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Navigating Gray Areas: Let’s Talk Inheritance – Part 2

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Families can be complicated and knowing how to handle the matter of inheritance can also uncover individual perceptions, long-term family roles, and necessary and unnecessary protections that are not easy to talk about. In our previous post about inheritance, we discussed the importance of open and honest conversations regarding next-gen wealth transfers. Today we’re diving deeper into three areas of the inheritance roadmap – gifting before death, unequal gifts, and changing financial pictures.

Family wealth can be tricky, but with thoughtful planning, it doesn’t have to be!

Gifting Before Death

When gifting money before death, it’s important to consider the family dynamics of your recipients. For example, if you have a large family with many children, it might be more difficult to evenly distribute a gift than if you have fewer children. It’s also important to think about the needs of your recipients – will they be able to use the money responsibly, and are you clear on how a gift may impact their finances?

While the answers to these questions may have you thinking twice about pre-death gifting, the 2023 IRS rules for gifting are clear:

  • You can give up to $17,000 per year to any number of individuals without having to file a gift tax return.
  • You’ll need to file a gift tax return if you give more than $17,000 in a year.
  • There is no limit on the amount of money you can give away over your lifetime, as long as it doesn’t put you over the lifetime gift tax exemption limit (which is currently $12.06 million per person and set to sunset in 2026).

Pre-death gifting conversations and decisions may feel like navigating land mines. However, there is an important advantage of gifting money before death. Families can avoid or reduce estate taxes because they are reducing the size of the estate. Gifting assets can also help simplify the inheritance process for loved ones who are grieving and can also be a way to provide financial security for loved ones who may need help now.

There is no one-size-fits-all answer to pre-death gifting, as the best way to gift money in life depends on the individual circumstances of the giver and the recipient. The best way to get started is to talk to your financial advisor and estate planning attorney to help you navigate these complicated waters.

Fair Division and Equitable Distribution

When it comes to dividing up an inheritance, there are two key concepts to understand: “fair division” and “equitable distribution.” Fair division is a process by which assets are divided equally between your heirs. This is the simplest way to divide an inheritance and is often used when there are only a few heirs involved. Equitable distribution is a process by which your assets are divided in a way that is fair but not necessarily equal. This is often used when there are many heirs involved, or when some of your heirs are not able to inherit assets outright. Equitable distribution considers the needs and wants of each heir and tries to create a balance between them. Again, there is no one-size-fits-all answer to this question. The best way to divide an inheritance depends on the individual circumstances of the family involved. Some examples of equitable distribution include:

  • Giving different amounts of money to different children, depending on their needs and wants.
  • Giving assets like property or stocks to certain children, while giving money to others.
  • Dividing up the estate in a way that benefits all of the heirs, rather than just a few of them.
  • Creating a trust or other legal mechanism to help distribute assets fairly.

Some families give unequal monetary gifts. This means that one child might get more money or assets than another child. Sometimes this is because one child wants to live in the family house, and the other children need to be made “whole” with money. The key to unequal gifts is understanding the needs and wants of your family. This requires open and honest communication from the entire family unit, considering the estate tax implications of different distributions, and consulting with an estate planning attorney and financial advisor to help you navigate these complicated waters.

Plans Change

Our best-laid plans often change. Life happens and there are many reasons why estate or gifting plans might change, including changes in the financial situation of the family, death or incapacitation of a family member, birth or adoption of new heirs, divorce or remarriage of new heirs, changes in health or wealth of heirs, and much more. Ideally, you should revisit their estate plan at least every five years. However, if there are major changes in your life – like a job change, a birth or death in the family, or a significant change in your financial situation you should do it sooner.

When it comes to family wealth, communication is key – but making sure everyone’s voice is heard while navigating the complexities of the inheritance roadmap can be difficult. It’s important to stay open and honest so that all parties involved can come away with a sense of equity and understanding. At Treehouse, we know that life is an adventure and we’re here to help guide you and your family through the process and discussions that help make your family legacy a positive experience.

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Sources:

Garrison Point Advisors, LLC doing business as “Treehouse Wealth Advisors” (“TWA”) is an investment advisor in Walnut Creek, CA registered with the Securities and Exchange Commission (“SEC”). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. TWA only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of TWA’s current written disclosure brochures, Form ADV Part 1 and Part 2A, filed with the SEC which discusses among other things, TWA’s business practices, services, and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov.

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