Should You Give Your Children Their Inheritance Early?

Things you might not have thought about

A Twitter post reminded me of my recent discussion with a friend.

The tweet was, “If you’re wealthy, give money to your kids while you’re still alive. A bit of money when they’re in their 20s or 30s can make a huge difference. But if you wait until you die of old age, they’ll be in their 50s or 60s and a windfall won’t make much of a difference.”

My friend said much the same thing. She believes waiting until parents die for children to inherit the estate means the children will be of retirement age themselves. By that time, they will have assets of their own. But if they get the money earlier, they can use it to buy homes and raise families.

Granted, the twitter writer appears to be talking about financial help rather than an entire inheritance, and he limits his discussion to wealthy parents. But what constitutes “a bit of money” and who qualifies as wealthy are relative and subjective.

Some people immediately think of billionaires when they talk about wealth. Others include millionaires in this category, and still others believe anyone living comfortably on a fixed income with considerable retirement assets is wealthy.

My friend who believes in giving away the inheritance before she dies has already given her child a considerable sum and is happy with this decision. But if you decide to give away your money while you’re still alive, there are several things you might want to consider.

The problem of unexpected circumstances

Only parents who can live comfortably within their means or who have more money than they anticipate spending in a lifetime should consider doling out the inheritance early. It isn’t as cut and dry as it seems to the young man tweeting about it, because there are a lot of things to consider before making such a big financial decision.

You could always encounter an unexpected reversal of your circumstances.

One of my friends gave her son a large sum of money to start his own business. The business failed, and my friend’s husband lost his job. They both suffer from failing health, are now unemployed, and the nest egg they had counted on is gone.

Another friend and her husband bought their son a house with the understanding that he would pay them back. He had been a repeat drug offender and they wanted to help him out now that he was clean. But he slipped back into addiction and the parents were stuck with a house that took a long time to sell.

As a result of owning the house for so long and doing extensive but necessary renovations, they had to delay retirement and sell some of their other properties.

People live longer, but not healthier

Parents also need to think about the amount of money they would need if they were no longer independent. People are living longer, but not necessarily healthier.

If dementia, cancer, or some other debilitating illness strips you of your ability to live alone, the costs of in-home care or assisted living facilities can be exorbitant. Would your children be willing to take care of you and would you want to burden them with this? A caretaking arrangement could be detrimental to everyone’s quality of life.

But it doesn’t always fall on the children. Sometimes one spouse becomes ill and the other spouse spends a bulk of their retirement savings for caregiving.

Another reason for not giving children their inheritance early is that you could lose your assets in a volatile stock market, a housing bust, or through skyrocketing inflation. These are things we can’t control, but it’s prudent to have a hedge against them.

If you gave away your money when the financial situation was great and now it’s not, you can’t get it back. Your earning years are probably behind you.

The previous generation

I don’t think my in-laws or my parents would ever have considered giving us our inheritance early. My mother needed the income from her rental property to supplement her small social security check.

My in-laws were better off financially, but the Depression taught them to be thrifty. They had grown up in adverse circumstances when even getting enough food was a challenge. Because they had struggled and prospered without help, they developed an attitude that their children should make it on their own.

When my husband and I were newly married with a first child on the way, we scraped together the money to buy a condo, but we couldn’t afford carpet. We borrowed the money from my husband’s parents, and they charged us 6 percent interest. We paid them back, plus interest, within a year.

In retrospect, I am glad no one gave us an inheritance early. We might have squandered it. We lost a lot of money over the years through bad investments and through major plunges in the stock market. If we had gotten money from our parents, that money would likely be gone by now.

Our children need our money

“But our children are raising families of their own and it’s tough. They need the money now.”

I’ve heard this argument and I understand it. We want to help our children and grandchildren. We hate to see them struggle when we have more than enough to live on. There is no right or wrong answer.

My husband and I have opted for a middle of the road approach. One son came to us with a proposition. If we would buy him and his family a house that was located on six acres, he would sell three acres to reimburse us and eventually buy the house.

We bought the house and he sold the land, which netted us a profit well above our original investment, so it was a good deal. He has been unable to buy the house from us yet, but has made all the mortgage payments, taxes and upkeep.

Another son asked if we could loan him $10,000 for the down payment on a house, which we did, and he paid us back within a year.

We have also given our children a few thousand dollars for Christmas and birthdays, although the amount doesn’t begin to touch their needs, since they have 12 children among them.

No right or wrong decision

Every decision will be an individual one depending on finances, relationships, and other things. But there are important considerations that go beyond finances.

One of those considerations is family harmony.

If you decide to give your children all or part of their inheritance early, you should do it without expectations. Believing they will come to see you more often or pay more attention to you because you have given them money will only lead to disappointment. It could also end up in ruptured relationships.

Don’t give the money with strings attached unless those strings are spelled out up front. Don’t try to control the money once you’ve given it away.

I know of one man who gave his son an early inheritance expecting the son to invest it wisely. Instead, the son quit his job and traveled for a year. Once you give it away, it’s out of your hands. Don’t expect anything in return. You can’t make decisions about how your children spend their money.

You don’t want your generous gift to disrupt family harmony, so another thing you need to think about is sibling rivalry. If you give one child money but not the others, you might justify it based on need, but siblings aren’t likely to look at it that way. They will see it as favoritism.

Bill Perkins, author of Die with Zero, has decided to give his children their inheritance before he dies and has written a book about it. “I want to give money to my children when they can best use it to plan for their futures, and while I’m still around to see them thrive,” he says.

But Barry Haimo writes, “Today, people are living longer than ever. Because of that, at some point you may need to tap into your assets to care for yourself. You don’t want to outlive the money you’ve set aside for yourself and then have to depend on your children to care for you.

“Think carefully about how much money you must keep for yourself if you intend to distribute your assets before your death. Be generous with yourself before you gift early inheritances to anyone.”

There is no right or wrong answer, and you can’t take your cues from someone’s tweet or a friend’s experience. You need to consider your own circumstances, and you shouldn’t feel guilty about your decision.

From my perspective, I’m glad my in-laws waited to pass along an inheritance. I don’t feel too old to enjoy it, and it enabled me to retire.

If they had given it earlier, there’s a good chance it would be gone.

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