When contemplating an Estate Plan, a common question that arises is: Why wait? Why not give part of my estate now, while I am alive? It is an understandable sentiment. For many people who are well off, it may seem callous to hold on to their assets until they die if they do not really need them.
It may be a sound idea in some cases to give assets to your children while you are living. However, before you proceed, be sure that you protect your ability to care for yourself and, if applicable, your spouse, and be clear about the purpose of your gift. In addition, giving some assets away now should not be a reason to neglect or delay putting a comprehensive Estate Plan together.
Reasons To Gift Assets To Your Children
There are many good reasons to give some of your assets to your children now, rather than make them wait for their inheritance after you die.
It is fairly common for adult children to have financial challenges. One child may want to buy a house and could use help with a down payment. Another might need help covering your grandchild’s college tuition expenses. Perhaps a child is starting up a new business and could use some seed money. When you are wealthy yourself, it can seem uncaring or even a bit absurd to let your child go through this struggle when you can easily help out. It is satisfying and enjoyable to help: you love your children and want to be there for them.
Or maybe there is no pressing financial reason. You just want to see the happiness of your children when you give them a gift, and want to enjoy the moment with them now. After all, after you die, you will not be there, and the sadness of your death will cast a pall over the gift. If you have the means to help them, why not do it?
If you believe this is the right thing to do, follow your instinct. But make sure you do so wisely.
Some Considerations Before You Transfer Your Assets
Before you proceed, take a good look at your assets and total resources. Even if you are living comfortably now, do not assume your situation will remain the same. Retain enough assets to provide for yourself and, if appropriate, your spouse, throughout your lifetimes. Speak to a financial advisor to help you evaluate the costs you may possibly face, and how you can expect your assets to perform over time. A financial advisor will work with you to understand your short-term needs and long-term goals. The advisor can provide recommendations and strategies that will affect how you put together your Estate Plan, as well as give you a good idea of what gifts you can reasonably give now without risking your future security.
As people age, health issues are almost inevitable. Make sure you retain sufficient assets to cover all health contingencies, from needing to cover high medical bills to deal with an accident or illness, to needing memory care, to needing home nursing. You also have to assume that you or your spouse may live past 100 years old. When you lose the ability to care for yourself effectively, the cost of medical and outside care can escalate very quickly.
Do not be so generous as to put yourself in the position of facing destitution. Even if you know your children will help you in your old age, there is no guarantee your children will have sufficient resources to help. It is very difficult for children to undertake care responsibilities for a parent, knowing that it is crippling them financially or otherwise. Before giving your children assets now, remember that one of the best gifts you can give them is to relieve them of the financial burden of having to support you in your old age.
Another thing to consider is how the gifts will be perceived. If you help out one child, will the others resent it, or expect the same? After all, if the goal is to please your family, make sure you do not create a situation where resentment or jealousy spoils family harmony. This can be especially true if the gift is in the form of a tangible asset that has sentimental value. One way to handle this is to talk to all the children together ahead of time. It is better to know everyone’s feelings now, and not after the fact.
Structure gifts so that neither you nor your children will face any tax consequences. There are different IRS rules and regulations dealing with gift taxes, estate taxes, gifts in lieu of inheritance, and the lifetime gift tax exclusion, so get good tax advice from a CPA, and inform your children of the tax ramifications of any gift. If you intend for a gift to be in lieu of a child’s inheritance, legally document it; otherwise, a child who receives a substantial gift now may still demand an equal share of the estate later.
Finally, make sure that you will be happy with the gift. For example, if you give money to your child in order to cover college tuition for a grandchild, and then find out your child bought a new car instead, your gift may result in making you angry rather than joyful.
If you are concerned about how your children will use the money or assets you give them, strongly consider creating a Trust, instead. You can create it now, and put assets into it for the benefit of your children or even grandchildren. This gives you the flexibility to help your children now, while still retaining control over how the money is spent during your lifetime.
A Trust has other benefits, as well, in that it is a very versatile financial vehicle. It can operate to distribute assets after you’re gone instead of a will, and you may also structure it such that, should you need the funds unexpectedly during your lifetime, you still have access to them.
There are a lot of considerations that go into the decision to give assets to your children while you are living. If you have further questions about gifts, Estate Planning, or would like to learn more about what you can do with a Trust or need help in formulating a financial plan, contact eLegacy today.