Many people want to help their loved ones get financially secure before they die. Inheritance tax planning is one way to do that.
However, if you have a large estate, you may be subject to inheritance taxes at the state and federal level. Early inheritance planning can reduce the size of your estate and thus reduce any inheritance tax liability that could arise.
Gifting Assets Outright
An inheritance tax is a tax on the transfer of property from the estate of a deceased person to their heirs or beneficiaries. It is a levy on the privilege of transferring property upon death. Inheritance tax California, is not imposed on the property but rather on the right to receive it.
Whether you want to help a loved one with a financial challenge or wish to leave money, assets, or property to a favorite charity, early inheritance gifting can be a smart move. The process also makes it easier to avoid paying inheritance tax when you pass.
Giving assets outright to take advantage of tax efficiencies is typically better than leaving them in a trust. In 2023, the federal estate and gift tax exemption is set at $10 million per person – an exceptionally high figure compared to the $5 million base amount since 2006.
When you give an asset outright, your beneficiary can immediately access the funds. It can be helpful if your child or grandchild has a specific goal, such as starting a business or buying a home. However, outright gifts can also be vulnerable to creditors and claims by ex-spouses and could be included in your beneficiary’s estate at death, meaning it might be taxed twice.
If you plan to gift an inheritance outright, seeking professional advice from a Probate Attorney to ensure your estate plan is structured properly is a good idea.
Transferring Assets Through a Trust
When an individual dies, their assets go to their estate and are distributed by the will. However, if you desire to give money or assets to your loved ones while still alive, consider setting up a trust. Creating a trust gives you the flexibility to provide for your beneficiaries while protecting your legacy and reducing tax liabilities.
The advantage of a trust is that it can keep your financial accounts out of probate, making it easier for your beneficiaries to access the funds after you’re gone. This is especially important if you have bills that already name a spouse, child, or other beneficiary – these are often called “payable on death” or “transfer on death” (TOD) accounts. You can change the beneficiary to your trust to avoid these accounts going through probate.
Early inheritances can help your loved ones climb the property ladder or fund a big-ticket purchase like a new car. They can also help them save for future events such as retirement or the cost of care.
Whether considering a lifetime gift or an early inheritance, working with a financial professional to ensure you aren’t over-giving is best.Â
Making a Charitable Donation
Whether you want to leave cash, financial assets, or property to your loved ones or charity, it is possible to do so while still alive. This is known as early inheritance gifting and can provide certain tax advantages.
For example, if you give heirs an inheritance before you die, the amount of your estate subject to inheritance tax (IHT) will be significantly reduced. It can make a difference to your family, especially if you are leaving behind a sizable fortune. In addition, if you give gifts within seven years of your death, the people you give to will not have to pay IHT.
While IHT can be a significant expense, you should not let this stop you from pursuing your charitable goals. You can donate money or assets to charities, including setting up a trust and using the annual exclusion.
You can also use IRA Required Minimum Distributions (RMD) to give to charity while lowering your taxable income. You can even “bunch” your contributions into a year to exceed the standard deduction threshold. However, working with an experienced financial planner is important when considering charitable giving. They can help you find the best way to make your donations while achieving your financial and legacy goals.
Making a Gift Through Insurance
Many individuals want to provide their children and other heirs with financial help as soon as possible. This may be due to several reasons, including needing to help with a child’s living expenses or helping them get onto the property ladder.
One way to do this is by giving them an inheritance outright. However, if you’re not careful, this could have significant tax consequences for you and your heirs. This is why it’s best to seek expert advice before making any decisions on how much to give or how to do so.
Another option is to make a gift through insurance. It can be a great way to help with your child’s living expenses, and it also provides a form of tax efficiency. You can give each beneficiary a cash amount from your life insurance policy. However, it’s important to consult with a qualified financial professional before doing this, as they can help you determine how much money you can afford to give away without compromising your financial future.
Giving your loved ones an inheritance is an excellent way to help them achieve their dreams and goals. However, it’s important to understand the complexities of inheritance tax planning before making any decisions. By working with an experienced estate lawyer and a financial advisor, you can ensure that your estate plan will be structured in the most tax-efficient way.
