When it comes to holiday seasons, birthdays, or helping a loved one with a financial need, family gifting may be one of your most meaningful objectives. It’s important to recognize, however, that gifts can have significant financial implications—both for the giver and the receiver. In this article, we break down some important considerations for family gifting, offering advice on how to do it strategically and with long-term benefits in mind.
Involve the Whole Family in the Process
Gifting can be an opportunity to bring your family together and have conversations about wealth management, financial literacy, and long-term planning. Consider involving your children or grandchildren in discussions about the value of money, the importance of saving, and how to make responsible financial decisions.
How Big of a Gift?
Gifting should be balanced with your long-term financial needs so having up-to-date planning projections will help you determine how much you can afford to give. The key is to ensure that you’re not giving away too much, too soon, leaving yourself without sufficient resources for retirement or other needs.
Annual Gift Limits
The IRS restricts how much you can gift to one person in any given calendar year without the requirement to file a gift tax return. This amount is known as the annual exclusion. This exclusion can apply to cash, stocks, or other assets, and the recipient does not have to pay taxes on the gift.
If you gift more than the annual exclusion amount, you’ll need to file a gift tax return. Two common ways to avoid this include:
- Spousal Gifts: If the gift recipient is married, you can make another gift up to the limit to their spouse.
- Bridge Years: Depending upon how quickly funds are needed, you can bridge years by making a gift during the current year and another gift in January of the following year.
Gifts of Cash or Assets?
Cash is the easiest choice for making a gift, for you and the gift recipient. You can give assets as an alternative, but there is a large caveat that the asset conveys with your original cost basis. This means that you are inherently transferring a future capital gain tax liability to the gift recipient.
Example: Mark gifts $19,000 of Microsoft stock that he purchased for $1,000 to his daughter, Molly. Three years later, Molly sells the stock for $25,000 and owes taxes on a gain of $24,000 ($25,000 less Mark’s $1,000 of original cost basis). She only benefited from a gain of $6,000 since receiving the gift but now owes taxes on a $24,000 capital gain because the stock was gifted to her.
Transferring assets does make sense in some planning scenarios typically involving large estates or illiquid assets such as a property or business that might be entitled to valuation discounts.
One-time or Recurring Gift?
An important consideration is whether your gift will be a one-time event or ongoing. Helping your child with a down payment on a home versus supplementing an income gap are two different scenarios that can have varying levels of impact and require distinct types of planning.
Gifting to Fund Education or Health Expenses
One of the most tax-efficient ways to give is by gifting for education or health expenses. Under IRS rules, you can pay for someone’s qualified tuition or medical expenses directly to the provider without it counting toward your annual gift limit. This can be a great way to support your family members while also avoiding gift tax implications.
Utilizing Gifting for Estate Planning
Gifting can play an essential role in your estate planning strategy. By giving assets away during your lifetime, you can reduce the size of your estate, potentially lowering your estate tax burden down the road. This is particularly beneficial for those with large estates or who anticipate significant appreciation in the value of their assets.
Family Equalization
If you’re thinking of making a gift to one child, but have multiple children, does that gift need to be equalized among the other family members? This is frequently the most complicated aspect of family gifting and there’s no right or wrong answer. Some families believe in giving resources based upon need, while others want to keep gifts equal.
If you want to make a gift and are concerned about equalization, three common solutions include:
- Estate Planning Updates: You can account for any gifts advanced during your lifetime by updating your estate planning documents.
- Equalization Gifts: You can consider completing equal gifts to each child at the same time, assuming you’re in a financial position to do so.
- Loans: Loans are a common alternative, particularly if you don’t want to make equal gifts to each child. The terms can be flexible and generous while retaining the amount of the loan as an asset in your estate for future equalization among your children.
SageVest Wealth Management understands the complexities of balancing personal and family wealth objectives. We can help guide you towards informed financial decisions that meet the financial needs and objectives for you and your loved ones. Please contact us for more information.
