How to Give to Your Family During Your Lifetime: Financial Gifting Strategies
Explore TopicsFinancial Planning Investment Management Retirement Planning
A common theme we see among clients is the desire to give gifts to their family members. The scale of gifting can range from a birthday gift for their son to payment of college tuition for their daughter. While the gift itself may be top of mind, the gifting strategy and rules governing gifting may be unintentionally overlooked.
Gifting Rules and Parameters
Before we dive into gifting strategies, let’s begin by covering how much you can give to different members of your family without incurring gift tax.
The gift tax exclusion amount for 2023 is $17,000 per recipient, per year.
To understand what this means, let’s look at a quick scenario:
- John (father) and Jane (mother) each want to gift the maximum amount of cash, up to the exclusion limit, to both Jack (son) and Jill (daughter) in 2023.
- Since they can give up to $17,000 per recipient, John and Jane each give $17,000 to both of their children, leaving the kids with $34,000 each.
- These gifts fit into the gift tax exclusion amount; therefore, there will be no gift tax applied to any of these completed gifts.
Now, let’s say that John wanted to give to his daughter above the $17,000 per recipient exclusion:
- John wants to give his daughter, Jane, $67,000 in 2023.
- This gift falls above the annual gift exclusion by $50,000.
- Rather than the gift being taxable, the amount in excess ($50,000) will be applied to the lifetime gift and estate tax exemption ($12,920,000 for 2023), leaving $12,870,000 for John to give in future gifts above the annual exclusion, including the value of John’s estate at his time of passing.
While the lifetime exemption may currently sit well out of consideration for many households, it is set to be cut in half in 2026, which gives more weight to present gifting decisions.
Another caveat to the gifting laws is the unlimited marital deduction. This states that at any time, an individual is allowed to transfer any amount of assets to their legal spouse, not subject to limitation. Therefore, the annual gift exclusion and the lifetime gift and estate tax exclusion are not relevant to any substantial transfer made between spouses.
Additional Gifting Strategies
The example we looked at with John and Jane incorporated gifts of cash. The same rules apply when gifting shares of company stock or physical property (cars, collectibles, etc.). While these may seem to be the most straightforward, there are many other avenues one can take to transfer assets. Cash can be spent upon completion of transfer, which leads us to the question: what other gifting options are out there that are more forward-looking?
The first overarching strategy is to open up and contribute to an investment account on a family member’s behalf. This account could take shape in a variety of different forms. Here are a few examples:
- 529 Plan – Contributing to this plan can help save for your child’s, or another family member’s, future education. Any contributions are subject to the same annual gift exclusion rules, but allow for longer-term growth and tax-free distributions for qualified education or related expenses.
- Custodial Account (UTMA/UGMA) – Funding these types of accounts can help support your child when they reach a certain age, called the “age of majority.” The beneficiary of this account cannot access the balance until this age, which varies by state, but in most cases, is age 21. Again, annual gift exclusion rules apply, but the principal can grow over time, and serve as a nice jump-start to your child’s adult life.
- IRA/Roth IRA – Assisting in the long-term security of a family member by funding an IRA is also an option. An individual can contribute, up to the lesser of the earned income of the family member, or the annual maximum ($6,500 for 2023) to an IRA for a family member. This is a great way to provide a nest egg for one of your family members, which can grow substantially over-time.
The family gifting umbrella also encompasses some gifting methods classified as gift tax exceptions, for instance, the direct payment of tuition or medical expenses. Payments such as these are excluded in totality from any gift tax rules or limitations.
- Direct Payment of Tuition - Rather than handing over a check to be used for college or funding an education-dedicated account for someone to support their college expenses, you can choose to submit payments directly to that individual’s college or university, specifically to help cover tuition. This is explicitly for tuition, and does not include other related expenses, like room and board or textbooks.
- Direct Payment of Medical Expenses - Medical expenses can be costly and unexpected. You can also choose to support family members, without restriction, through payments of medical expenses or health insurance premiums, made directly to that individual’s medical provider.
Gifting to family is not only a way to provide for the people closest to you, but it also acts as a way to reduce the value of your estate. If you already plan to leave behind a legacy, gradually making gifts throughout your lifetime can drastically improve your estate liability situation, while simultaneously lending a hand to the people you care about at times when they may benefit from it most. For more information about Estate Planning and how to Live Your Legacy through strategic charitable giving, check out our article, “4 Mistakes to Avoid During Estate Planning.”
Before making a decision about which gift giving strategy is right for you, make sure you prioritize your long-term financial goals, including retirement, and your current financial position so you can make these gifts without them being a detriment to your financial security or future.
An advisor can help build family gifting strategies into your long-term planning, giving you the confidence to give generously while feeling secure in your financial future. Reach out to your financial advisor today to talk about your unique situation, or send us a message to get started.
Advisory services are offered through the Burney Company, an investment adviser registered with the U.S. Securities & Exchange Commission. Registration as an investment Adviser does not imply a certain level of skill or training.