Gifting Money to Family: A Comprehensive Guide

When it comes to gifting money to your family, it’s essential to understand the various laws and regulations to ensure compliance with the tax system. Familiarizing yourself with these rules can help you make informed decisions and avoid legal issues.

Gift tax exemptions and limits

The IRS allows individuals to gift a certain amount of money to someone else each year without incurring any gift tax. As of 2024, the annual gift tax exclusion is $18,000 per recipient. This means you can gift up to $18,000 to any individual without reporting it or paying any gift tax. If you are married, your spouse can gift an additional $18,000 to the same individual, raising that total annual gift exclusion amount to $36,000 for a married couple per recipient.

There are nuances to what’s deemed a “gift.” Paying institutions directly for a family member’s college tuition or hospital bills does not count against the annual gift tax exemption amount — a gift in practice but not in name.

Be aware of the generation-skipping transfer tax when passing assets to individuals more than one generation younger than the donor, such as grandchildren, or to unrelated individuals more than 37 ½ years younger than you. The current limit in 2024 is $13.61 million. Think of this as a way to pass your assets down to your grandchildren and skip your children if they are successfully amassing their larger nest egg.   For example, we work with a family looking to pass their assets down to their descendants; however, their desired gift would have pushed their children into a taxable estate. Due to this, they chose to gift the money directly to their grandchildren, bypassing their kids, who were already on the path to amassing a large estate on their own. However, certain exemptions and limits are in place for this tax, so it’s crucial to consult a tax professional to navigate these complexities.

Gifting money can also have longer-term tax implications for the gifter. While recipients generally don’t have to pay taxes on the gifted amount, the gift giver may need to report larger gifts (over $18,000 for 2024) when they file their tax returns. Gifts over the exemption amount are counted against your lifetime federal exemption limit ($13,610,000 in 2024, which is currently slated to drop at the end of 2025). The giver and the receiver need to understand the potential tax implications and seek advice from a qualified tax professional.

Strategies for structuring gifts

When it comes to gifting money to your family, there are several strategies you can use to ensure your gifts are structured most efficiently — maximizing the benefits while minimizing tax implications:

• Establishing trusts for gifting: Trusts can be beneficial if you have specific requirements or conditions for the gifted funds, such as obtaining a certain age, using the money for education, healthcare expenses, or protection from creditors. By utilizing trusts, I have seen many people gift assets that could sustain their loved ones, who sometimes wouldn’t or couldn’t manage the money successfully.
• Creating education funds: Education funds, such as 529 plans, offer tax advantages and allow the funds to grow over time, maximizing the potential of your gifted dollars.
• Utilizing purposeful planning: Consider your goals and intentions when gifting money to your family. I find it helpful to frame your purpose through questions: When will the gift most impact the recipient? Do you wish to wait until you pass away when your family is established to give money? Or do you want to provide gifts over your lifetime when they may have more impact? Alternatively, if giving money directly to your family doesn’t align with your values, consider paying institutions, such as colleges or hospitals, directly. This has the added benefit of not being subject to annual exemption limits.

Considerations for family gifting

Set boundaries to ensure a healthy financial relationship when gifting money to family members. While supporting family members can be a rewarding experience, it’s crucial to establish clear guidelines to prevent your relationship from becoming unhealthy down the road. We have heard sayings about teaching those around us to fish rather than passing out a free meal. While this can certainly feel a bit cliche, we all want to see our loved ones chart a path towards their financial success.

Avoiding overcommitment is also crucial when gifting money to family. While it may be tempting to help in every situation, assessing your financial situation is essential and ensuring you can sustain your generosity in the long run.

Maximizing the impact of your gifts

It is also essential to understand the financial implications for the recipients of your gifts. Depending on the amount of money gifted directly to an individual, there may be tax implications or eligibility concerns for certain government benefits such as Medicaid or Supplemental Security Income (SSI).

Lastly, structuring gift-giving can help you achieve your intended goals. This can involve setting up trusts, establishing annual gift limits, or utilizing other estate planning strategies. By structuring your gifts thoughtfully and strategically, you can provide ongoing financial support to your family while minimizing many potential negative consequences.

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