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Wradical

{{{ crre:so what is an early inheritance? }}}
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[[[For tax purposes, there is no such thing.
--Peter ]]]
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"Peter is correct, of course, but I've also heard the term thrown around loosely, in "as if" or "sort of" type terms.

Gifts and inheritances are different events, in that gifts happen during the donor's lifetime, and an inheritance occurs at death.

In the simplest terms I can think of, "Inheritances", and all other transfers at death, regardless of the means, by will or otherwise, are subject to the estate tax if the amount if high enough. And the amount is pretty high right now - over $11 million. BUT - that amount also includes the donor's taxable lifetime gifts, in excess of the annual exclusion amount of $15,000. So lifetime gifts can make the eventual estate tax, if there is one, higher. And gifts over the annual exclusion are reported on a gift tax return, but are not immediately payable, until the total exemption is used up. And on gift tax returns, you keep a running tab on that number.

So that's how terms like "advance inheritance" come into play, though not technically accurate."


While I do not disagree with Bill (or Peter), I would also note that it is not really an "earlier inheritance" if the will is not adjusted to recognize the early gifting.

Lets us assume three kids, $1.8M dollar estate to be divided equally, and one of the kids (Kid 3) ask for any early $300k, knocking the estate down to $1.5M. If the will is not adjusted, each kid will received $500k from the will, and Kid 1 and Kids 2 would have received "only" $500k while Kid 3 would have received $800k (300k early and 500k from will). Not exactly equally.

And there are more potential complications, what if is years before parents die and the estate grows (should Kid 3 share equally in the growth or only in part because the 300K "early inheritance" did not share in the growth of the estate, i.e. opportunity cost of early receipt)? Also, how do you treat inflation?

For example. Let me adjust the assumptions - three kids, $1.8M dollar estate to be divided equally, and one of the kids (Kid 3) ask for his $600k early, knocking the estate down to $1.2M. Now if the estate grows to $1.5M, should Kid 23 share in any of that growth? IOW, equalize payments, $600k to each of Kid 1 and Kid 2, divide the remaining 300k in 100k chucks to each kid or should it simply be $750k to kid 1 and Kid 2?

Even if the latter, what if $750K (because of inflation in the intervening years) is worth less (in purchasing power) than the $600K that was distributed early to Kid 3?

Worse what if the estate suffers a loss and there is only $1M at time of death and Kid 1 and Kid 2 received $500k, fewer gross dollars than Kid 3's $600k, and even less in real dollars because of inflation?

Food for thought.

Regards, JAFO
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