As a parent, there’s no doubt you want the best for your kids. You strive to provide all they need to thrive, both now and as they grow into adults. Because of this, many high-net-worth parents and grandparents are now considering whether the old way of leaving an inheritance is still the best idea. Why wait until you’re gone to share your wealth with your children and grandkids if they might benefit most from it today? In this article, we look at 5 ways to pass on your wealth sooner and help you decide if this approach is the right move for you.
What Is an Accelerated Inheritance?
An accelerated inheritance refers to an inheritance given during your lifetime, rather than at death. It is a way for parents to provide financial support to their children while they are still around to enjoy it, rather than leaving assets and money after they pass away.
Accelerated Inheritance Strategies
An accelerated inheritance doesn’t have to look the same as a traditional inheritance. There are many ways to share your wealth with your children during your lifetime, including:
Lifetime Gifting
You don’t need to wait until you’ve passed away to give money and assets to your kids or grandkids. In 2024, the annual gift exclusion is $18,000 per year per person. If you’re splitting the gift with a spouse, you can give up to $36,000. So that means a married couple with two kids can give $36,000 to each child for a total of $72,000. If you and your spouse choose to split gifts, you are generally required to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This form is necessary to report the gift-split election even when no tax is due.
Lifetime gifting can help you strike a balance between taking care of your family and depleting your own retirement assets, and it can also help reduce the taxable portion of your estate.
It’s worth noting that once you gift more than the annual exclusion, the excess amount spills into the “lifetime exclusion bucket.” You must use this entire amount before the IRS requires you to pay gift tax. For 2024, the current lifetime exclusion is $13.61 million for individuals and $27.22 million for married couples.
But keep in mind, these limits are likely to drop starting in 2026 due to provisions in the Tax Cuts and Jobs Act. While the projected reduction could be around $5 million per person (adjusted for inflation), the exact amount will depend on legislative updates and inflation rates. If you think your estate is going to be subject to estate taxes once the exclusion amount resets, you may want to consider taking advantage of the current exclusion to make gifts.
Gifting Appreciated Securities
Many parents wish to give large gifts to their adult children, usually in the form of a wedding gift or a down payment for a house. There is a common belief that cash is the best way to give these gifts. In reality, any cash gift above the annual exclusion will trigger potential gift tax consequences. Gifting appreciated securities can be a way to give an accelerated inheritance to your kids while reducing your tax liability on capital gains and reducing the value of your taxable estate.
For those who are not eligible for the 0% capital gains tax rate due to income thresholds, consider gifting highly appreciated assets to an adult child instead of selling them yourself. Chances are your kids are in a lower tax bracket, which will result in a reduced or eliminated tax liability if they sell the investment themselves.
Fund a Family Vacation
More and more, successful parents and grandparents are thinking less about leaving money to their family and instead looking to enjoy the fruits of their lifelong labor through quality time with their loved ones. Experiences shared as a family will often mean more than cold, hard cash. Rather than safeguarding your wealth to be left after you’re gone, consider buying a vacation home where everyone can gather. Or take your whole family on that trip you’ve always dreamed about. These experiences will produce lifelong memories that are likely more impactful than leaving a larger inheritance.
Consider a 529 Plan
Another great way to transfer wealth to your children and grandchildren is through the use of a 529 college savings plan. There is a special provision that allows donors to contribute 5 years’ worth of gifts as a lump sum. This means an individual can gift up to $90,000 ($18,000 x 5) and a married couple can gift up to $180,000 without incurring gift taxes! The beneficiary can then withdraw the funds and investment growth tax-free to pay for qualified education expenses. If the child chooses not to go to college, the funds can be transferred to another beneficiary or withdrawn at the marginal tax rate and charged a 10% penalty.
The individual who initiated the 529 plan (the plan owner) has the option to alter the beneficiary—and without incurring any penalties—provided that the new beneficiary qualifies as an “eligible family member.” Addressing concerns among families regarding the potential confinement of funds within a 529 plan due to limited beneficiary change options, SECURE 2.0 introduced a provision in 2024, under which 529 plan beneficiaries can transfer some unused funds directly to a Roth IRA without facing penalties or triggering taxable income recognition.
Create an Irrevocable “Dynasty” Trust
If you have concerns about how gifted or inherited funds will be used by your family, or you want to leave specific instructions on how the money should be spent, consider creating an irrevocable dynasty trust. Utilizing an irrevocable dynasty trust can be an effective tool to reduce your estate tax and provide guidance for your heirs on your desires for the inheritance. It is permanently binding and you cannot change the terms or beneficiaries. Depending on how the trust is structured, your beneficiaries can receive payments before you pass away, making this an effective vehicle for accelerated inheritance.
Making the Right Choice
While it can be a valuable way to support your children and grandchildren and share your wealth, an accelerated inheritance is not a decision to make lightly. It is important to consider various factors, like:
- Retirement security: Before giving an accelerated inheritance, it is essential to assess your own financial situation and make sure you have enough savings to support your retirement goals. Remember, a well-planned and thoughtful accelerated inheritance can be a valuable way to support your family, but it should never come at the expense of your own financial stability.
- Level of financial responsibility: It’s important to assess your child’s level of financial responsibility before giving them an accelerated inheritance. Giving money to children who are not mature enough to handle it can lead to poor financial decisions, such as overspending, debt accumulation, or even becoming victims of scams.
- Taxes:When gifting money or assets to your children or grandchildren, there may be tax implications to consider, especially if the gifts are above the annual exclusion amount. Therefore, it is crucial to understand how an accelerated inheritance will impact your tax liability before making any decisions.
How We Can Assist You
If you’re thinking about passing on your inheritance early, it’s crucial to first take a good look at your finances and decide if it’s the best financial move for you and your loved ones. By working with a wealth manager, you’ll gain insights into the pros and cons. They will guide you toward the right choice for your situation.
At Anderson Financial Strategies, our goal is to help our clients feel confident and clear about their financial future. Part of that is assisting you in exploring your options for an accelerated inheritance. If you would like to learn more about our services for your family or business, please call us at 855-237-4545 to schedule an executive briefing to discuss your goals.
About Shon
Shon Anderson is president and chief wealth strategist at Anderson Financial Strategies, LLC with over 20 years of experience. As a fiduciary, Shon’s mission is to provide his clients with quality financial expertise along with rapidly responsive service through an honest relationship. He specializes in providing family office-style services to help his clients organize and focus their financial life. Shon graduated from Wright State University with a bachelor’s degree in financial services and an MBA in finance. He is a CERTIFIED FINANCIAL PLANNER™ practitioner and holds the Chartered Financial Analyst® (CFA®) certification. His insights have been quoted in leading financial news publications such as CNBC, Yahoo Finance, Fox Business, Consumer Reports, Forbes, Bankrate.com, Investment News, and Kiplinger. Shon serves as an adjunct professor teaching personal finance courses at Wright State University, leads CFP® exam review courses for Keir Educational Resources, and is president of the CFA Society Dayton. Shon and his wife, Jessica, reside in Sugarcreek Township, Ohio, and are blessed with triplet daughters, Elizabeth, Bridgette, and Alexandra, along with their son, Jacob, and dog, Jack. Over the years, Shon has been involved in several volunteer organizations including the Wright State chapter of Delta Tau Delta as an alumni advisor and was a Big Brother in the Big Brothers/Big Sisters program. To learn more about Shon, connect with him on LinkedIn.