyment
Seeing your children enjoy the money that you have worked hard for can be a fulfilling experience. It also allows you to witness the impact of your generosity firsthand. One of the main benefits of giving to kids now is that you get to see them enjoy the fruits of your labor.
2. Tax Benefits
Giving to kids now has the potential to lower your estate taxes. According to US tax laws, an individual can gift up to $17,000 to as many individuals as they like without any gift tax. If you have a large estate, you can reduce your tax liability by transferring assets to your children. Keep in mind that gift tax rates range from 18% to 40%, and typically, the gift giver pays the tax.
3. Avoiding Probate
Transferring assets to your children can help them avoid the probate process. Probate is a legal process that takes place after someone passes away. It involves validating the will, paying off debts and taxes, and distributing the assets. This process can be time-consuming and costly, and it can tie up your heirs’ inheritance for months or even years.
By gifting your assets to your children now, your children can receive their inheritance immediately. It’s important to note that not all assets can be transferred outside of probate. Assets such as life insurance policies and retirement accounts will need to go through the probate process. Working with an estate planning professional can help you come up with strategies that minimize taxes and avoid probate.
Cons:
1. Resentment
There are also some potential downsides to giving to kids now. For example, if you give your children large sums of money or assets, it may affect their motivation to achieve financial independence on their own. It’s also possible that giving now could create resentment or conflict among your children if you’re not perceived as being fair or even-handed in your gifts.
2. Misuse of Funds
Another downside of giving money to your children now is the risk that they misuse the funds. This can lead to financial problems down the road. Giving your children a large sum of money without any restrictions may lead to the temptation to invest it unwisely, potentially leading to financial instability.
To mitigate this risk, consider setting up a trust or other legal arrangement that provides more structure and oversight. This can help guarantee that the money is used in a responsible manner.
Giving to Your Children Later
Pros:
1. Protecting Your Family
Leaving an inheritance in a trust can protect assets from creditors, lawsuits, and divorce. A trust is essentially a roadmap of instructions for how assets are distributed to your beneficiaries. Trusts ensure that your family is protected and your assets are distributed according to your wishes.
2. Flexibility
Leaving money in a trust allows you to provide for your family’s needs. A trust also specifies how and when the money is distributed. Trusts ensure that your wishes are carried out in the event of your death. An estate planning professional can assist you in setting up a trust that meets your specific goals.
3. Asset growth
Delaying the distribution of inheritance to your children can have advantages. By leaving money to your children later, you give them the opportunity to grow and manage their own assets. This results in a larger inheritance in the future. By waiting, you allow your children to mature and develop their own financial management skills, which can be valuable in managing a substantial inheritance.
Cons:
1. Tax Implications
One important consideration when leaving an inheritance to your family is the potential impact of estate taxes. When you pass away, your assets are subject to federal and state estate taxes. These taxes can significantly reduce the amount that your children ultimately receive. Consider estate planning strategies such as gifting, trusts, and charitable giving to reduce tax implications.
Working with a financial advisor can help you identify the best strategies for minimizing estate taxes and ensuring that your family receives the maximum benefit of their inheritance.
2. Delayed Gratification
Your children may have to wait years or even decades to receive their inheritance, which can be frustrating for them. Communicate with your children about your plans and expectations for the inheritance. By having open and honest conversations with your children, you can help manage their expectations and ensure that they understand your goals for the inheritance.
Ultimately, the decision of how and when to distribute your inheritance to your children should be based on your goals. Working with a financial advisor can help you make an informed decision and ensure that your children receive their inheritance in a way that aligns with your wishes.
Final Thoughts
Determining whether it’s best to give to your children now or later depends on your overall goals. Seeking advice from an estate planning professional can help you create a comprehensive plan.
CKS Summit Group can aid in creating custom retirement plans, including estate plans tailored to your specific goals. If you’re ready to protect your family’s future, contact us to set up a complimentary strategy session today.
