On behalf of Law Offices of Frye, Fortich & Garcia, P.L. | October 5, 2021 | Estate Taxes
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.
Types of Early Inheritance Gifting
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.
Gifting Outright
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.
Create a Deed
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.
Create a Living Trust
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.
