Leaving an inheritance to your loved ones is a thoughtful way to show how much they mean to you. People often assume their estate will be given to their heirs once they pass away. For years, this has been the tradition — but it is no longer the only option. More often these days, people are finding ways to give their estate to their heirs before they pass away.
Should you pass your estate on to your heirs before or after your death? There is no right or wrong answer here. It really depends on your financial situation and your family relationships. Below, we’ll take a look at the advantages of both options.
Giving Before Your Passing
Giving your estate away before your passing has a lot of emotional advantages. You’ll get to watch your decedents enjoy the property and assets. There may be specific things that your assets can help them achieve. For instance, you may be able to pass part of your inheritance on to fund your grandchild’s college education or help them buy their first home.
Passing your assets on early also gives your family a chance to start building wealth earlier. Assuming they invest some of the inheritance, they will benefit from the additional time in the market thanks to compounding interest. If you pass on real estate, there will be more time for the value of the property to grow under your family’s ownership.
On the financial side, there can be some tax benefits of passing on your assets before death. If your estate has more than a certain value — that exact value changes as the tax code changes — your loved ones will have to pay estate tax on it if they inherit it after your death. If you instead choose to pass your assets on a little at a time, year after year, you can avoid paying those taxes. You will, of course, need to stay under the annual limits for gift tax. For 2022, that limit is $16,000 per recipient. Gifts larger than this will be taxed. Your financial planning advisor can give you a better idea of the tax codes that apply to your financial situation.
Giving After Your Passing
Many people find that waiting to pass on their estate until after their death is simply easier. This is the protocol that estate laws and tax laws are really designed for, so there tends to be less paperwork and planning involved in this approach. You can simply work with your financial planner and an estate attorney to create a will, then know the plan will be carried out when you pass away.
If you wait to pass on your estate, you may also feel freer to spend and enjoy the money you have. Different families have different philosophies in this regard. Your family may feel that the money you’ve earned is yours to enjoy. They may want you to spend it freely and enjoy it during your retirement, only leaving them whatever happens to remain. Passing your inheritance on after death fits with this philosophy.
If your estate is on the smaller side, your heirs are unlikely to owe estate tax if you pass it on to them after your death. As such, there may be no real tax benefit of gifting it to them early.
It’s also possible that your family is not in a position in which they need your money and assets right now. If they are financially stable and secure, you might as well wait and pass on their inheritance later. They may need it more at that time — or they may be excited to have it as a memorial to you, even if they don’t explicitly need the money.
Deciding how to pass your assets down to loved ones is not easy. You not only have to weigh the emotional impact of this decision, but also its financial implications. Working with a financial planning expert is a good way to get a better idea of your options. A financial planner can review your personal finances and investments and make some suggestions you may not have considered on your own.
If you’re looking for personalized financial planning services, contact RLJ Wealth Management to schedule a consultation. Our customer-first approach makes sure you feel comfortable and confident with any financial decisions that are made. We’ll work with you one-on-one to ensure your inheritance is passed on in the most advantageous way.