Transferring an inheritance before death can be advantageous for both the giver and the recipient. However, navigating this process requires careful consideration of various factors, including tax and legal issues.
In this guide, our CPAs will explore the pros and cons of giving inheritance before death, offering key considerations and strategies for efficient estate planning to guide you through this process.
Why Consider Giving Inheritance Before Death?
The key is to understand how early giving impacts your financial future. Transferring assets before death offers several potential benefits, such as:
Estate Tax Reduction
By giving away assets during your lifetime, you can reduce the size of your taxable estate and potentially lower your estate taxes. This is especially important for those with substantial wealth exceeding the federal government's lifetime exemption. The amount of estate taxes you owe will depend on the amount you leave in your estate, so the earlier you give the money, the less you pay in estate taxes.
Avoid Probate
Giving assets in a timely fashion can help avoid probate proceedings. It’s a complex and time-consuming legal process that can be expensive and delay the transfer of assets to your beneficiaries. Instead, consider giving inheritance early to speed up the transfer of the money.
Financial Support for Family Members
Transferring assets can provide financial support to family members who might need it while you’re still alive. For example, it’s common to use early inheritance to support children, especially for children's inheritance, or to provide financial support to family members facing financial challenges. Some people also give money to their children for their education. Financial support can be in the form of cash, property, or other assets.
Medicaid Planning
In some cases, giving early might affect your Medicaid eligibility. This is particularly relevant for individuals seeking long-term care assistance, as the five-year lookback period for determining eligibility might be impacted. It is important to note that this is a complex area. Consult an attorney and a financial advisor.
Control and Flexibility
Giving assets during your lifetime allows you to maintain control over how and when the assets are used. For example, you can specify conditions or restrictions on the use of the funds. This also allows you to see how the beneficiaries use the money and perhaps modify the financial plan going forward.
Tax Advantages
Depending on the size of the gift, certain gift tax exclusions may apply, minimizing your gift taxes. You should also remember the annual exclusion, which allows you to give a certain amount of money tax-free each year. For 2025, this limit is $19,000.
When Does Giving Inheritance Before Death Make Sense?
There are several circumstances where making an early distribution of inheritance might be appropriate:
- Immediate need: If a family member faces an immediate need, such as significant medical expenses or financial hardship, transferring funds earlier may be beneficial. For example, you might want to give money to your child for an education or as a wedding gift.
- Advancement of financial goals: Transferring assets can help beneficiaries achieve their financial goals, such as purchasing a home or starting a business.
- Minimizing estate taxes: For high-net-worth individuals, early distributions can be a strategic way to reduce their estate taxes, especially when they have wealth exceeding the lifetime exemption.
- Avoiding probate: Transferring assets into a living trust can help avoid probate and ensure a smoother transition of your estate. This strategy can allow you to leave assets to your beneficiaries in a more timely fashion.
Which Assets to Consider for Early Inheritance
Not all assets are equally suitable for early inheritance. The Lewis CPA team has provided guidance on which types of property might be appropriate to give during your lifetime:
Cash and Securities
Cash gifts are straightforward and offer maximum flexibility for recipients. Similarly, stocks, bonds, and other securities can be relatively simple to transfer. Consider:
- The basis of investments transfers with the gift, unlike inheritances received after death, which get a stepped-up basis.
- Highly appreciated assets might be better left for inheritance to take advantage of the stepped-up basis.
- Cash from retirement accounts may trigger income tax consequences when withdrawn for gifting.
Real Estate
Real property can be transferred during your lifetime, but this requires careful consideration:
- Property can be transferred outright or placed in a trust.
- You might retain a life estate which allows you to live in or use the property until your death.
- Partial interests in property can be given over time to stay within annual exclusion limits.
- Consider the property's basis and potential capital gains tax implications for recipients.
Business Interests
Transferring business ownership requires particularly careful planning:
- Ownership can be transitioned gradually through gifting shares or interests.
- Family limited partnerships or limited liability companies can facilitate transfers while maintaining control.
- Buy-sell agreements can provide structure for transitioning ownership.
Personal Property
Items of personal property such as artwork, jewelry, furniture, and collectibles can also be part of an early inheritance:
- Document the value of significant items with professional appraisals.
- Consider the emotional attachments and potential family dynamics.
- Create clear records of who receives what to prevent future disputes.
