If you’re the giver, leaving an early inheritance allows you to share the joy of your thoughtful and generous gift with your heirs. And if you’re the recipient, getting an inheritance early may help solve an immediate financial need, fund a startup business or build your dream home. Aside from the emotional boost of bestowing inheritance gifts before death, you may be pleasantly surprised to learn that neither you nor your heirs will be saddled with inheritance taxes – as long as your gifts are within tax-free IRS guidelines, which are quite robust.
IRS Definition of a Gift
The inheritance you plan to give others may be money, real estate, personal items or a combination of these and other things. The IRS defines a gift as a “transfer” of any type of property. Money is considered property just as parcels of land, automobiles and items of jewelry are also considered property. Further defining the term, your gift may also include the income from or the use of your property, which doesn’t result in your receiving something that’s comparable in value.
Heirs Can Bypass Probate
When someone dies, the probate process for heirs can last from a few months to a few years, depending on the state laws where you live. But if you leave an early inheritance during your lifetime, it immediately transfers to your heirs and is not subject to probate. You can also choose to give a partial early inheritance and give the balance of your inheritance upon your death. It’s not an all-or-nothing proposition; you can decide how much to give and when to give it.
No Estate or Gift Taxes
The vast majority of taxpayers will not incur gift or estate tax penalties when they make inheritance distributions before death because of the high IRS tax-free limits, called exclusions. As of 2019, you can give a tax-free gift of $15,000 per person, per year. During your lifetime, you can give up to $11.4 million without paying tax on your gift. But if you're giving to your spouse, all gifts are considered tax-free, regardless of the amount of the gifts.
Paying for Educational Costs
If you pay tuition for someone at an eligible educational institution, it’s called an “educational exclusion,” which is not considered a taxable gift. This advantage of leaving an early inheritance helps pay the educational costs for family members who may otherwise be unable to afford higher education or who may be saddled with student loan debt to pay for their education. Refer to IRS Form 970 (Tax Benefits for Education), which defines eligible educational institutions and qualifying educational costs. Visit IRS.gov/forms to search for this publication by number.
Helping With Medical Costs
Often a big advantage of leaving an early inheritance is being able to help with someone’s medical costs. Similar to paying educational costs, paying medical costs for someone is a “medical exclusion,” which is not considered a taxable gift. IRS Form 970 defines eligible medical providers and qualifying medical costs, and it also notes that you’ll have to pay the medical provider directly for your gift to be tax-exempt.
Early Inheritance Considerations
Don’t forget to consider your own financial needs at, and beyond, retirement to help rein in your generous nature so you resist the urge to “over-give.” You may want to call an estate planner or a tax attorney (or both) to help you navigate the waters of how to leave an early inheritance while still providing for yourself.
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.