Family gifting strategies
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Giving financial gifts during one’s life means benefiting family members sooner rather than later, along with the added enjoyment of witnessing the impact on others. Awareness of gift tax rules is imperative when structuring a strategy. Whether gifting to adult family members or children, there are many ways to find a balanced approach to transferring assets.
Gifting Rules
The federal government specifies both annual and lifetime gift tax exclusion amounts. The annual gift tax exclusion is the maximum amount of money you can give to another individual annually without incurring gift tax penalties. Gifts within the annual gift tax exclusion limits do not count towards the lifetime gift tax exclusion. Any gifts made to an individual over the exclusion amount must be tracked on a gift tax return and count towards the lifetime gift tax exclusion amount.
The annual exclusion amount is $18,000, and if the gift giver is married, the combined limit is $36,000 per year. This amount changes periodically due to inflation adjustments or legislative changes. Tax-free gifts are unlimited between spouses who are both U.S. citizens.
The lifetime gift tax exclusion is the amount of assets that can be gifted tax-free over a person’s lifetime. Currently, the exemption amount is $13.61 million per individual. However, that amount is temporary, and in 2025, it is scheduled to revert to the previous exemption amount of $5.49 million per individual adjusted for inflation.
Here are a few examples of gifting scenarios:
- You and your spouse gift your granddaughter $15,000 for college graduation. The gift falls under the annual gift tax exclusion amount ($36,000 between you and your spouse); no gift tax return is needed.
- If you and your spouse instead gift your granddaughter $20,000 as a college graduation gift, the gift exceeds the individual gifting limit of $18,000 but does not exceed the joint spousal gifting limit of $36,000. Consequently, a gift tax return should still be filed to report the intention to split the gift between spouses.
- You and your spouse decide to give $40,000 to your son for the down payment on a new home. $4,000 of the gift exceeds the annual gift tax exclusion amount and counts towards your lifetime gift tax exclusion amount. A gift tax return documenting the gift will need to be filed.
Gifting to Adults
There are different ways to give a financial gift to other adults, whether adult children, nieces/nephews, parents, cousins, or friends. Often, the easiest and most used method is giving cash or writing a check. Gifts of cash or checks give the recipient the greatest flexibility with the use of the money. Gifts of cash can be used to pay down debt, build an emergency fund, make IRA contributions, or used to fund an expense. There are other creative ways to gift assets, depending on the goals and intentions behind the gift.
Another possibility is to gift securities like appreciated stocks, bonds, or mutual fund shares directly to an individual. Giving securities can help to establish or add to another’s investment portfolio. It can also help shift capital gains from the gift giver, who may be in a higher income tax bracket, to the recipient, who might be in a lower tax bracket.
Logistically, the gift recipient should establish a brokerage account to receive such securities, which are transferred directly to the account in kind. Ultimately, the recipient can retain the security or cash it out.
While gifts of cash or securities count towards the annual gift tax exclusion and potentially the lifetime gift tax exclusion limit, depending on the gift size, another method of gifting does not.
Paying educational or medical expenses directly to institutions on behalf of another individual doesn’t count towards either limit. Paying education or medical expenses to institutions is a practical way to support family members without triggering gifting rules or limitations.
Gifting to Minors
Gifting to children can be more complex from a practical and legal perspective. Minors cannot control financial assets until reaching the age of majority. A custodian or guardian must administer assets on behalf of the child until adulthood. Gifts to minors can be structured in different ways depending on the intent of the gift itself.
- 529 Accounts. One popular way to give gifts to minors is by contributing to 529 accounts. 529 accounts are tax-advantaged college savings vehicles with the future student or current student named beneficiary. Cash can be contributed directly to the 529 account and once contributed, grows and is distributed tax-free for qualified education expenses. In some cases, the donor may also receive state tax benefits for making contributions to 529s.
- UTMA Accounts. If the intent is to gift assets that don’t have to be used for qualified education expenses, transferring cash or securities to UTMA (Uniform Transfer to Minor Act) accounts or trusts is another avenue. UTMAs are accounts managed by a custodian and protected until a minor reaches adulthood (age 18 or 21, depending on the state).
- Trusts. Trusts are fiduciary arrangements managed by a trustee. They allow for more control when a minor gains control of the asset. However, trusts can be more costly to establish and manage than a UTMA.
Gifts to 529 accounts, UTMAs, and trusts count towards annual gift tax and potentially lifetime gift tax exclusion limits. As mentioned earlier, paying educational or medical expenses directly to institutions on behalf of the minor does not count towards either limit.
Summary
Giving a financial gift can have a life-changing impact on the recipient. Gifts can be structured differently to accomplish varying goals depending on the intent. Discuss your goals with your financial advisor or CPA to maximize efficiency and mitigate tax implications.
Abby VanDerHeyden, CFP, is a Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Abby at AVanDerHeyden@bedelfinancial.com.