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Early Giving: A Thoughtful Approach to Building Generational Wealth

Early Giving: A Thoughtful Approach to Building Generational Wealth

October 25, 2023

Building generational wealth is a long-term goal that can be achieved through careful planning and execution.  One way to start building generational wealth is to give adult children an early inheritance.  For many affluent families, gifting cash and assets sooner rather than later can help maintain and grow wealth, as well as reduce transfer taxes.  The planning specialists at Cedar Point Financial Services LLC work with families and their advisors in developing gifting strategies which benefit everyone involved.

A Helping Hand

There are many benefits to early giving, including:

  • Helping children achieve their financial goals.  An early inheritance can help children pay for a downpayment on a home, start a business, or provide the opportunity to invest and grow the inheritance over a long-time horizon. This can give them a significant head start in life and help them achieve their financial goals faster.
  • Minimizing estate taxes. The federal estate and gift tax exemption is currently $12.92 million per person, and is scheduled to rise slightly in 2024, and again, in 2025, before falling to approximately $7 million in 2026, unless Congress intervenes. This means that $12.92 million can be given away today without having to pay estate or gift taxes.  In addition, there is an annual gift tax exclusion amount of $17,000 per beneficiary in 2023.  By giving away some assets early, the size of an estate can be reduced, which will result in correlated savings on estate taxes.
  • Avoiding probate.  Probate is the legal process of transferring assets from a deceased person's estate to their heirs.  It is often a public process that allows for challenges to an estate plan, potentially circumventing the deceased’s intentions.  In addition, probate can be a long, expensive process, so avoiding it can save time and money.  Avoiding it also ensures that the deceased’s assets are distributed pursuant to his/her wishes. 

What is a Gift?

According to the IRS, a gift is a “transfer” of any type of property by one individual to another. Money, property, land, vehicles, and other assets may all be considered property.  Gifting may also include income from a property without the expectation of receiving something else of equal value in return.

An inheritance may include money, real estate, personal items, or a combination of assets.  Keep in mind that selling an asset for less than its value, reducing interest charged, or charging no interest can also be considered gifts.

Not so Fast

Of course, there are also some things to consider before giving an early inheritance, such as:

  • Making sure the gift does not cause financial harm.   While someone might be in excellent financial shape today, they do not want to give away so much money that they end up struggling to meet their own financial needs, including the possibility of high long-term care and medical costs associated with aging and longevity.
  • Making sure children are responsible with the money.  Those considering advancing part of an inheritance should ensure that their heirs will use the money wisely and not waste it.
  • Getting professional advice. It's a good idea to meet with an estate planning attorney and the experts at Cedar Point Financial Services LLC before making any decisions about early giving.

If you're considering giving an early inheritance, it's important to weigh the pros and cons carefully.  With careful planning, early giving can be a great way to help your heirs achieve their financial goals and build generational wealth.

Be Smart About Early Giving

Here are some tips for making the most of your early giving:

  • Be thoughtful about goals.  Gifting assets can have emotional, tax, financial, and/or lifestyle implications for everyone involved.  It is critical to weigh how the goals of the gift may be impacted by any potential positives or negatives in advance.
  • Does the gift have strings attached?  To ensure that a gift’s recipient uses an asset as intended, there are structures, such as trusts and LLCs, that will allow the gift-giver to guide the use of the following: the transfer of money, other assets, and/or family business interests.
  • Consider a wealth replacement contingency.  To ensure that a gift does not harm the giver in the long-term, a cash value life insurance policy can provide a tax-efficient method to save additional funds.  A policy’s income tax-free death benefit can also provide for a spouse and other family members, and/or offset family business liabilities.

Amplifying Giving with Life Insurance

Life insurance can play more roles in giving an early inheritance than just wealth replacement for the giver.  By making all or part of the gift a cash transfer to an irrevocable trust using the giver’s annual and/or lifetime federal estate and gift tax exemption, recipients can benefit in various ways:

  • The most obvious benefit is that a gift will have been advanced and leveraged in the form of a tax-free death benefit, while the benefit will be delayed until the death of the insured giver.
  • The trustee may be able to take tax-preferred or tax-free distributions from a policy’s cash value to benefit the beneficiaries during the lifetime of the insured giver.
  • The insured of the policy does not have to be the giver, but may be other adult family members, such as “generation two” so that grandchildren, great-grandchildren, or other potential heirs benefit from the gift far into the future.
  • It can help avoid probate. Since the policy is held outside of the estate of the giver, the death benefit will not be subject to probate.  This can save the recipients time and money.

No matter what structure is chosen, it is important to work with legal, accounting, and life insurance professionals, including the life insurance specialists at Cedar Point Financial Services LLC.

Here to Help

With careful planning and execution, early giving can be a great way to help family members build a strong financial future.  While it may be desirable to help heirs become financially secure, it’s important to consider both the giver’s and the recipient’s financial positions, including planning for income and estate taxes and how life insurance may fit as a solution.  Cedar Point Financial Services LLC works closely with clients and their other advisors to assist in structuring life insurance solutions to meet established goals and objectives.