Thinking of Gifting Funds to Family?

Note: The numbers and limits listed in this newsletter are for 2024, and may be different in the year that you are reading this. 

Over the past several weeks, I’ve had multiple conversations with our clients about the best and most tax-efficient options to make monetary gifts to family members. When people make gifts to their family, usually children or grandchildren, they often don’t think about saving taxes… but we do!

If you are in a position to provide financial support, wouldn’t you want it to be as tax-advantageous as possible to the entire family? Most of the ideas discussed below are relatively easy to implement. It’s just that many people are not aware of them. So read on!

Before we dive in, just a quick heads-up. This newsletter isn’t meant to offer tax, financial, or investment advice. The strategies and simplified examples here are for informational purposes only. Your situation might look quite different, so we highly recommend working with a qualified professional if you plan to use any of the ideas mentioned in this newsletter.

Let’s start with the basics. How much can you actually gift each year?

In 2024, you can gift up to $18,000 to any individual, regardless of their relationship to you, without needing to file a gift tax return.

For example, if you are married and have two children, you and your spouse can gift $18,000 x 2 parents x 2 children = $72,000 in 2024.

If you go over the limit per individual, you would need to report the gift on your tax return, and the amount over $18,000 will reduce your lifetime gift exemption (currently $13.61M at the federal level).

Exceeding the lifetime gift tax exemption isn’t a problem for many people, but it’s still good to be aware of it.

Each state has its own estate and gift tax exemptions. We won’t go into much detail in this newsletter. (If you live in Maryland or the District of Columbia, you should be aware of the limits, as they may have a significant impact on your estate plan.) 

So, if you gift $50,000 to your daughter for a house purchase, you would need to file a gift tax return, and your lifetime exemption would be reduced by $32,000 ($50,000 minus $18,000). 

Please note that you will not need to make any gift tax payments in the example above.

What if you want to make many small gifts to your children or grandchildren for the holidays?

Give them cash and watch their faces light up when they receive the gifts from you. There’s no planning that needs to be done. If you’re on the receiving side, please be thankful. It means a lot to your parents or grandparents to hear kind words from you or receive an unannounced phone call.

Are you considering making larger gifts to your children?

Depending on your children’s financial situation, it may be more beneficial for the entire family if you gift appreciated stock.

Here is a specific example:

Assume you purchased a stock position for $3,000 and it appreciated in value to $10,000.

If you sell the stock, you would have to pay capital gains taxes on the gain of $7,000, which would be around $1,400 to $1,800 depending on your specific tax situation.

If you gift the stock to one of your children, there’s a possibility that they can sell it and pay much less in taxes or no taxes at all if they are in a lower tax bracket.

If they don’t want to sell, there’s a possibility they can keep the stock as part of their own investment strategy and sell something else for their cash needs.

The points above are rather technical in practice but can save the entire family $10,000s or even $100,000s in taxes in the long run with proper multi-generational planning.

Do you want to give significant gifts to your minor grandchildren?

Most grandparents struggle with the idea of making large monetary gifts to their minor grandchildren, but they still want to help.

One of the better options is to create 529 college savings plans that provide tax-free growth as long as the funds are used for college-related expenses.

Many states also provide deductions for contributions to state-specific plans (there are no federal deductions for any 529 plan contributions).

Please keep in mind the 529 plans belong to you, not the beneficiary, which means you maintain full control over the investment strategy and timing of distributions.

You can also change the beneficiary of the 529 account if the circumstances or your preferences change.

If the college expenses are already covered, consider creating a Uniform Transfer to Minors Act (UTMA) account for your minor grandchildren.

One common strategy is to fund the UTMA with the annual gift tax exemption of $18,000 in 2024.

You would want to limit the annual dividends and capital gains in the UTMA, as any amount over $2,500 will be taxed at the custodian’s (e.g., grandparents) tax rate. 

Here is the catch with the UTMA accounts. They become the property of the beneficiary at the age of majority, which is either 18 or 21, depending on the state of residence.

So be careful if you plan to accumulate large amounts in the UTMA accounts as it may lead to unexpected consequences.

Do you want to provide significant support to your family members with “strings attached”?

I don’t mean to add any negative connotation to this section, but some parents or grandparents want to have some control over the funds even after they provide the necessary support to their loved ones.

Consider creating a promissory note if this is what you are trying to accomplish.

This approach allows you to create a legally binding agreement between you and your family members with beneficial terms.

Here is an example. Instead of gifting $100,000 to your son for a down payment, you can create a promissory note with a specific interest rate and payment schedule.

Your son will receive the funds and will be legally obligated to make the payments to you according to the terms of the agreement that you define based on your preferences. 

However, in any given year, at your discretion, you can forgive a certain portion of the loan.

In many cases, a sensible plan is to make this portion approximately equal to the annual gift tax exemption ($18,000 in 2024) if you do not want your children to make any actual payments to you.

There is much more to the promissory note approach, but please keep it in mind if you want to make large gifts to your family members.

What other options are available to me? 

If you make direct payments for tuition or medical expenses for your children or grandchildren, this approach does not impact your annual or lifetime gift exemption. 

In other words, you can directly pay for someone’s college tuition and/or medical bills and also gift them up to $18,000 per year without needing to file a gift tax return.

Why is all of this important to me? 

Based on my experience working with clients who want to make significant monetary gifts to their children or grandchildren, I believe it’s important to be thoughtful and strategic about your approach.