Gifting money within families has long been a way for people to empower their loved ones; Whether it’s giving young family members a head start in life or celebrating important life moments such as buying a first home. While these transactions are often similar to inheritances (as they both involve the transfer of assets between family members), there are some important differences. Therefore, careful planning and understanding is needed from both donor and recipient.
While an inheritance often comes as a bittersweet unexpected event following the passing of a loved one, a monetary gift is a proactive, voluntary gesture throughout the donor’s lifetime. And just as the beneficiary of an inheritance should consider the responsible use and potential tax consequences of their newfound assets, so too should donors and gift recipients.
Ask these questions for best results
When are gifts appropriate? The transfer of family wealth is not just about numbers and assets; It is about generational relationships and inheritances. So determining the right moment and approach for such a gift requires consideration of your unique situation.
Is the donor financially healthy? First, consider the financial health of the donor. Does the intended gift come from abundance or excess? Or could it put a strain on the donor’s retirement plans or current lifestyle? Is there any debt? No matter how noble the intention, a financial gift need not jeopardize the donor’s well-being.
Are there conditions? A detailed bequest to a trust may come with specific instructions or conditions. But financial gifts made during the donor’s lifetime typically do not do this; These are simply gifts with no strings attached. To preserve the integrity of the relationship, it is recommended to treat them only as gifts. If there are “circumstances” where the donor tries to establish control over the recipient, this can lead to an unhealthy relationship.
However, donors have creative ways to direct specific gifts to specific causes; such as paying medical bills directly to a hospital, paying tuition directly to an educational institution, or writing a check to a college savings account.
Both parties can communicate openly to ensure the gift does not create unwanted burdens or misunderstandings. This clarity can go a long way towards ensuring a lasting family bond.
Consider these technical points
When it comes to gifting money or assets to families, there are several technical considerations that are vital for tax purposes and overall financial planning.
Annual gift exemptions: As of 2023, the Internal Revenue Service allows an individual to make a gift of up to $17,000 to another individual (or $34,000 to an individual from a married couple) without having to delay the transaction. Moreover, there is no limit to the number of people you can gift this amount to. This is not limited to monetary gifts only; Assets such as vehicles, stocks or real estate are also included in this amount.
There are several common gift-giving methods.
Advance: The easiest way to give gifts is cash. Whether it’s by writing a personal check or transferring the money directly to a bank account, this method is by far the most straightforward and uncomplicated.
Stocks: Stocks offer another way to give gifts. Instead of selling shares and possibly facing a tax bill, consider gifting them outright. When shares are transferred as a gift, the buyer inherits the original purchase value. This means that tax effects will only arise if the beneficiary decides to sell these shares.
Educational expenses: Education has long been a meaningful gift, and 529 college savings plans offer a tax-efficient way to contribute to one’s academic future. Funds in a 529 plan grow tax-free, and when it comes time to pay for tuition, books, or other qualified educational expenses, those withdrawals remain tax-free.
In all these methods, the basic principle remains the same; Giving gifts of money, assets, or other forms is best done as an act of generosity. It is vital to approach the process thoughtfully, ensuring that both giver and receiver truly benefit from the gesture.
Gifts are lasting legacies
Financial gifting is a practice built on a combination of goodwill and foresight. Whether you are a donor willing to support loved ones or a grateful recipient of help, it is important to understand the big picture and broader implications. With proper planning, financial gifts can have a lasting positive impact across generations.
Hunter Yarbrough, CPA, CFP, is vice president and financial advisor at CapWealth. He is passionate about taking a holistic view of personal finance including investments, taxes, retirement, education, estate planning and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.
