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Why Make Your Heirs Wait?

Giving your children their inheritance now, instead of passing it on in a will, can be very satisfying. Here are some things to consider before fast-tracking your legacy.

TURNS OUT YOUR GRANDSON, the computer geek, wasn't wasting all that time on the couch with his laptop after all. Now he has created a killer mobile app and is working day and night to launch his own company. Or maybe your daughter has just finished her Ph.D. in microbiology and wants to become a founding partner in a biotech startup. Then there's your favorite grandniece, who's going to need a private coach to take her love for figure skating to the next level.

Even if you always thought of your financial legacy as something you'd leave your family after you're gone, real-life needs keep popping up—needs that could be met if you were willing to give now instead of waiting to pass your legacy on in your will.

Sixty percent of people 50 and older would prefer to give sooner rather than later, saying they want to enjoy helping their children pursue their dreams.

In fact, many people are making the choice to give now. According to a 2013 Merrill Lynch retirement study, Family & Retirement: The Elephant in the Room, 60% of people age 50 and older would prefer to give sooner rather than later, saying they want to be there to enjoy helping their children pursue their dreams. Women in particular favor that approach, with 65% saying they'd rather pass along an inheritance during retirement, compared with 53% of men who feel that way. Additionally, the tax laws have changed over the past decade, and the amount you are allowed to give away during your lifetime that is exempt from the gift tax is several times larger than it used to be. But for lifetime giving to be successful, there are some important issues to consider.

"It’s important to take the time and be deliberate in thinking through whether transferring some of your wealth makes sense now,” says Stacy Allred, head of the Center for Family Wealth at Merrill Lynch. “Think about the potential rewards and risks not only from your standpoint, but also that of your family members,” she adds. Consider asking yourself the following three questions before you rewrite your will.

Fast-tracking Your Legacy: Three Things to Consider

If I give to one, must I give to all?

Some of your children may prefer to wait for their inheritance, while others could benefit greatly from having the money now. "The most effective approach to giving may vary widely from one family to the next, with different individuals having different needs," says Allred.

For instance, if your grandson's startup requires seed money to be able to beat the competition to market, and other investors are hard to come by, giving him his entire inheritance now might make a lot of sense. You'll get the satisfaction of seeing him invest in his future. And he won't have to defer his dream. But consider, too, how other family members may feel about the gift, and what their immediate needs are. Talk with everyone, and make it clear that gifting now could affect how much they will receive later on, in your will.

The tax laws have changed over the past decade, and the amount you are allowed to give away during your lifetime that is exempt from the gift tax is several times larger than it used to be.

Is it a gift—or a burden?

Larger gifts, in particular, sometimes bring unwanted responsibilities. Ask yourself: Does your daughter want to run the family business? Does your son feel well suited to manage your private foundation? If, for example, you give one child control of a trust—and discretion over distributions to other family members—could you be thrusting that child into an unwelcome position?

Am I over-giving?

Before you give, work with your advisor to determine what you need for the rest of your life—and make sure you've set those resources aside. Otherwise, you may shortchange not only yourself but the very family members you're trying to help. You don't want to put them in a position of having to support you later on. Allred notes that this is a major concern for many families, with parents or grandparents giving away more of their wealth than they can realistically afford, then finding themselves without enough money to support their lifestyles.

For some people, the best approach is to give both now and later, Allred adds. "This provides you the flexibility to start small, and allows both the giver and receiver to benefit from the power of learning by experience what it means to be an effective giver and receiver. Then, if you choose to also leave assets through a will or testamentary trust, you can do so with added clarity, increasing the probability that your gift will be productive."

Giving Now or Later? The Tax Facts1

To the IRS, the timing of your generosity makes little difference. The U.S. tax code makes it pretty easy to give your children money, stocks or a piece of the family business—and it doesn't matter whether you make the gift during your lifetime or through your will. In 2019 you can transfer $11.4 million without the gift being subject to federal gift or estate taxes. (That amount is currently indexed to inflation, so it's expected to rise in future years.)

You're also free to give $15,000 annually to as many people as you like without owing current federal gift taxes or using up any of the $11.4 million in 2019. Plus, all of those amounts are doubled if you elect to split gifts with your spouse, with each of you claiming half the value of your gift.

So suppose in 2019 you and your wife establish a trust for your three children and fund it with shares of your company worth $4 million. You can count $90,000 of that amount as tax-free annual gifts to the three kids (three times $30,000), and use part of the $11.4 million exemption to cover the rest. You still have more than $7.4 million of your exemption (and $11.4 million of your spouse’s exemption) left to reduce or eliminate federal transfer taxes on any future bequests. And, of course, what you give now will reduce the size of your estate.

You might also keep in mind that generally, if you’re going to give assets to the next generation, anyone selling an asset they received as a gift that has grown over time must pay capital gains tax. That can reduce the benefit to the person who received the gift by more than 20% (before any state or other taxes), or up to 37% (before additional taxes) if they sell the asset a year or less after it was originally purchased.

For your particular circumstances, speak with your tax advisor and estate attorney.

3 Questions to Ask Your Advisor

  1. Are some assets more tax-efficient to give than others?
  2. How do I transfer the family business to my heirs?
  3. What should my children know about managing the money I give to them?

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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice.  You should consult your legal and/or tax advisors before making any financial decisions.



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