You’ve succeeded in accumulating wealth. Now, you’re wondering: should you distribute this wealth to your heirs in your will or should you start gifting it to your loved ones during your lifetime? Both options have advantages and disadvantages. Before you decide, consider the pros and cons of a lifetime gifting strategy.
You Can’t Take It with You
Rather than hoarding material possessions, some people argue that you should live life to the fullest. This may involve spending money freely as well as sharing it with others. In Die with Zero: Getting All You Can from Your Money, Bill Perkins popularizes the idea that people should focus on getting the most out of their money instead of over-saving.
However, many people are worried about their future financial security, which may make them unwilling to give anything away. In fact, Money says six out of 10 older workers don’t think they’ll have enough money in retirement.
There are other issues to consider as well, including tax rules and the potential for family disputes. As with many aspects of estate planning, there’s a lot to consider.
Weighing the Pros and Cons of Lifetime Gifting Strategies
If you’re thinking about a lifetime gifting strategy, consider both the pros and cons to make an informed decision.
Pro: You’ll be able to leverage the annual gift tax exclusion.
Many people embrace lifetime gifting strategies due to the tax advantages. This is important because estate taxes may take a big chunk out of your wealth, especially in Oregon. By maximizing the annual gift tax exclusion, you’ll reduce the total tax burden on your estate. This means you’ll pass on more wealth to your loved ones.
Con: You may not want your family to be financially dependent on you.
According to Pew Research Center, only 45% of adults between the ages of 18 and 34 say they’re completely financially independent from their parents.
Although many parents want to help out their adult children, it is hard to know when that help is actually hurting. You want your adult kids to become financially dependent, not to keep relying on the Bank of Mom and Dad. If you provide money each year, your adult children may come to rely on it and make poor financial decisions.
Pro: You’ll see your money go to good use.
Helping your loved ones is a rewarding experience. Many people choose lifetime gifting strategies because they want to see their money help their loved ones. If your loved ones are struggling financially, this may be particularly motivating.
Con: You may need more money than you expect.
If you’re trying to give away all the money you don’t need, you have to figure out how much you will need, which may be difficult. There are so many unknowns – from how long you’ll live and what medical problems you’ll have to investment performance and inflation rates. If you’re worried about running out of money, keeping all of your money during your life and then distributing it in your will may make sense.
Creating a Lifetime Gifting Strategy
If you’re interested in lifetime gifting, the following tips will help you create a strategy that balances the advantages and disadvantages.
- Make sure you take care of your needs first. This isn’t selfish – it’s practical.
- Discuss your plans with your loved ones. A frank conversation should help you avoid misunderstandings. For example, if you’re giving gifts now instead of using a traditional inheritance, let your loved ones know to ensure they won’t expect anything else.
- Consider alternatives to direct gifts to loved ones. You could help out your loved ones without putting money into their bank accounts. For example, if you want to help your grandchildren with their education costs, consider funding a 529 plan or making payments directly to a college. In addition to ensuring your loved ones spend the money how you intend, these strategies may have tax advantages.
- Understand tax implications. Although the annual gift tax exclusion should help you minimize your tax burden, there are limits – and those limits are subject to change.
- Work with an estate planning attorney. An estate planning attorney can help you explore all your options and understand the potential implications and tax issues.
Do you need help crafting an estate plan that leverages a lifetime gifting strategy? Contact Skinner Law.