The Benefits of Creating a Living Inheritance for Your Heirs
Following decades of diligent saving and investing, many Baby Boomers are finding themselves sitting on a nest egg that is significantly larger than they will realistically need to live on as they enter retirement. In fact, according to Fidelity's most recent 401(k) Millionaire study, the number of people with $1 million or more in their 401(k) accounts reached another all-time high.
For many, this creates an opportunity to rethink the traditional approach to inheritance. When most people think about leaving an inheritance to their heirs, they imagine transferring assets after they’ve passed away, ensuring their children and grandchildren are financially secure for years to come. While this traditional approach to inheritance has its merits, there is an increasingly popular alternative that offers profound emotional, financial, and practical benefits: a living inheritance.
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Also known as an "accelerated inheritance," a living inheritance is a proactive approach to wealth transfer. At its core, a living inheritance is simply the transfer of assets or financial gifts to beneficiaries, typically children or grandchildren, during the giver's lifetime rather than after their death.
Think of a living inheritance as an advance on their inheritance designed to help your adult children with major expenditures (e.g., a downpayment on a house), assist with the cost of childcare, provide startup capital for a new business venture, or fund a grandchild’s education. These are all things that have a tremendous impact today, as opposed to decades later, when your adult children will presumably be significantly more financially stable.
Life’s financial milestones, such as purchasing a home, starting a family, or paying off student loans, often come at a time when your children and grandchildren may not have accumulated significant wealth themselves. By providing financial assistance during these critical periods, you can make a substantial difference in their lives. This timely support can prevent them from incurring unnecessary debt, allowing them to build a stronger financial foundation for the future.
The essence of a living inheritance is that it allows you to see the tangible benefits your gifts bring, fostering closer relationships and providing timely support when it’s most needed. What’s more, helping your offspring with a downpayment on a home or offering to foot the bill for a family vacation allows you to share in their joy and create lasting memories, which would not be possible if you had waited for them to receive their inheritance after your passing.
There’s no one right way to structure this type of gift. The age of the children makes a difference, of course, as does the family’s financial circumstances. But the most important aspect of any living inheritance arrangement is the quality of the dialogue between the generations.
Such a gift should help to establish lines of communication regarding finances and offer an opportunity to begin imparting some of your earned wisdom onto your next generations’. You can provide not just financial support but also guidance, mentorship, and wisdom, helping loved ones navigate the complexities of life with the benefit of your experience. This transfer of knowledge and values can be just as valuable, if not more so, than the monetary gift itself.
Additionally, a living inheritance is a great way to test-drive how well your adult children will handle their inheritance when the time comes. By giving them a portion of their inheritance now, you can observe their financial behaviors, decision-making, and responsibility firsthand. This real-time feedback allows you to assess whether they may need further guidance or education in managing wealth, and it provides valuable insights into whether you need to make any adjustments to your estate plan or adjust your expectations for future asset distributions.
Creating a living inheritance is more than just a financial transaction; it is an opportunity to leave a lasting legacy. By providing financial gifts during your lifetime, you can not only make a meaningful impact on the lives of your children and grandchildren, but you get to experience the satisfaction of seeing your generosity at work. A living inheritance also gives you more influence over how those gifts are used, allowing you to offer guidance, set specific intentions, or help fund important milestones that align with your own values and vision for your family’s future.
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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants.
Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.
Investments in securities and insurance products are:
NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE