As we enter the holiday season, you might be reflecting on ways to give back or support your loved ones โ and understandably so. Gifting money to family members can be a meaningful way to provide support, celebrate milestones, or share your wealth with the people you care about most.
However, as generous as these acts are, they often come with tax and financial planning considerations that shouldnโt be overlooked. In this guide, weโll explore the key factors to consider before gifting money to family members and how thoughtful planning can align your generosity with your broader financial goals.
Understanding the Basics of Gifting
Before you start gifting, itโs important to understand the Internal Revenue Serviceโs (IRS) rules surrounding it. For 2024, the IRS set an annual exclusion amount of $18,000. This means you can gift up to this amount to each recipient without filing a gift tax return or affecting your lifetime gift tax exemption.
The lifetime gift and estate tax exemption, also known as the Unified Credit, is currently $13.61 million for 2024. This exemption represents the total amount you can give over your lifetime (or leave to heirs at your passing) before triggering federal gift or estate taxes. However, the Unified Credit is scheduled to decrease significantly in 2026, so now may be an opportune time to integrate gifting into your estate plan.
What to Consider When Gifting Money
Before gifting, itโs essential to evaluate the broader implications:
Your Financial Security: Before making significant gifts, ensure your own financial needs are met. Gifting too much too soon can create challenges later in life.
Tax Filing Requirements: Gifts exceeding the annual exclusion require filing a federal gift tax return (Form 709), even if no tax is due.
State Tax Liability: In addition to federal laws, some states impose their own estate, gift, or inheritance taxes. Be aware of your stateโs tax laws and how they affect your strategy.
Family Dynamics: Large or uneven gifts can sometimes create tension within families. Transparency and clear communication can help prevent misunderstandings.
The Tax Impact on Recipients
While gifts are generally income tax-free for the recipient, โin-kindโ gifts of appreciated assets, such as stocks, may carry future tax implications. The recipient assumes the donorโs original cost basis for calculating capital gains, meaning they will owe tax on the difference between the sale price and the original purchase price if the asset is sold.
Unlike inherited assets, โin-kindโ gifts do not receive a step-up in basis, which adjusts the cost basis to the assetโs fair market value at the donorโs death. This adjustment can significantly reduce or eliminate capital gains taxes for heirs, making it an important consideration when deciding between gifting during your lifetime or passing assets through your estate.
โIn-kindโ gifts can still be beneficial if the recipient is in a lower capital gains tax bracket or if the asset has a relatively high cost basis, minimizing taxable gains. Careful planning ensures your gifts align with your financial goals while considering the tax implications for the recipient.
Strategies to Maximize Your Gifting
Gifting money involves more than simply transferring cash. Itโs an opportunity to be strategic and intentional. Here are a few ways to enhance the impact of your gifts.
Use the Annual Gift Tax Exclusion
The $18,000 annual gift tax exclusion allows you to transfer wealth to loved ones without reducing your lifetime gift and estate tax exemption. This is an effective way to gradually reduce your taxable estate while providing financial support to family members. Married couples can combine their exclusions, gifting up to $36,000 per recipient each year.
Make Direct Payments for Education or Medical Expenses
Direct payments made to educational institutions or medical providers for qualified expenses are not subject to gift tax. This can be an excellent way to provide meaningful support to adult children without reducing your annual exclusion or lifetime exemption.
Leverage the Unified Credit Before 2026
With the lifetime gift and estate tax exemption set to decrease in 2026, now is a critical time to consider larger gifts. By utilizing the current exemption, you can transfer substantial wealth and minimize future estate tax liability.
Use Trusts for Structure and Control
Trusts can provide a structured way to distribute larger gifts over time while maintaining control over how the assets are used. This is especially helpful for minor children or beneficiaries who may need guidance managing their finances.
Share the Joy: Plan Your Gifting with Confidence
Gifting money to family is a generous way to share your wealth, but it requires thoughtful planning to avoid unintended consequences. From understanding annual exclusions to exploring advanced tax strategies, our expert financial advisors are here to help you maximize your generosity while safeguarding your financial future.
