Issues to Consider When Giving an Early Inheritance

You have saved and invested throughout your life to build enough wealth to fund your retirement. You have worked with your estate planning attorney to establish an estate plan to leave behind assets to your loved ones to share after you pass away. However, like many individuals, you are now considering giving your children or beneficiaries their inheritance before your death. There are many advantages to giving an early inheritance, but also some important considerations.


Advantages to Giving an Early Inheritance


Providing an early advance could provide your children with some needed financial help. Whether your children are experiencing financial difficulty, starting a new business venture, or are planning a big purchase, such as a house or getting married, providing them an early gift may be of greater value now than after your death.


For purposes of tax planning, New York does not have an inheritance tax, however, a handful of states do. If you were to relocate to a state with an inheritance tax, giving early may help alleviate that tax burden depending on the applicable state’s tax law. Giving early will also reduce the size of your estate for federal estate tax purposes, and therefore any estate tax that may be due if you have a sizable estate. Keep in mind that gifts within your lifetime may be subject to federal gift tax to the extent they exceed the annual exclusion, which in 2015 is $14,000 for each you and your spouse ($28,000 total).


Another advantage of an early inheritance is the that it gives you the opportunity to see your gift put to use. For many this provides a benefit to those they love, and provides them with lasting memories and a greater sense of satisfaction.


Additional Considerations


You will have to consider the overall effect your early gift will have on your financial future. Of course, you will have to consider if an early gift will compromise the funding of your living expenses and goals for the remainder of your life. You will want to meet with your financial advisor to ensure you are not overextending yourself with an early gift. You will also want to consider your family dynamic and the possibility of potential disputes among your beneficiaries in cases where you are giving unequally.


If you intend for early gift to be an advance on the donee’s share of your estate, you will have to take additional steps with the help of your estate planning attorney. For example, assume you have two children and your will provides that each child shall share equally in your estate. Assume you give child A $20,000 as a down payment on a new home while you are alive, and you give child B nothing. Now assume that upon your death, your estate has a value of $80,000. Per your will, child A and child B will each receive $40,000, even though you already gave child A $20,000.

Under New York law, if you intend for the $20,000 gift to child A to be a true advancement of their share of your estate you will have to execute a document evidencing your intention that the gift be treated as an advancement. If you intend the $20,000 gift to be an advancement and executed the proper documents at the time of the gift, child A would receive $30,000, and child B would receive $50,000 upon your death. Planning your gifting strategy with the help of financial and legal advisors will ensure your gifts are effectuated as you intended them to be.

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