After years of building your savings and investing wisely, you can now enjoy the fruits of your labor and then some. You might ask yourself, what comes next?
Opting to give an early inheritance to your family allows you to see the impact of your generosity and opens the door to advanced estate planning strategies that can benefit both you and your family. There is also a practical side. By giving early, you can ensure your money is used when it is most needed. Whether that manifests itself as helping with medical bills, paying off debt, or providing financial stability during a job loss—an early inheritance can be life changing for those you love. Open communication will play a key role because giving an early inheritance may help them dramatically in the short term, but it could also create challenges like dependency or poor financial choices. By discussing your intentions with your family, you ensure they understand the purpose of the gift and your expectations for the gift. Assuming giving now is the best decision for you and your family, consider which strategy aligns with your objectives:
Select Estate Planning Strategies
1. Gift Tax Annual Exclusion Gifts
It is said that the single most powerful estate tax strategy is to use the annual gift tax exclusion. This allows you to give each recipient a certain amount per year without using any gift tax exemption. For gifts made in 2024, the exclusion is $18,000 per donor per recipient, and it is $19,000 for 2025 gifts. If you are married, you and your spouse can each utilize the exclusion, effectively doubling the amount you can give without tax consequences. By gifting within this limit annually, you can meaningfully reduce the size of your estate while providing immediate benefits to your loved ones. Note that a gift tax return is required if cumulative gifts to one recipient within a year exceed the annual gift tax exclusion.
Many people choose to make these gifts outright to their adult children. The primary advantage of this approach is its simplicity: it enables straightforward transfers without the complexities of trusts or other estate planning tools. However, the downside is that once the gift is made, the child can use or dispose of it as they wish, which may not align with your long-term intentions. Because the gift is immediate and irrevocable, you relinquish control over how the funds are used or invested, which can be a consideration for those concerned about how their child might manage the gift. As a result, many of our clients use trusts as the recipients of such gifts, which if properly drafted and implemented qualify for the gift tax exclusion.
2. 529 College Savings Plans
A 529 plan offers a tax-advantaged way to save for educational expenses. Contributions to a 529 plan grow income tax-free, and withdrawals for qualified educational expenses are also tax-free. By contributing to a 529 plan for your children, grandchildren, or other young family members, you can ensure that they have funds available for their education, while enjoying these tax benefits.
From an estate planning perspective, 529 plans offer a way to reduce the size of your estate while benefitting your loved ones. Contributions to a 529 plan qualify for the annual gift tax exclusion discussed above. Many of our clients choose to “front-end load” 529 gifts for a young grandchild. This allows you to spread the gift over 5 years for gift tax purposes, effectively increasing the amount you can transfer without using any gift exemption. In 2024, a married couple could contribute $180,000 ($18,000 x 2 donors x 5 years). Note however that unlike using a single annual exclusion, this requires filing a gift tax return. In addition, annual exclusion gifting for that recipient is no longer available for the next five years (except for COLA increases).
One of the unique benefits of gifts to a 529 plan is that you can retain control over the funds even after they are contributed. Unlike an outright gift, where control is transferred once the gift is made, the owner of a 529 plan continues to manage the account, ensuring that the funds are used as intended. Indeed it is even possible for you to change the beneficiary of the 529 account to someone else in the family. And beginning in 2024, the 529 plan beneficiary may roll any unused assets to a Roth IRA, subject to certain limitations.
3. Intentionally Defective Grantor Trusts (IDGTs)
Beyond the use of the gift tax annual exclusion, an Intentionally Defective Grantor Trust (IDGT) is said to be the most significant estate planning tool of all, mostly due to its income tax features. The “defective” part of an IDGT refers to its status under income tax rules, despite its effectiveness in achieving estate planning goals.
For estate planning purposes, when you contribute assets to the trust, it is considered a complete and irrevocable gift. Whereas, due to certain “tax-driven features” drafted into the trust instrument, the income generated by the trust is attributed to you for income tax purposes. This makes it what is called a grantor trust for income tax purposes. The result is that you, rather than the trust, are responsible for reporting the income/capital gain associated with the trust earnings on your individual income tax return.
Your resulting income tax payment is often called an “invisible gift” because it does not trigger additional gift tax consequences. The IRS views you as the owner of the trust for income tax purposes, and as such, the tax payments are seen as an extension of your tax liability rather than a new gift to the trust. Even so, the trust assets, including any future appreciation, are not included in your estate, reducing your estate tax exposure. As with most wealth transfers, this strategy allows you to give assets to your heirs while reducing your estate tax exposure and leveraging your family wealth more effectively. But most compelling is the invisible gift feature.
The Practical Benefits
By transferring assets now and including your family in the process, you can witness the benefits (or risks) associated with your heirs’ use of their inheritance. This can help inform you on how to adapt your overall estate plan. Additionally, utilizing advanced strategies can optimize the tax benefits and ensure that your wealth supports your family’s needs for the long term.
Ultimately, deciding to give an early inheritance to your family members represents a deeply personal choice. It first requires balancing your desire to support your family against the practical needs of your own future. Once you determine a current gift is right for your family, consider leveraging this by using advanced estate planning tools. This way you can make the most of your wealth, support your loved ones, and enjoy the peace of mind that comes with knowing your legacy is having a meaningful impact.
Sometimes the greatest gift is being there to see your legacy unfold.