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Pros and Cons of a Living Inheritance

It can be a “financial helping hand” and a great way to test-drive how well the adult kids will handle their inheritance when the time comes.

As record numbers of baby boomers reach retirement age, I keep coming across articles and studies about living inheritances. When structured correctly, a living inheritance (also known as an “accelerated inheritance”) can allow parents to give away some of their assets to children while they are still alive rather than waiting until after they’re gone.

Think of a living inheritance as an interest-free (and usually tax-free) advance on their inheritance to help adult children with major expenditures such as a downpayment on a first house, seed capital for a new business or funding for higher education or relief of student debt. For parents/benefactors, a living inheritance is a “financial helping hand” and a great way to test-drive how well the adult kids will handle their inheritance when the time comes.

I just got off the phone with a couple worth about $200 million. Their kids are still young (ages 11 and 17). I started the conversation by asking them how prepared they felt their kids were to inherit substantial wealth someday. “That’s one of our biggest concerns,” the husband confided. “We don’t want the money to ruin them. We want them to have the money, of course, but we also want them to be good citizens.”

When I have these conversations, one of the first things the ultrawealthy tell me is that their kids don’t think the family is wealthy. Trust me, kids know they’re rich. They may not know their family’s net worth, but they know they have more money than most other families. They know they live in an extremely nice house, attend private schools and fly first class or by private jet when traveling to the Four Seasons or an African safari.

Tools like a living inheritance are best used with some stipulations attached. For instance, your clients could tell the kids, “We’re giving you this money because we trust you, but we also want to see how you handle it, because there’s more money behind this gift.”


There’s no one right way to structure this type of gift. The age of the children makes a difference, of course, as does the family’s financial circumstances. Additionally, depending on the size of the transfer, proper reporting of the potential “gift” must also be considered. However, the most important aspect of any living inheritance arrangement is the quality of the dialogue between the generations.

Real-World Example

A client recently helped his daughter and son-in-law make a down payment on their first home. They’re both gainfully employed, but without the help they never could have afforded to move out of their city residence and become suburban homeowners. The young couple has been married for 18 years. They’ve worked hard and have become good citizens and great parents. They’ve lived on their paychecks, raising two kids and sending them to private school. Their family deserves a comfortable house. The parents desired to transfer some wealth today instead of waiting until they were no longer around to watch the young family enjoy the gift. Helping to structure the most effective means of transfer was relatively easy for us.

Every parent must judge how responsible their kids are and what level of financial commitment they want to make. It’s all about facts and circumstances. Parents don’t want to spoil their children. At the same time, they don’t want to ignore the inheritance issue. Parents don’t want the kids to be completely unprepared for, say, a $15 million inheritance when they die. It’s never too early for clients to have conversations with children about why they’re doing what they’re doing and what the future looks like.

Four Pros

  1. Tax benefits. The annual gift tax exclusion for 2024 is $18,000. Your clients can give $18,000 to any person in a calendar year ($36,000 for a married couple) without having to file a federal gift tax return or having it count toward their lifetime exemption amount.
  2. Shared experiences. As mentioned above, helping the children with a downpayment on a home, family trip or business investment allows your client to share in their joy—not possible if they had waited for the children to receive their inheritance after they died.
  3. Financial relief. This includes relief from student debt, large medical bills, oversized mortgages or special needs care for a grandchild.
  4. Wealth transfer. This is possible if your client uses some of the current “exemption” amount now. The future growth of the assets is out of your client’s estate, which may lower their future estate taxes.

Three Cons

  1. Loss of incentives. Even if the living inheritance is structured gradually, some children may lose the incentive to earn as much money as possible.
  2. Over-gifting. Sometimes, parental love and generosity cause clients to gift way more to children than they can afford to maintain their lifestyle in an era of escalating healthcare costs, inflation, job insecurity and 30-plus-year retirements.
  3. Family dynamics. Ensure your client’s well-intentioned living inheritance to one child doesn’t create family friction with the other children (or spouse). An advisor can be especially helpful here.

Other Tools

Other tools exist to help children without spoiling them. For example, charitable trusts can help your client leave the kids a steady income stream. Your client can establish a trust that will produce income for the client and their spouse for the rest of their lives and then name the next generation as income recipients. This way, the kids receive an income stream that they can’t screw up. It’s not an asset they can spend, but they have a creditor-protected, steady stream of income that could last them the rest of their lives. And if the child’s marriage (or marriages) ends in divorce, the money stays in the family. It doesn’t go to the ex.

Of course, there are many estate planning tools to deploy to protect future wealth. But here, we’re talking about accelerating the process with a current inheritance to enable heirs (and parents) to experience joy now instead of later.

The Sweet Spot

Warren Buffett is famous for saying, “I want to leave my children enough so that they can do anything, but not so much that they can do nothing.” No one knows exactly where that sweet spot is for every family. That’s where you come in.

Randy A. Fox, CFP, AEP  is the founder of Two Hawks Family Office Services. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. 

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