You know you’re planning to leave something behind to your children, grandchildren, a favorite charity or maybe a combination of all three after you pass away. But are there benefits to gifting your estate before death? There are pros and cons to the approach.
“If you decide to give away part of your estate,” says Ken Elbert, director of advanced planning at Northwestern Mutual, “you’ll likely experience a great deal of enjoyment from doing so — but whether it’s the right choice for you will depend on your expectations and whether you’re doing so strategically.”
Elbert says it’s important to manage your expectations and not give away more than you can afford. Here are the pros and cons of gifting an estate before death.
THE PROS OF GIFTING AN ESTATE BEFORE DEATH
There are many financial and personal benefits to giving away money or assets while you’re alive — from potential tax benefits to the personal satisfaction of knowing you’re helping your kids buy homes or your grandkids go to college, for example.
But if you’re expecting to generate tax savings, you should know that the tax benefits are only relevant to those with significant assets. “The estate exemption amount is very high right now — $11.7 million for an individual and $23.4 for a couple,” Elbert says. “But if you do have a net worth of more than that, you’ll have to pay federal estate taxes, and then state taxes on top of that. So, giving away money as a gift to loved ones during your life can allow you to use your annual exemption and help you avoid those taxes.” Elbert also notes that some states have lower exemption limits, which may come into play if you have a net worth that hasn’t yet reached federal levels.
If you aren’t at the point where the estate tax is a concern, you may still be able to help your family build wealth earlier in life, help them complete a life milestone like buying a home, or access things they otherwise might not be able to afford. You might even choose to give a family member an asset like a family cottage before its value increases, which could result in additional capital gains taxes upon your death.
“When your kids get their inheritance earlier it allows them to use the money for things that they need, and could help them increase their net worth earlier and reduce their money stress,” Elbert says. “Being there when they get the money also allows you to give them advice on how to spend the money or to direct the money towards specific things.”
In addition, giving a little at a time can help them learn how to manage wealth. “Learning from mistakes with smaller amounts can set them up to better manage money when they inherit your whole estate,” he adds.
THE CONS OF GIFTING AN ESTATE BEFORE DEATH
Before you start writing checks or signing over assets, it’s important that you understand the potential drawbacks of doing so.
“You need to make sure that your own needs are taken care of first,” Elbert says. “Understand your projected income needs for retirement and work with a financial professional to think through the worst-case scenarios to make sure that you’ve factored everything in.” Having that certainty that you're covered can give you the confidence to give without stress about your own financial situation.
And while seeing your money being used by your loved ones can give you great joy, the reverse can also be true. “I often see people give away their money and then regret doing so afterwards, because the recipients don’t use it the way they wanted them to or they were unhappy with the outcome,” Elbert says. “It’s important to manage your expectations around giving so that you don’t feel bad if you don’t get thanked the way you expected to, or if you don’t approve of how your recipient uses the money.”
WAYS TO GIVE
There are a number of ways to gift assets or cash. Some people make cash gifts for very specific purposes like a down payment on a home, tuition or paying student loans. When giving cash gifts, some choose to make a one-time lump sum payment while others might want to give a smaller amount annually as a holiday or birthday gift.
“Giving smaller gifts of cash is most common,” Elbert says, “but so is giving experiences. I recently gave one of my sons several thousand dollars to take a vacation with his wife since they’ve never had a vacation since they got married.”
You might also choose to do something more structured and strategic, like taking out a permanent life insurance policy on each of your kids and grandkids — something Elbert did for his family.
“I pay a certain amount for the policy’s premium each month. When each child turns 18, there will be a certain amount of cash value protected in that policy,” he says. “That money can be taken out and used for college, or anything they would like. They may also choose to keep the insurance to protect their own family someday.”
If you’re concerned about how a child or grandchild might spend a lump sum of money, another option to consider is buying them an annuity. That will provide them with annual income in a way that protects the principal that you gift over a long period of time.
A financial professional can help you go over options based on your situation and what you’re trying to accomplish, and help you understand what assets it could make sense to gift now versus after your death. Then you can feel reassured that you've fully thought through how to best pass on your assets.
This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation. The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy.