My name is Evan Vladem, and I’m a partner and financial advisor at Associated Investor Services. I get it... talking about money can be intimidating... So, we created a judgment-free space where there are no "dumb" questions or embarrassing situations.
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Dear Evan,
As we turn to a new year, my spouse and I have been discussing the best way to share our wealth with our children. Should we start gifting money now or wait to leave it as an inheritance? What are the pros and cons of each option?
We want to help our children now while they could really use the money, but we’re also concerned about maintaining our financial security and avoiding tax headaches.
Any guidance would be greatly appreciated!
-Thoughtful Givers
Dear Thoughtful Givers,
This is an excellent question, and you’re not alone—many families wrestle with the decision of whether to gift money during their lifetime or leave it as an inheritance. The good news is, there’s no wrong answer, but each approach has unique benefits and considerations. Let’s break it down:
1. Gifting Wealth During Your Lifetime
Gifting can be a wonderful way to support your loved ones while you’re here to see the positive impact it makes.
Pros of Gifting:
- Immediate impact: Your children can use the money now when they may need it most—for buying a home, paying off student loans, or starting a business.
- Tax advantages: The annual gift tax exclusion for 2025 is $19,000 per recipient, meaning you and your spouse can give up to $38,000 to each child without triggering gift tax.
- Estate reduction: Lifetime gifting reduces the size of your taxable estate, which can minimize estate taxes down the road.
Special Strategy: Gifting Through a 529 Plan
If your goal is to help fund education, a 529 plan offers a unique opportunity to "superfund" your contributions. You can gift up to five years’ worth of contributions at once—$95,000 per child ($190,000 for a couple)—without triggering gift taxes. This strategy not only accelerates education funding but also removes the gifted amount from your estate for tax purposes.
Cons of Gifting:
- Financial security concerns: Gifting too much too soon could leave you with less flexibility to cover your own future needs.
- Recipient readiness: Ensure your children are financially responsible and ready to handle a large gift.
2. Leaving an Inheritance
If you prefer to pass wealth after your lifetime, inheritance can ensure a more structured transition of assets.
Pros of an Inheritance:
- Controlled distribution: You can use tools like trusts to dictate how and when your children receive their inheritance, ensuring the money is used responsibly.
- Retain assets longer: Keeping assets until you pass ensures you have full access to your wealth for the rest of your life.
- Tax deferral: Some inherited assets, like retirement accounts, can offer tax advantages when passed to heirs under specific rules.
Cons of an Inheritance:
- Lack of immediate benefit: Your children might miss out on financial opportunities that early gifting could have provided.
- Estate taxes: Without proper planning, estate taxes could reduce the amount your children ultimately receive.
3. Why Not Both?
In many cases, a combination of gifting and inheritance can provide the best of both worlds. For example, you could superfund a 529 plan for education costs now while using trusts or other vehicles to structure how the rest of your wealth is distributed later.
4. Tips for Success
- Work with professionals: A financial advisor (myself, of course), your CPA and an estate planning attorney can help you navigate gifting limits, tax strategies, and trust structures.
- Have a clear plan for your legacy: Whether through gifting or inheritance, ensure your strategy aligns with your family’s needs and long-term goals.
- Communicate your plans: Open conversations with your children about your intentions can prevent misunderstandings and ensure your wishes are respected.
Final Thoughts
The choice between gifting and leaving an inheritance depends on your financial situation, goals, and family dynamics. Both options have their advantages, and with careful planning, you can make a meaningful impact on your children’s lives while ensuring your own financial security.
If you’re ready to explore these options in greater detail, we’re here to guide you every step of the way.
Have a question for the advisor? Submit it HERE and you may see it featured in an upcoming blog post!
Cheers,
-Evan Vladem