Executive Summary
- When transferring wealth, there are pros and cons to giving while you’re alive versus after you’ve passed.
- For starters, transferring wealth after death ensures control during your lifetime and potential tax benefits after death, but may come too late to be truly impactful for your heirs.
- Alternatively, gifting wealth during your lifetime allows you to see the positive effects and provides immediate support for your beneficiaries but could risk your financial security and possibly create financial dependence.
- In the end, balancing these approaches involves considering tax implications, family dynamics, and your own financial security.
When it comes to transferring wealth, the default approach for most is to pass along an inheritance after you die, or give with a “cold hand.” And this makes sense in many ways, not only because of the tax benefits involved (your heirs can receive a favorable “step-up” in cost basis for certain assets) but also because it ensures that you still have access to your wealth while you’re alive—a key concern for many as people are living longer and medical costs are rising.
However, some financial experts argue that inheritances often come too late to be truly beneficial. Bill Perkins, author of “Die with Zero,” suggests that gifting money earlier, when it’s the most needed, can be a wise decision. He believes that waiting until after death to transfer wealth means missing the opportunity to see the positive impact your gifts can have and possibly delaying support until a time when it is less meaningful.
In his book, Bill tells the story of a woman who had recently gone through a divorce and was struggling to make ends meet as a single mom. Decades later, after her financial situation had stabilized, she inherited a significant sum from her parents. Reflecting on that experience, Bill writes that she would have much rather received even a fraction of the money decades earlier when it would have had a major impact on her ability to make ends meet at a critical time. This example highlights the importance of timing and not waiting until it is too late to make a difference.
In this article, we will explore the pros and cons of giving with a “warm hand” and a “cold hand”. By considering different factors such as tax implications, family dynamics, timing, and your own financial security, our goal is to help you make an informed decision that aligns with your unique values, goals, and personal situation.
Giving With a Cold Hand
Simply put, giving with a cold hand means waiting to transfer your wealth until after you die.
First, let’s explore some of the benefits to this approach:
Pros of Giving with a Cold Hand
Here are some of the key benefits of waiting until after death to transfer your wealth:
Tax Benefits: One of the main advantages of waiting to transfer wealth until after your death is the potential for significant tax savings. Your heirs may benefit from a “step-up” in cost basis for certain assets, which can reduce capital gains taxes if they decide to sell the inherited assets. For example, if you bought stock for $20/share but it is now worth $100/share, typically if you sold the stock you would have to pay taxes on the gain of $80. But, if your heirs inherit the stock when it’s worth $100/share, the cost basis (the amount you paid for it) then shifts from $20 to the current market value of $100/share. The result is that if your heirs sold the stock immediately when they inherited it, there would be no taxable gain.
Control and Security: By retaining your assets during your lifetime, you maintain total control over your wealth. This can provide peace of mind, knowing you have the necessary funds for any unexpected expenses or long-term care needs.
Legacy Planning: Waiting until after death to distribute your wealth can also allow for a more structured and planned approach. This can include setting up trusts with specific instructions to ensure your wealth is used and distributed for generations to come, according to your wishes.
Ultimately, there are some key benefits to giving after death as it can provide tax benefits for your heirs, allow for more control and security during your lifetime, and enable you to create a lasting legacy.
Cons of Giving with a Cold Hand
Alternatively, here are some of the cons of giving with a cold hand:
No Immediate Benefit: First, a major drawback to this approach is that you won’t be able to witness the positive impact your wealth can have on your heirs right now, reducing the satisfaction you can get when transferring wealth.
Potential for Higher Taxes: Also, despite the tax benefits that can come from passing on assets after death, depending on the size of your estate and the current estate tax laws, your heirs might face significant estate taxes, which could reduce the amount of wealth they ultimately receive. Currently, with the lifetime exemption amount hovering around $13.61M per person (the amount you can transfer to your heirs free of estate taxes) this is not a huge consideration for many. That said, the current amount is set to expire on December 31st, 2025, and will be reduced to $5.6M per person if Congress does not extend the current laws. This is where smart financial planning can be critical as you navigate the complexities of estate taxes.
Family Disputes: Delaying the distribution of your wealth until after your death can sometimes lead to family disputes or conflicts over the inheritance, particularly if there are disagreements about your intentions or the terms of your will. Alternatively, by making gifts while you’re alive, your heirs can rest assured that your wishes are being carried out as you intended.
Less Impactful Timing: As Perkins highlights, inheritances often come when recipients are already financially stable. On average, people receive inheritances around the age of 50, a time when many are already financially secure. Alternatively, many could have used the funds in their 30s or 40s as they were starting families, buying homes, and often paying off student loan debt.
