Granting an Early Inheritance With Gifting

By Ashley Chorpenning

Many people are unaware that you don’t have to wait until death to give or receive an inheritance. If you want to start giving to your heirs early, there are several ways you can do so. If you’re considering granting an early inheritance, here’s how gifting can be used to help your heirs achieve financial security before you pass away.

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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 can also include income from a property without expecting to receive something of equal value in return.

You can give an inheritance in the form of money, real estate, personal items, or a combination of your assets.  Keep in mind, if you sell an asset for less than its value, reduce interest, or charge no interest, this may also be considered a gift.

Before you decide if you want to give an early inheritance, it’s important to understand the benefits of doing so. Here are some of the advantages of granting an early inheritance with gifting:

• Heirs can bypass probate: When you pass away, your heirs will have to go through the probate process. This process can take anywhere from a few months to years, depending on the state. However, if you leave an early inheritance to your heirs, they will receive the transfer of the property right away. Keep in mind, you don’t have to give all your inheritance early on; you can decide to give a partial early inheritance. It’s not an all-or-nothing situation.
• Paying education costs: If you have a loved one who is attending an eligible education institution, you can pay their tuition and it’s not considered a taxable gift. This is known as an education exclusion. Paying your heirs’ education costs can help them avoid student debt and the financial burden of their education.
• No estate or gift taxes: Most taxpayers won’t incur gift taxes because of the high tax-free limits. As of 2020, taxpayers can give up to $15,000 per year. There is also a lifetime exemption of $11.4 million. If you’re gifting to your spouse, there are no limits and all gifts are considered tax-free.
• Paying for medical costs: If your loved ones have medical bills, you can pay for their medical costs. Like the education exclusion, taxpayers can pay for someone’s medical expenses under the medical exclusion.

Now that you understand the advantages of early giving, there are a few ways you can grant an early inheritance with gifting to your loved ones, as well as things to be cautious of when giving.

One of the simplest ways to gift is to transfer ownership of your assets. For example, you may want to re-title a vehicle in your daughter’s name or change the deed on your home to your grandson’s name. There are plenty of ways to transfer ownership of your property.

It’s important to note that you should not gift all of your assets outright. This is because you should always maintain an emergency fund and enough assets to avoid a sticky financial situation. If unexpected expenses arise, you should be prepared to handle them.

If you choose to gift your property or assets outright to your family and do not have sufficient assets to your name, you may have to rely on them for support if a financial disaster occurs. Additionally, if one of your heirs who inherited the property early on gets married or files bankruptcy, the assets that were once yours may no longer exist.

Another option is to change the deed of your home so that your heir shares legal ownership of the property. By creating a joint tenancy deed with rights of survivorship, your home will transfer directly to your heir without going through probate when you pass away.

If you decide to change your deed to a joint tenant deed, your heir’s creditors could seize your property if they don’t pay off their debts. If the debts are significant enough, this may force the sale of your home. To avoid this situation, you could use a beneficiary or transfer-on-death deed. Keep in mind, not all states recognize this type of deed, you will want to contact your attorney to make sure this type of ownership transfer is valid. Using this type of deed will ensure your property is yours and is safe from creditors other than your own.

Another option for giving is to create a living trust. With a living trust, you can put the assets in the trust’s name and add your heirs as beneficiaries. This means that upon your death, the assets will transfer to your heirs according to your wishes. Trusts can avoid probate and assets are free from creditors, of course, until they transfer to your heirs. At this point, if they don’t repay their debts, then their creditors will have access to these assets.

If you create a revocable trust, you are the grantor and can act as a trustee. Essentially, you can place the assets in the trust and decide how they are distributed upon your passing. You can also change beneficiaries or eliminate the trust if you decide it wasn’t the best idea.

With a revocable trust, you will name a successor trustee. This trustee will manage the trust if you become incapacitated or die. When you pass away, your successor trustee will distribute all funds to your heirs according to your wishes and what is in the trust.

It’s important to be careful when creating a trust. Make sure you consult with an attorney and have them draw up the agreement so that you are protected until the end of your life. If you decide to create it alone be sure to have your attorney review the final copy.

When deciding how to grant an early inheritance with gifting, you will need to consider how taxes play a role. With a revocable trust, you can gift your property and avoid a gift tax. This is because a revocable trust operates under your Social Security number, essentially, gifting to yourself. This is not the case with irrevocable trusts.

When you give assets to your heirs outright, you may face taxes depending on the amount you give. As previously stated, in 2020 you can give up to $15,000 per year and $11.4 million over your lifetime. If you decide to give your heirs your home that’s worth $400,000, you can assign the remaining $385,000 to your lifetime exemption.

You should also consider how transferring your property may impact your Medicaid eligibility. When you apply for Medicaid, the federal government conducts a five-year look-back period. The government doesn’t want you to spend your assets so you can qualify. If you decide to give your assets away within five years of applying for coverage, you may face a penalty. Each state has different rules regarding this period, so make sure that you understand the implications gifting can have when you apply for Medicaid.

While you may want to help your heirs become financially secure, it’s important to consider your financial needs so you won’t over-give. You should consult with an estate attorney and a financial advisor to help you navigate how to leave an inheritance while continuing to provide for yourself.

• Consider talking to a financial advisor about early gifting. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
• If you have a loved one who deals with chronic illness or a disability of some kind, you want to be able to keep supporting them after you’re gone. However, you don’t want to disrupt their ability to collect funds from programs like Medicaid or Social Security Disability.

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