It can be a “financial helping hand” and a great way to test-drive how well the adult kids will handle their inheritance when the time comes..
As record numbers of baby boomers reach retirement age, the concept of living inheritances, also known as "accelerated inheritances," is gaining attention. A living inheritance allows parents to give some of their assets to their children while still alive, providing an interest-free and usually tax-free advance on their inheritance. This can help adult children with major expenses like a down payment on a house, starting a business, or funding education. For parents, it's a way to offer financial support and assess how well their children manage the inheritance.
Ultrawealthy parents often worry about the impact of substantial wealth on their children, fearing it might spoil them. Many wealthy families have conversations about preparedness and responsible financial behavior. Living inheritances can be structured with stipulations to ensure children handle the money wisely, such as giving money with the condition of observing its management. Proper structuring and reporting are crucial, and the most important aspect is the quality of dialogue between generations. An example includes a client helping their daughter and son-in-law with a down payment on their first home, providing financial relief while witnessing their joy.
There are pros and cons to living inheritances. Benefits include tax advantages, shared experiences, financial relief, and reducing future estate taxes. However, potential downsides include loss of incentives for children, over-gifting that could affect parents' financial security, and possible family dynamics issues. Other tools, like charitable trusts, can help provide steady income streams without spoiling children. The goal is to find the right balance, as famously noted by Warren Buffett, to leave children enough to do anything... but not so much that they do nothing.
Want to read the full article on WealthManagement.com? Pros and Cons of a Living Inheritance
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