In summary, while giving with a cold hand allows for tax benefits, control, and security during your lifetime, it means you won’t see the positive impact on your heirs and could lead to less impactful timing of the inheritance. Next, let’s explore “giving with a warm hand,” which involves making gifts during your lifetime to ensure your wealth benefits your loved ones when they need it most.
Giving with a Warm Hand
Giving with a warm hand is the concept of transferring wealth to your heirs while you are still alive.
This approach to estate planning goes against the traditional notion of passing down assets after death and instead focuses on sharing your wealth with loved ones during your lifetime. By giving with a warm hand, you can witness the impact of your generosity and ensure that your loved ones are financially secure and supported while you are still here. In some ways, it can also allow for more control over how your wealth is distributed today and can help minimize potential conflicts among heirs.
Ultimately, for some, giving with a warm hand can allow for a more personal and fulfilling way of passing down wealth to future generations.
Pros of Giving with a Warm Hand
Immediate Impact: By gifting your wealth during your lifetime, you can see firsthand how your generosity benefits your heirs. This can be especially rewarding if the funds are used for meaningful purposes such as education, starting a business, or buying a home.
Tax Benefits: There are also certain tax advantages to gifting during your lifetime. For example, you can take advantage of the annual gift tax exclusion ($18,000 per person per year for 2024) and potentially reduce the size of your taxable estate, which could lower total estate taxes upon your death.
Strengthened Relationships: Providing financial support while you’re alive could also strengthen family bonds and foster a sense of gratitude and responsibility among your heirs. It also allows you to offer guidance and support in managing their inheritance.
More Meaningful Timing: As mentioned, by giving to your heirs in their 30s and 40s, you may be able to give financial support when they need it most – when starting a business, buying a home, or raising a family. This can make your gift even more meaningful and impactful for both you and your heirs.
Cons of Giving with a Warm Hand
While giving with a warm hand has many benefits, there are also potential drawbacks to consider:
Reduced Financial Security: Gifting substantial amounts of wealth during your lifetime can potentially compromise your financial security, especially if unexpected expenses arise or if you live longer than anticipated. That’s why it is critical to understand how much you need to sustain yourself throughout the rest of your life, build in a very conservative and healthy buffer, and ensure that you have adequate resources to cover yourself before giving away large sums of money.
Complexity: Lifetime gifting can also add complexity to your financial plan, especially when gifting different amounts to different beneficiaries over time, which may ultimately affect how you want the remainder of your wealth transferred after you pass.
Dependency Risks: Of course, each situation is unique, but there’s a risk that your heirs may also become overly reliant on, or have an ongoing expectation of your financial support, which could hinder their ability to manage their own finances independently.
In the end, giving with a warm hand involves transferring wealth to your heirs while you are still alive, allowing you to witness the positive impact and provide support when it is most needed. Though it can foster stronger family bonds and offer tax benefits, it requires careful planning to avoid compromising your financial security and creating dependency among your heirs.
Deciding Which Approach is Right for You
Ultimately, understanding your family’s dynamics and financial needs is crucial when deciding how and when to transfer your wealth. Remember, personal finance is personal, and there’s no one-size-fits-all approach.
Fortunately, open communication with your heirs about your intentions and their needs can help prevent misunderstandings and conflicts. Additionally, consulting with a trusted professional is essential to navigate the complex tax landscape associated with transferring your wealth, both before and after death. They can help you understand the tax benefits and drawbacks of both lifetime gifting and bequests.
And of course, ensuring your own financial security should be a top priority, so working with a wealth advisor to create a comprehensive plan that helps you understand how much money you need to be secure is essential.
Finally, remember that there are benefits to both approaches, and for some, it may be best to do a little bit of both, rather than focusing exclusively on one approach or the other. As an example, this could mean making annual tax-free gifts to your heirs during your lifetime while still transferring a larger sum after you pass.
In The End
In the end, whether you choose to give with a ‘warm hand’ or a ‘cold hand,’ thoughtful planning, open communication, and professional advice are key.
By carefully considering the pros and cons, as well as the unique needs of your family, you can create a wealth transfer strategy that provides meaningful support to your heirs while ensuring your own financial security.
Ultimately, the best approach is the one that aligns with your values and helps you achieve your unique financial goals.
Albion Financial Group is an SEC registered investment advisor. The information provided is intended solely for educational purposes and should not be construed as an offer or solicitation for the purchase or sale of any particular securities product, service, or investment strategy. Past performance is not indicative of future performance. Additional information about Albion Financial Group is also available on the SEC’s website at www.adviserinfo.sec.gov under CRD number 105957. Albion Financial Group only transacts business in states where it is properly registered, notice filed or excluded or exempted from registration or notice filing requirements.