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Why Make Your Heirs Wait?

Giving your children their inheritance now, instead of passing it on in the 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's got 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 another 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, tax laws that once favored gifts through wills now make it just as easy to transfer assets during your lifetime. But for lifetime giving to be successful, there are some important issues to consider.

"You've got to think carefully about the benefits and the potential risks of transferring your wealth now, for both yourself and your children," says Michael Liersch, head of Behavioral Finance at Merrill Lynch Wealth Management. He recommends asking yourself the following three questions before you rewrite the 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 right approach to giving may be different within each family, with different individuals having different needs," says Liersch.

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.

Tax laws that once favored gifts through wills now make it just as easy to transfer assets during your lifetime.

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, 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. Liersch notes that this is a major concern for many families, with parents or grandparents giving away more of their wealth than they should and then finding themselves without enough money to support their lifestyles.

For some people, the best approach is to give both now and later, Liersch adds. "That way you can start small and refine your intent. Then, if you choose to leave a legacy in your will as well, you can really articulate what you want in a way that gives you confidence that it will be carried out in a productive way."

Giving Now or Later? The Tax Facts

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 2016 you can transfer $5.45 million without 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 $14,000 annually to as many people as you like without owing current taxes or using up any of the $5.45 million . Plus, all of those amounts are doubled if you're making a joint gift with your spouse.

So suppose 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 $84,000 of that amount as tax-free annual gifts to the three kids (three times $28,000), and use the $5.45 million exemption to cover the rest. You still have more than 1.5 million dollars of your exemption left to reduce or eliminate taxes on any future bequests. And, of course, what you give now will reduce the size of your estate.

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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