Does It Make Sense to Give Money to Your Kids While You’re Still Living?

Transcript of Podcast Episode 303

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, does it make sense to give money to your kids while you’re still living?

The term “accelerated inheritance” is a relatively new way of describing an old idea: parents giving some of their assets to their adult children while they’re still living, rather than waiting until they die.

It certainly does make sense in some cases. Financially secure parents are usually inclined to help their children, who may have a new mortgage, childcare expenses, or student debt.

Note that gift tax exclusions can be used when funding an accelerated inheritance. This means that both you and your spouse can give each of your children up to $18,000 in 2024 without any gift tax implications. For example, a husband and wife with two children can give $36,000 in annual individual gifts to each child, for a total of $72,000, without creating a taxable gift.

If you go beyond this amount, you must file a federal gift tax return. But that doesn’t necessarily mean you’re going to owe any gift taxes. Instead, you count the overage against your lifetime federal gift and estate tax exclusion amount. In 2024, the combined lifetime gift and federal estate tax exclusions are $13.61 million per person. So, if you go above the $18,000 annual exclusion amount, you won’t have to write a check to the IRS, unless you’ve gifted more than $13.61 million. Note that without a change in the tax law, the lifetime exclusion amount will be reduced in half at the end of 2025.

So, giving large amounts of money to your children can be easy and without tax complications. But when is it a good idea, and when it is a bad idea? Here are some of the pros and cons of accelerated inheritance.

First, some of the advantages:

• Easing your child’s financial burden. This can be especially important if one of your children has unusual expenses such as high medical bills, alimony payments, or has a child of his or her own with special needs. It could be a chance to help reduce their financial stress and improve their psychological well-being.
• You get to witness it yourself. Your kids will enjoy the opportunity you give them. But more than that, you might also enjoy seeing the impact you have with your own eyes.
• It can be like a test drive. Gifting to your children now might just be a good way to see if they can handle larger amounts later on.
• You are (hopefully) deepening the family connection while you’re still there to see it. Financial security, and an appreciation for what you have done for them, might bring your family closer together.

Now, some of the disadvantages:

• Sibling rivalry. No matter how hard you try, it can be very difficult to truly treat each child equally. What if one went to a more expensive school than the other? What if only one of the children is involved in the family business? Giving assets away now can awaken some long dormant resentments.
• Giving away too much. Sometimes your generosity can get the better of you. What if you give away so much that if affects your own lifestyle? This tends to happen when people end up living longer than they had anticipated. As Mickey Mantle is quoted as saying, albeit in a different context, “If I had known I was going to live this long, I’d have taken better care of myself.”[1]
• Diminished work ethic. Could gifted or inherited money make your child less motivated to work hard? In some cases, it certainly can. Perhaps the best way to avoid this is by structuring an accelerated inheritance to take place gradually.

For those who are hesitant, there is one other piece of good news. You don’t have to give them all this money in cash. You can structure the living inheritance in the form of a trust. With qualified legal assistance, a trust can be used as a way to protect assets against creditors, divorces and spendthrift ways.

Your Security Mutual Life insurance advisor can help get the process started. Your Security Mutual Life insurance advisor will assemble your team and coordinate with your attorney and tax professional to review your situation and to determine the plan that will best suit your needs and objectives.

[1] Schwartz, Larry. “More Info on Mickey Mantle.” espn.com. https://www.espn.com/classic/000813mickeymantleadd.html (accessed October 4, 2024).

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