Leaving an inheritance is a significant financial decision that can impact both the giver and the receiver. While most people assume an inheritance is something passed down at the time of death, the truth is that many people choose to distribute inheritances to their loved ones while they are still alive—and some people even do a little bit of both. Leaving an inheritance while you’re still alive means that you can witness the impact of your gift. It can also provide the beneficiary with much-needed financial support when they need it most. However, giving away too much too soon could negatively impact your future financial security.
On the other hand, delaying an inheritance until after you’re gone can ensure that you have enough money to cover your own expenses, and enjoy your much-deserved retirement. It also allows you to adjust your plans as circumstances change throughout the course of your life. However, this approach may mean that your loved ones have to wait a long time to receive their inheritances, and it may not have the same impact as a gift given earlier in life.
Ultimately, a combination of both strategies may be the best approach. This strategy allows you to provide some financial support to your loved ones now, while still retaining funds for your own future needs and plans. It’s important to consider all factors, including taxes, when making the decision about the best way to leave money to your family and loved ones.
When It Makes Sense to Distribute Inheritances Early
There are several situations when leaving an inheritance while you’re still alive might be the best decision. For instance, if you have a loved one who needs financial assistance due to a health crisis or other unexpected expenses, providing them with their inheritance can help ease their burden. Additionally, if you want to pass on a specific asset or property, such as a family heirloom, giving it as an inheritance while you’re alive allows you to see the recipient enjoy it, and can also help avoid any legal disputes down the line. Finally, leaving an inheritance while you’re still alive can also reduce your estate tax liability, and ensure that your assets are distributed according to your wishes.
When It Makes More Sense to Wait
Depending on your personal preferences and circumstances, you may not want to start distributing inheritances early in life. For example, if you have outstanding debts or financial obligations, starting to gift your assets may not be the best decision—it can create additional financial strain and stress. Similarly, if you have a complex estate, or own assets with complicated tax implications, it may be best to wait until after your passing to distribute those assets. For example, highly appreciated assets—like real estate—are best passed down at death, because of the step-up in cost basis your heirs will receive. This step up eliminates the capital gain that occurred between the original purchase and the heir’s acquisition of the asset, thereby reducing the heir’s tax liability.
Additionally, if you have children or heirs who have not yet developed responsible financial habits, giving them a large sum of money or valuable assets may not be in their best interest.
It’s important to consider your own financial situation, as well as the needs and capabilities of your loved ones, before deciding what (and when) to distribute their inheritances. Consulting with a financial advisor or estate planning attorney is the best way to gather information and make informed decisions.
Ultimately, the subject of leaving inheritances is highly personal and dependent on your unique situation. Only a qualified estate planning attorney or financial advisor can help you determine what’s best for you and your loved ones. Take advantage of our offer for a free 45-minute consultation and learn more about how the Hailey-Petty Law Firm can help you make informed decisions about your future in order to best protect your family and loved ones.