What You Need to Know Before Gifting Money to Family
What you need to know before gifting money to family – Holidays, birthdays, and other milestones typically inspire generosity and an increased desire to give. Many families use these times to give monetary gifts to loved ones. Let’s face it, the last few years have been tough on many families, and parents and retirees may feel compelled to help family members who have recently suffered economic hardship.
It’s common for widows to put the needs of their children ahead of their own. They are compelled to gift money to their less-fortunate children or grandchildren but may be compromising their own financial security by doing so. While their generosity is admirable, gifting too much or in the wrong way can cause unintended consequences.
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If you’re new to the family gifting process, you may not realize there’s more to it than simply writing a check. It’s important to consider the emotional implications as well as the tax and legal implications of giving a large financial gift.
Emotional Considerations
Large gifts can bring happiness to recipients, or even relief to family members who need a financial lifeline. But financial gifts can also be controversial – causing jealousy, anxiety, even anger. The following suggestions may help you determine how best to make these types of gifts:
#1. Don’t Overcommit
While it’s natural to want to help children and family members, think through the long-term implications of making gifts, particularly larger amounts. If helping one child could be construed by your other children as an invitation to ask for the same, make sure you can truly afford to gift that same amount to all your kids. Talk to your advisor first to ensure that your gifts are reasonable, and don’t compromise your own financial freedom. Put another way, ask yourself if gifting now will put you in a position to require financial help down the road.
#2. Set Boundaries on Supporting Family Members
If a family member approaches you for help paying their bills or supporting their small business, make sure you have clear discussions about how far your support will extend. Can you structure the financial support as a loan instead of an outright gift? Have you set clear boundaries upfront about what is and is not an acceptable amount of support down the road?
A common mistake that parents make is gifting the same amount every year for the holidays. You may be setting the expectation that such gifts will continue forever. Consider having a conversation about why you are gifting to your family member. If you’re providing a one-time gift for support, make sure they know that. If you don’t want to set expectations for continuing gifts, then make a commitment to stay away from giving on a regular basis, which can enable family members to become more self-reliant.
Structuring Gifts to Family Members
Gifts to family members have tax implications, so it’s important to understand what they are and to work with your advisor or attorney to structure your gift properly. Here are some answers to common questions about this process, beginning with a look at some common misconceptions:
What are some common misconceptions about gifting money?
A common misconception is that the recipient of a gift has to pay income tax on the gift. Gifts are generally income-tax free to the recipient at the time of the gift. However, if you gift a security, such as a stock or mutual fund, the recipient may have to pay capital gains tax if he or she subsequently sells the security. The donor’s tax basis for figuring capital gains tax transfers to the recipient when the gift is made, so the recipient has the same capital gains implications as the person making the gift, if that person were to sell the security.
Making “in-kind” gifts can make sense if the recipient’s effective capital gains tax rate is lower than the donor’s, or if the asset has a relatively high cost basis. Keep in mind that gifted assets do not receive a “step up” in cost basis at the death of the person making the gift. Generally, if an asset subject to capital gains tax remains in the donor’s estate at death, the tax basis adjusts to the fair market value of the asset as of the date of death. Many families benefit from the step-up in basis from a loved one’s death because the asset can be sold with no or significantly reduced income tax liability.
If a donor is charitably inclined, “in-kind” gifts can be made to a charity without any capital gains tax realized if the security is transferred directly to the charitable recipient “in-kind.”
How does the lifetime gift tax exemption work?
In the U.S., each individual has a $13.61 million (2024) federal estate tax exemption – which allows $13.61 million to be left estate-tax free at death. (In 2025, the amount increases to $13.99 million.) Each individual may make gifts during his or her lifetime as well. The annual exclusion of $18,000 (2024) allows each individual to gift $18,000 in any given year to any donee he or she wishes, without the need to file a gift tax return. (In 2025, the amount increases to $19,000.) A married couple can gift double that amount — $36,000 in 2024, and $38,000 in 2025.
Gifts above the annual exclusion amount require the person making the gift to file a gift tax return. If a gift tax return is filed, gift tax is not automatically due because the donor can apply the “taxable” gift against his or her lifetime exemption amount. Therefore, $13.61 million can be gifted in 2024 ($13.99 million in 2025) during the donor’s lifetime before any gift tax is due. Any gifts above $18,000 in 2024 ($19,000 in 2025) will reduce the amount of lifetime exemption available at death. Alternatively, a donor can elect to pay gift tax on gifts above the annual exclusion at the time the gift is made. Once someone uses up his or her lifetime exemption, gift tax is due on all gifts made above the annual exclusion.
When someone makes a lifetime gift above the $18,000 annual exclusion, such gifts in excess of the annual exclusion must be reported on a federal gift tax return (Form 709). As mentioned above, these lifetime “taxable” gifts are tracked on Form 709 until the donor’s death, at which point the lifetime gifts reduce the applicable estate tax exemption amount in the year of death.
