Giving Children an Early Inheritance

Giving children an early inheritance in California, or in any location, is a significant financial decision that should be carefully considered and planned. As a Folsom lawyer who specializes in estate planning, I often work with savvy clients who wish to give their children an early inheritance for a variety of financial and personal reasons. While you have the freedom to distribute your assets to your children as you see fit, it’s essential to understand the potential implications, both financial and legal, of providing an early inheritance. Here are some important points to keep in mind:

1. Gift Tax: In the United States, including California, there are federal and potentially state gift tax rules. While there is a federal lifetime gift tax exemption that allows you to gift a certain amount without incurring federal gift tax, you should be aware of the limits and any tax consequences. California does not have a separate state gift tax, but federal rules still apply. The federal lifetime gift tax exemption is $13.61m as of 2024. 
2. Estate Tax Considerations: Gifting assets during your lifetime can reduce the size of your taxable estate, potentially reducing estate taxes for your heirs. However, it’s essential to work with both an estate planning attorney and tax advisor to understand how this may affect your estate plan.
3. Impact on Medicaid Eligibility: If you anticipate needing long-term care and may require Medicaid assistance in the future, gifting assets can affect your eligibility. Medicaid has a “look-back” period during which gifts made within a certain timeframe can result in a penalty period during which you may not be eligible for benefits.
4. Protecting Assets: Consider how your children will manage the assets you gift to them. If they have financial challenges, are involved in a divorce, or face legal issues, these assets may not be protected from creditors or legal claims.
5. Equal Treatment of Children: Be mindful of treating your children fairly and equally to avoid potential conflicts among family members. Unequal gifting can lead to disputes.
6. Estate Planning Documents: Update your will, trust, or other estate planning documents to reflect any gifts or changes in asset ownership. This ensures that your estate plan is up-to-date and consistent with your intentions.
7. Impact on Your Financial Security: Consider how gifting assets will impact your own financial security and future needs. Ensure that you have sufficient assets to maintain your lifestyle and cover potential healthcare costs.
8. Legal and Tax Guidance: Consult with an experienced estate planning attorney and, if necessary, a tax advisor to navigate the legal and tax implications of gifting assets to your children.
9. Alternative Approaches: Explore alternative methods of providing financial support to your children, such as setting up trusts or educational funds, which can offer some protection and control over the assets.
10. Open Communication: Discuss your intentions and the potential early inheritance with your children to manage expectations and avoid surprises.

Conclusion

Giving children an early inheritance can be a generous way to support them financially, but it should be done thoughtfully and with a full understanding of the financial, legal, and tax consequences. Working with a Folsom lawyer who specializes in estate planning can help you create a plan that aligns with your goals and protects your interests and those of your heirs. If you have any questions about giving children an early inheritance, contact Thapar Law at 916-579-0605 or send us a message.