As a parent, the prospect of your children asking for an early inheritance can bring about a mix of emotions and considerations. On one hand, you want to support them in achieving their financial goals and aspirations, but on the other, you need to ensure that your own financial security, including retirement, remains intact.
While the immediate financial implications might seem straightforward, there are nuanced aspects that demand careful consideration. GOBankingRates spoke with Angela Dorsey, founder and financial planner at Dorsey Wealth Management, to get her valuable perspective on whether providing an early inheritance to your children is a wise decision.
Balancing Your Financial Well-Being
Obviously, the biggest question Dorsey asks you to consider if you’re thinking about a request for an early inheritance is whether it could jeopardize your own financial future.
“If your children ask you for an early inheritance, there are many factors to seriously evaluate,” said Dorsey. “First, make sure that by giving an early inheritance you are not jeopardizing your retirement. Be sure to include having enough money for possible healthcare expenses including long-term care.”
While it’s admirable to want to provide for your children, the last thing you want to do is compromise your own financial stability in the process.
Timing Is Everything
Dorsey said that one compelling argument for providing an early inheritance is that your children may need the money most during the years when they’re first striking out on their own. This is a time when financial pressures are often at their peak, and the money you can provide may be a true lifesaver when they’re working at an unpaid internship, paying off student loans, or starting a family.
“Is there a clear and good reason why your child is asking for an early inheritance?” asked Dorsey. “Is it for a home down payment, investing in a sound business plan, or some other compelling reason? If it is just to pay off debt, it may not be a good idea if your child has a spending problem.”
Dorsey advised that it’s crucial to be aware of the tax implications associated with an early inheritance. The annual gifting exclusion for 2023 is $17,000 per recipient.
“That means you could give up to $17,000 (or a married couple could give a total of $34,000) in annual exclusion gifts to a child. If you give more than the exclusion to a child, you will need to file tax forms to disclose those gifts to the IRS. You may also have to pay taxes on it.”
Dorsey emphasized that careful financial planning is essential to ensure that an early inheritance aligns with your overall estate planning goals and minimizes tax implications.
Retirement and Long-Term Planning
The decision to provide an early inheritance should also be seen in the context of your plans for your golden years.
“Consider your own financial planning goals when considering whether to give an early inheritance,” said Dorsey. “Were you planning to leave a financial legacy in the form of an inheritance? Or would you enjoy giving an early inheritance so you can see your children enjoy using the money you gave them?”
“If your child asks for an early inheritance, this is an opportunity to also have an open and honest conversation about your overall estate planning and your wishes,” said Dorsey.
It’s a chance to align your financial goals with your children’s aspirations and create a comprehensive roadmap that benefits both parties. This is also the perfect time to consult with a financial advisor, with your children present, and conduct a thorough analysis of the potential impact of the early inheritance you’re considering.
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