The Benefits of Early Inheritances

If you have built up enough wealth for your retirement and are sure to have lots left over it is a great position to be in. This can mean years down the road what is leftover can flow into an estate and be a valuable gift for your beneficiaries. In talking with many families though, they would like to help out their kids or other family members before it becomes an estate. This is partly due to the fact their kids may need the money more now than in the future. This can also bring satisfaction in watching families use this money today rather than after you pass.

Gifting Pitfalls

Gifting early has many benefits, but this can also be messy if it is not well thought out.

• Uneven Gifting- Some families do this flying by the seat of their pants. The classic example is one kid is not doing well financially so they buy him a house while another kid is doing better and receives nothing. This can sometimes create feelings of resentment amongst the family.
  
  
• Large Lump Sum Gifts- Here large amounts of wealth are parted with which are very permanent. This will have a major impact on your finances permanently as well as create some adverse tax consequences. In addition, it could lead to the loss of control of a large asset such as a family cabin if gifted or a joint owner is added.
  
  
• Misuse of Funds- Some of our beneficiaries may not be in the position to receive a larger lump sum responsibly. This can lead to misuse of funds, or a beneficiary could also lose funds in the event of divorce or bankruptcy.

Gifting Tips

So, what are some tactics we can use to help our family early? The key is adding some structure.

• Annually Gifting- I’m a big fan of annually gifting to beneficiaries a specific dollar amount. This is very measurable and easy to track what you have given to each family member. This is especially helpful if you want to treat everyone equally.
  
  
• Utilize Investment Income- Many investments generate income such as dividend paying stocks, fixed income assets and even real estate. Using this income can assist with making these annual payouts. In this scenario you are using the golden eggs without killing the golden goose.
  
  
• Lower Estate Tax- Another benefit to gradually paying out an income is it can reduce your future estate taxes. The day you pass away you are deemed to have sold all of your assets in one year. This can be a potentially devastating tax hit with the top rate in Alberta at 48% if your income is high enough. So, if we can gradually pull this money out at reasonable tax rates it could be beneficial.
  
  
• Reduce Misuse of Funds- If you’re paying an annual income this avoids the potential to squander a large lump sum by your beneficiaries. This can also protect against the loss of a lump sum due to divorce or bankruptcy.
  
  

There are also more complex solutions depending on the size of the gifts and complexity needed. Reach out if you have more questions and wish to set up review of these options.