If you have a significant amount of money saved, you might be considering giving some of it away while you are still alive via what is known in estate planning jargon as a living inheritance. Depending on your desires, you can give your beneficiaries a portion of or all of the inheritance you intend to give them.
Below are some common reasons why people establish living inheritances and make them a part of their estate plan, as well as a variety of factors to consider when establishing one. As you will discover, a living inheritance can set you and your family up for success if used correctly, and it just might be the inheritance plan for you.
Why might you want a living inheritance?
There are several reasons why someone might want a living inheritance. It may make more sense for your inheritor(s) to have access to the money you set aside for them now instead of later. For example, if your child wants to return to school, pay down their mortgage, or tackle another big payment or loan, you can help them with a living inheritance.
In these situations and others, the money may serve a higher purpose now than later. You can give money yearly or as a one-time payment, meaning that you and your family are afforded some flexibility in when the money is spent and how.
Tax benefits are also another motivator for establishing a living inheritance. Washington state does not have a gift tax as of the time of this writing, meaning you can gift money to your inheritors without it being taxed at the state level. This aspect might be a motivator depending on the value of your estate, which could be subject to Washington estate tax.
For 2023, in Washington state, the estate tax applicable exclusion amount is $2,193,000. So, depending on the value of your estate, you may want a living inheritance to avoid state taxes. The IRS’s annual gift tax exclusion is $17,000 as of 2023. In other words, for each person you give up to $17,000 yearly, it remains non-taxable at the federal level.
What should you consider with a living inheritance?
When contemplating a living inheritance, you should think about your financial picture now and in the future. The same holds for that of your inheritors. Here are a few issues to consider.
Your financial health.
Though a living inheritance has many perks, there are also several consequences to consider when deciding whether you want to create one. These financial and emotional consequences can be significant for you and your family.
First, you should check that setting up a living inheritance will not interfere with your long-term or short-term financial health. Ask yourself:
- Will gifting money affect your desired retirement plans?
- Will gifting money impact your ability to cover future medical expenses?
- Can you still travel in retirement if you choose to gift money?
- Will you be financially secure without the money you gift?
A living inheritance might very well fit with your financial picture, depending on your answers. However, you should consider working with a Seattle estate planning lawyer and financial professional to ensure you understand the ramifications, especially if you worry about your future.
The financial health of your inheritors.
Before deciding on a living inheritance, you should also consider its potential impact on your inheritor’s financial well-being. Indeed, it might alleviate a massive burden for them, such as student or medical debt, a mortgage, or other expenses in your family’s life. However, it might also inadvertently encourage frivolous spending or poor financial habits since the inheritor might feel encouraged to make rash decisions due to your gift.
Not every family will face this issue; if your beneficiary is incredibly strict about how they spend their money, you might have less to worry about. However, if you worry that they could develop a poor mindset or habits, it might be worth setting clear expectations or asking if they think such a gift would be helpful in the long term. In some cases, a living inheritance might not be worth it.
Broaching the subject of a living inheritance with loved ones.
Should you decide to utilize a living inheritance in your estate plan, one critical step is to be transparent and open with relevant family members and loved ones about your choices and, if applicable, why you are making them. It might warrant explaining to the inheritor how you intend them to use the money, such as for schooling, paying down a mortgage, or something else.
If the money is for them to use as they see fit, this is also worth telling them. Since you will be there to see how they will use the money, it is reasonable for each of you to lay expectations on the table so you can avoid conflict about it later.
Additionally, though you are not obligated to explain your decisions to others, it might help ease tension. For instance, if you want to use a living inheritance to allow a grandchild to continue to higher education or to pay for another relative’s medical expenses, this might warrant an explanation to those relatives who thought they would receive money during your lifetime, too.
Especially if you think that a particular relative will be upset, confused, or angry because of your decision to set up a living inheritance, it might be worth explaining to them why you are choosing to do so and what it will mean for them in the future, good or bad. It might be an unpleasant conversation, but having it can prevent long-term confusion and resentment, even challenges to your will once you pass.
Contact a Washington state estate planning lawyer to discuss your living inheritance.
A living inheritance can be a great option if you want to see the fruits of your giving for yourself and those you give to. But coming to this decision does require careful thought and planning.
Given the factors involved, consulting with a skilled Washington state estate planning attorney experienced in incorporating living inheritances into estate plans is best. Our team of seasoned estate planning attorneys is here to help. Contact our Seattle office today.