Beginning in 2026, the federal estate tax exemptions are scheduled to be reduced with the expiration or “sunset” of the Tax Cuts and Jobs Act. It is estimated that the inflation adjusted estate tax exemption may be reduced from $13.61 million to approximately $7 to $7.5 million at that time.
How can I gift money to family members without incurring estate or gift taxes?
In addition to making annual gifts under the annual limit, a person can make unlimited tax-free gifts without using their lifetime exemption amount if the gifts are made directly to an educational institution for tuition, or to a medical care provider for qualified medical expenses on behalf of another. Such gifts are referred to as tuition and medical payment exclusion gifts.
Loans can also be made to others, such as children, to assist with major purchases such as buying a first home, so long as the interest rate on the loan meets or exceeds the appropriate Applicable Federal Rate (AFR), and the loan is properly documented via an enforceable debt instrument and is intended to be a loan by both parties. These loans may be forgiven at death.
What is the difference between gift taxes and estate taxes?
Gift taxes are taxes on gifts made during someone’s lifetime, whereas estate taxes are taxes assessed on the transfer of wealth at death. Making gifts during one’s lifetime can remove future appreciation from the donor’s estate, therefore reducing future estate tax exposure. In addition, depending on the type of assets gifted and the structure of the gift, valuation discounts may be applied that reduce the value of the gift for gift tax purposes.
How do I file a gift tax return?
A qualified professional, such as a CPA or an attorney who specializes in estate planning, can assist with the filing of Form 709. A description of the gift(s), the value of the gift(s), and documentation substantiating the value of the gift(s) for non-cash gifts, such as a statement or appraisal, must also be provided. Form 709 is generally due April 15th following the year in which the taxable gift is made but it may be extended to October 15th.
Are there any state-specific gift tax rules I should be aware of?
A handful of states have a state estate tax. For many of these states, the estate tax exemption amount is much lower than the federal exemption amount, which can cause state estate taxes to be payable on more estates. As of October 2024, 12 states and the District of Columbia have an estate tax that applies at death: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Other states, such as Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania, have an inheritance tax, which is a tax payable by the recipient of the inheritance. Maryland uniquely has both an estate tax and an inheritance tax.
You should plan carefully to minimize the effects of state estate tax since the threshold to pay state estate taxes is much lower. State estate taxes may cause some families to relocate to lower-tax states.
How can I use trusts to manage gifting and taxes?
One type of trust commonly used to manage gifts and plan for estate taxes is an irrevocable trust. A person who creates a trust is called a grantor. An irrevocable trust can be created by a grantor either during lifetime or at death. If the grantor creates the trust during their lifetime, they may transfer assets into the trust using their annual exclusion or lifetime exemption amounts. The same rules for lifetime gifting (as described above) apply to gifts made to irrevocable trusts as gifts made outright. The benefit of gifting to an irrevocable trust during the grantor’s lifetime is that any asset put into the irrevocable trust will not be included in the grantor’s estate at their death. This includes the value of the gift as well as any appreciation of the asset.
An irrevocable trust must name a beneficiary. The beneficiary may, for example, be a spouse, descendants, or a charity. Most states do not allow for grantors themselves to be the beneficiary; however, some states do. Trusts created for the benefit of the grantor are called self-settled trusts and may provide some asset protection depending on state law.
The benefit of transferring assets to an irrevocable trust, either during lifetime or at death (in which case the trust is called a testamentary trust), is that a donor can provide asset protection (from potential creditors or a divorce) and shelter assets from multi-generational estate taxation in the future if structured properly.
Irrevocable trusts generally have higher effective income taxes, given the compressed marginal income tax brackets that are applied to trusts. However, the grantor of an irrevocable trust created during the grantor’s lifetime may be able to structure their irrevocable trust as a “grantor trust” for income tax purposes. With a “grantor trust,” the grantor pays taxes on the income at his or her marginal income tax rate versus the trust paying the tax.
Another common estate planning tool is the revocable living trust. A revocable living trust is an alternative to a last will and testament. The main advantage to using a revocable living trust in an estate plan is to avoid probate and to plan for incapacity.
Assets held by a revocable living trust are included in the grantor’s estate for estate tax purposes. The revocable living trust has no tax advantages or disadvantages. Assets placed into a revocable living trust during lifetime will receive the same step-up in basis for income tax planning purposes as assets that pass by a will.
What are the benefits of gifting money to grandchildren?
Gifts to 529 plans can be a great way to provide for income-tax free college funding. 529 plans grow income-tax free, and distributions are also income-tax free if used for qualified higher education expenses. Plus, you may be able to capture a state income tax deduction if you contribute to the sponsored plan in the state of your residence.
Gift Wisely
Giving money to family members can be a meaningful way to help support their goals, but it’s important to approach it with a clear plan. By understanding the emotional, legal, and tax implications, you can make thoughtful decisions that benefit everyone involved. If you’re considering gifting to loved ones, working with a financial advisor can help you navigate the complexities and ensure your generosity doesn’t jeopardize your own financial well-being.
This is intended for educational purposes only and should not be construed as personalized investment advice.