Tax Implications of Giving an Inheritance Before Death
The federal government imposes taxes on transferring money or property to others while receiving nothing (or less than full value) in return. However, not all gifts are taxable. Here are the key considerations to keep in mind:
Annual Exclusion
As of 2025, you can give up to $19,000 per recipient per year without triggering gift tax reporting requirements. This means a married couple can give up to $38,000 annually to each recipient through gift-splitting. These amounts don't count against your lifetime exemption.
Lifetime Gift Tax Exemption
Beyond the annual exclusion amount, the federal government allows a substantial lifetime exemption. Currently, the exemption is $13.9 million per individual, meaning you can give up to this amount over your lifetime — beyond the annual exclusions — without paying gift tax. This exemption is shared with the estate tax exemption.
Gift Tax Rates
If you exceed your lifetime exemption, gift tax rates range from 18% to 40% with the exact amount depending on the amount over the exemption.
Special Exemptions
Certain gifts are exempt from gift taxes regardless of amount, including:
- Payments made directly to educational institutions for tuition;
- Payments made directly to medical providers for medical care;
- Gifts to spouses (if they are U.S. citizens);
- Gifts to qualified charities.
State-Level Considerations
While we've focused on federal gift taxes so far, it's important to note that some states have their own inheritance or estate taxes with different thresholds and rates. This is why it’s so important to consult with a financial advisor who understands both federal and state tax codes.
Cons of Giving an Inheritance Before Death
We’ve highlighted some of the numerous potential benefits, but there are also some drawbacks to consider:
Loss of Asset Control
Once you've given away assets, you generally lose control over their use. While you could make certain conditions with your will, you won’t have the same control as you would if you kept the assets. Unless you arrange for a trust, the beneficiaries can use the money as they see fit.
Potential for Financial Instability
Giving away a significant portion of your assets could potentially impact your financial stability, especially if your financial situation changes unexpectedly. You should always maintain enough funds to meet your own financial goals, including healthcare costs, retirement expenses, or other needs.
Legal and Administrative Costs
Transferring assets involves some legal and administrative costs. This might include attorney's fees or other professional fees. Also, the assets must be properly transferred, a potentially complex process depending on the type of asset.
Unforeseen Circumstances
Life is unpredictable. Giving significant assets before death leaves you exposed to the possibility of unforeseen circumstances. If your financial situation drastically changes for the worse, you could find yourself without the resources you might need to take care of yourself.
Tax Implications for Recipients
The recipient of the gift may also face potential tax implications. For example, the recipient might need to pay capital gains tax on certain assets. Tax implications could vary depending on the circumstances.
Key Considerations When Giving Inheritance Before Death
Before deciding to give inheritance to a loved one early, carefully consider these key factors:
- Your own financial situation: Assess your current and projected financial needs to make sure you have sufficient funds to support yourself and meet your future financial goals. Be aware that, in the United States, a large amount of money transferred might affect your Medicaid eligibility. Understand your financial situation and develop a comprehensive financial plan from there.
- Tax implications: There are also potential gift tax and estate tax implications to consider, and the IRS limits must be carefully reviewed. As a best practice, it’s wise to consult with financial advisors or tax professionals. You should review your own financial situation as well as the financial situation of your beneficiaries.
- Beneficiaries' needs: Consider the recipients' needs and whether early distribution would be beneficial for them. This includes assessing their financial goals. Is there an immediate need for the money?
- Asset type: The type of asset being transferred impacts tax implications. The tax consequences of giving away cash differ from transferring property. Some assets might result in a capital gains tax, so it’s always ideal to seek expert advice.
- Legal and ethical considerations: Ensure the gift is legally sound and consider any ethical implications, such as the potential impact on family members or implications concerning children’s inheritance. Any legal or ethical conflicts can be avoided through professional advice.
At Lewis.cpa, our team provides comprehensive and hands-on estate planning and tax advisory services to guide you through this process to guarantee a smooth and tax-smart transfer of your wealth. Our team will work closely with you to develop a personalized plan that minimizes tax liabilities and achieves your unique estate planning objectives.
Create Your Early Inheritance Strategy with Lewis.cpa
When it comes to inheritance, there's no one-size-fits-all solution. The decision of whether to give an inheritance before or after death depends on individual circumstances, financial goals, and family dynamics. We understand that this is an incredibly important and personal decision. That's why seeking professional guidance from a CPA matters.
Contact us at Lewis CPA today for a confidential consultation to explore how giving an inheritance before death might benefit both you and your loved ones. We emphasize our exemplary service and are passionate about helping our clients achieve success and peace of mind. Let's take the first step toward a strategic, tax-efficient giving plan together!
