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Why you should consider giving an inheritance before death

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Leaving assets to your loved ones or your favorite causes can give you a great sense of satisfaction. As you pass on the resources you've built up during your life, you can make life financially easier for others and make a positive difference in the world. Many people give everything away only after they've died—but you don't have to wait if you don't want to.

Giving an inheritance before death could make sense for you, especially if you go about it wisely. Let's look at the pros and cons of passing on your wealth early and how to gift property before death to the people and causes you cherish most.

What is an early inheritance?

When you give an inheritance early, you are essentially handing down your assets before your death rather than waiting for it to be done after you pass. For instance, if you intend to leave money, financial holdings, property or something else to your loved ones or favorite charities, you don't have to wait—you can pass on your assets while you're still alive. Early giving can be particularly rewarding if you have valuables or items that are earmarked for certain family members and you want to see the smiles on their faces when you pass on any meaningful gifts.

If you wait until death, assets that are still in your name typically go to your estate and are distributed according to your will. Meanwhile, assets held in trusts or under joint ownership may go to others by different methods, so that's worth considering sooner rather than later.

Defining a gift

As the IRS defines it, a gift is anything you give away without receiving something of similar value in return. That includes money or items you give to friends and family members as well as donations to charities. If you want to distribute your inheritance before your death, you should be cautious about how much you give away since the IRS has some rules about sizeable gifts (more on that below).

How to gift assets before death

Giving away your inheritance while you're alive or waiting until after you've passed isn't an either/or choice. Gifting can work in tandem with your will and other elements of your estate strategy. If you decide it makes sense to give assets away during your life, you have several options. Here are some common ones:

  • Outright transfer. You might write a check, physically hand over items or otherwise transfer property directly to the recipient. Another way to transfer an asset involves adding others as joint owners on your accounts, which may automatically make them owners after your death—but you should consult with tax and legal experts before going down that road.
  • Deed changes. It's possible to add owners to real estate by adding them to the property's deed. This is best done with careful guidance from an attorney and a tax specialist, as it may cause loved ones to miss out on tax benefits, such as a step-up in basis after your death.
  • Living trusts. Creating a trust can allow you to direct what happens with assets, potentially both during and after your lifetime. Depending on how you arrange things, you might still have access to funds if you need the money. An attorney can help you create the appropriate trusts that meet your needs.
  • Pay others' expenses. You might pay educational institutions directly for tuition, or you could pay life insurance premiums to help provide protection and build a cash value. You can even take care of fun things, like vacations.

Advantages of giving an inheritance early

Passing on your assets before you die can feel rewarding both personally and financially. You may want to take some time to think about why you want to give and how you can make the biggest impact on the people and causes that matter most to you.

Here are three benefits of arranging an early inheritance:

1. Helping others

Lifetime giving can bring joy to you and others. By giving early, you can open doors for your loved ones, maybe even when they need it most:

  • You could fund a young adult's academic pursuits or help them buy a home.
  • Giving while you're alive can bring satisfaction by witnessing how people and organizations benefit from your help.

2. Shaping the future

When you give an inheritance before death, you have the opportunity to offer your guidance along with it.

  • You can encourage recipients to continue your legacy of giving and helping others.
  • You can share your knowledge and teach others how to manage assets for subsequent generations.

3. Maximizing your money

You may benefit financially from lifetime giving strategies. Of course, it's critical to work with your accountant and financial advisor when designing your charitable giving strategy to avoid any tax or fee surprises.

  • You may be able to reduce the size of your estate, potentially leading to lower probate costs and estate taxes after your passing so more money can go to the people and charities you value.
  • You can take advantage of income tax deductions when donating assets to tax-qualified charities.

Potential pitfalls of giving an inheritance early

Before you start doling out your cash and assets, be aware of the challenges it can involve. Here are some situations you could end up navigating:

Values conflicts

You don't want to let over-generosity get the better of you—nor do you want to endanger your relationships.

  • Think about how much you can comfortably give without putting yourself at risk. Make sure you're keeping a financial cushion for any surprises, like health care, emergencies or lifestyle changes.
  • Realize relationships can change in unexpected ways after money and assets change hands. Will you be happy no matter what the person does with your assets, or could it create friction between you? Plus, consider what might happen with anyone you don't give assets to.

Medicaid lookback period

You might be counting on Medicaid for long-term care or other health services. Neither Medicare nor private health insurance offers much coverage for long-term care, so it's wise to protect your Medicaid eligibility.

  • You can face Medicaid penalties if you give away assets to loved ones or charities without getting something of equal value in return within five years before you apply for benefits. This is also known as the lookback period.
  • If that happens, Medicaid may delay payment for services you need. You might have to recover your assets or go through a lengthy appeal before you can become Medicaid-eligible.
  • It's not impossible to gift your assets and still qualify for Medicaid. One potential way to do so is to conduct your giving at least five years before applying. An elder law attorney can explore other approaches and strategies with you.

Legal and tax issues

In any case, it's best to consult with your attorney, accountant and financial advisor. They can work together to help you coordinate your gifting wisely. Some potential issues may include:

  • Ownership legalities. Let's say you add a joint owner to an account while you're alive so they can access it. This could potentially mean it's legally not only yours anymore. If that person has unpaid creditors, they may be able to seize assets you still need. This and other legal issues are worth thinking through with professionals.
  • Tax complications. In 2022, the IRS allows you to gift up to $16,000 per person annually without incurring a gift tax, and you can give away (or leave) up to $12.06 million over your lifetime. Keep in mind that these numbers change every year. Beyond these IRS limits, you may need to file forms and pay taxes. It is important to note that capital assets given during life take on the tax basis of the previous owner, when these assets are given after death, the assets are assessed at current market value. This may cause loved ones to miss out on tax benefits, such as a step-up in basis after your death. Experts can help you foresee these situations and explore your most economical options.

Getting help with transferring your wealth

Giving away assets during your lifetime can be helpful for others and rewarding for you personally and financially. You can enjoy the satisfaction of watching others put your assets to good use, and you can provide funds sooner rather than later, possibly when the money is needed most.

At the same time, you can't ignore the complications that may arise when giving assets away. You should be careful to not give away so much that it cuts into your essential funds or interferes with eligibility for services or taxation.

You don't have to navigate this alone. An outside opinion, especially from professionals, is often helpful. Connect with a local financial advisor who can help you evaluate various giving approaches and serve as a sounding board while you make decisions.

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Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.
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