9 Smart Reasons to Give Your Kids an Early Inheritance

When we think about inheritance, we often picture money, property, or other assets inherited after someone’s death. We envision a family garbed in dark colors perching eagerly (but not too eagerly) in a lawyer's office as the will is read.

But it doesn’t have to play out like this. What if giving your children an early inheritance now could benefit everyone involved, financially and emotionally?

There are 9 smart reasons why giving your kids an inheritance now may be a smart money move, simplifying your overall financial picture.

Your children may benefit far more from an inheritance in their 20s, 30s, or 40s rather than later in life. Whether it’s paying off student debt, purchasing a home, or starting a business, an early inheritance can help them gain a financial foothold sooner rather than later.

For instance, a young adult receiving $30,000 to buy a home could potentially buy a home sooner and avoid taking out a high-interest mortgage. 

This could save them tens of thousands of dollars in interest and PMI payments, not to mention the added wealth of increased equity through earlier home ownership.

Leave your kids an inheritance in a will, and you will have no way to influence how they spend it from beyond the grave. But, if you gift the money while you’re still alive, you can help guide their financial decisions.

For example, you could set your child up with a financial planner to create a long-term wealth-building strategy.

Selflessness is learned, not inherited. Passing down wealth also means instilling a sense of financial responsibility and generosity, not just gifting money in a free-for-all.

An early inheritance allows you to teach smart money habits, so your children learn how to invest, save, and donate their resources.

Gifting wealth early may help you qualify for higher Social Security benefits, as early gifting reduces your taxable income and overall assets. As benefits are based on total lifetime earnings, lowering your taxable income in later years may help you avoid higher tax brackets.

Need-based programs like Medicaid and Supplemental Security Income (SSI) also have strict asset limits. Reducing countable assets, such as non-homestead property, as a second vehicle, cash, or investments may ensure program eligibility and your ability to support your kids.

An early inheritance may bring tax breaks, especially if you take advantage of annual gift tax exclusions. In the U.S., you can currently gift up to $19,000 per year per recipient tax-free, reducing the taxable portion of your estate.

If your estate is subject to federal or state estate taxes, gifting assets now can reduce the heirs’ tax liability later on.

With federal estate taxes reaching up to 40% and state estate taxes reaching up to 20%, minimizing the estate’s value can significantly impact how much of your wealth you are able to pass down.

Probate, the legal process of proving the will and settling an estate, can be a lengthy and costly ordeal. Gifting assets early means you reduce the amount of heritable assets — and the need for your estate to go through probate.

This simplifies things for your heirs, as it can save months (if not years) of legal work and thousands of dollars in court, attorney, and estate administrator fees.

Nothing causes family feuds quite like money. Especially when it comes to an after-death inheritance where siblings feel assets were given out in a lopsided manner. If one party feels they were short-changed, it can cause resentment for generations to come.

If you give an early inheritance now, you can clearly communicate your intentions while you’re alive, and reduce the risk of acrimonious legal battles down the road. 

For example, you can explain why John gets the boat and $5,000 while Ted gets $25,000, and prevent your kids from speculating about who mom and dad loved best.

An early inheritance doesn’t mean you have to give everything to your kids now. You can still give them money after your passing.

Increasingly, many parents are opting for a blended approach: They gift some assets now to help their kids and have the pleasure of seeing them succeed, and then reserve the rest for later distribution.

This helps ensure you have enough income to live on without running out of money. If your financial situation changes, you still have control over your remaining funds.

An early inheritance may be a win-win for both you and your children. It allows you to reduce estate tax liability and help your children get ahead financially. 

However, gifting assets early isn’t without risk. Medicaid’s five-year lookback rule could impact eligibility for long-term care, poorly structured gifts can trigger surprise tax consequences, and there’s no guarantee your children will use the money responsibly.

If you don’t want them to blow the money after you’re gone, how will you feel watching the money go up in smoke now? 

There are plenty of considerations, so it’s crucial to consult with a financial planner or estate attorney to develop the best strategy that balances your generosity with long-term financial security. 

Plus, getting objective input that looks at your children’s ability to manage and build wealth is important.