Gifting to Children

Written By: Kevin Reardon, CFP^®

We have frequent conversations with clients about giving money to their children. There are many considerations and constraints that go with this topic, so let’s look at a few scenarios.

Gifting Limits

The government limits the amount of money you can give to another person each year. This gifting limit is called the ‘Annual Gift Exclusion’ and in 2022 the amount is now $16,000 per year, per person. As an example, a husband and wife can give a combined $32,000 per year to any individual. If your child is married and you and your spouse also want to give money to their spouse, you can collectively give $64,000 per year to this happy couple. In the event you go over the annual gifting limit, don’t despair. You will file a Gift Tax Return (IRS Form 709) noting the excess gift to the IRS and this additional amount is counted against your lifetime gift tax exclusion. The lifetime exclusion amount is currently $12,060,000 (2022).

Note: There are no gifting limits between spouses, so feel free to give them all your money. In addition, there are no limits on the amount that can be given to charity, although the tax deductibility of larger gifts can be limited.

Exceptions to the Limits

Not included in the annual exclusion amount are payments made directly to educational institutions, health insurance companies and medical providers. Please note these payments must be made directly to these providers. As an example, you can write $50,000 to the hospital or healthcare provider for the benefit of your child AND gift them $16,000 per year. If you give the $50,000 to the child with the intention they will pay the healthcare bill, you have exceeded your annual gifting amount and must file a gift tax return.

What is Considered a Gift

Typical gifts would include cash, stocks and bonds, vehicles, real estate or anything else of value you give to someone. Also included as a gift would be airline tickets, vacation expenses, etc. If you are funding a child’s IRA or Roth IRA, this is also considered a gift and must be accounted for against the annual gift exclusion amount.

Why People Give

We see parents making gifts to children for many reasons. Frequently parents give money to adult children to help with a down payment on a home purchase. This has become more common given the rising real estate market over the last decade. We see parents giving funds to children and/or their spouses to pay down student loan debt incurred from college or graduate school. From a values perspective, a gift from a parent to an adult child may afford them or their spouse the ability to spend more time raising their young children (your grandchildren) and less time working. Clients may also give money to pay for their grandchildren’s parochial school tuition or extracurricular activities.

As clients age and they realize they will be leaving their children an inheritance, some want to simply share it with their children and grandchildren while they are alive so they can watch them enjoy it. In this regard, they are able to watch how their adult children handle small gifts and can take necessary steps to prepare the children to handle a larger inheritance when they are gone. From an estate tax perspective, clients who are concerned about paying estate taxes on their death prefer to give money to their children to reduce the amount that may ultimately go to the government.

Considerations

It is not uncommon for clients to initially bristle at the concept of giving money to their children. People will frequently comment, “My parents never helped me and I’m not going to help them either”. This is a valid consideration as monetary gifts can sometimes create a disincentive to work, especially when the child knows the gifts will continue.

Many parents change their perspective of gifting when they see their children working hard, being responsible and realize the children will use any gifting in a productive way. In addition, when precious grandchildren arrive on the scene, clients are more willing to gift to help the third generation.

There are instances where an adult child will mishandle a gift. Sometimes there are issues of alcohol or drug dependency, gambling addiction or they or their spouse are simply spendthrifts. In these instances, gifts can be made into a trust for the benefit of the child, with a third party involved in helping them make prudent financial decisions.

In some instances, an adult child may face a financial calamity, which prompts a gift from parents. If there are other adult children in the family, a gift to one child may create hard feelings between the siblings. There is no easy solution to this situation, but we have found full transparency among family members allows the parents to control the messaging and potentially squelch any animosity that could develop within the family.

Making gifts to children can be more complex for blended families. One spouse may have a disproportionate share of the wealth when they enter the marriage. Each spouse may have children from a prior marriage or they may have children together. Also, there may be a need to preserve some of the wealth for the lifestyle and care of the less wealthy spouse if the wealthier spouse pre-deceases. It is important to consider all interested parties before giving money.

Conclusion

People give money to loved ones for many reasons. It can be a joyful opportunity to share your wealth, a necessary measure to assist someone facing financial challenges, a desire to reduce taxes and maximize family wealth and a host of other reasons. Whatever is prompting your action, we want to make sure you properly navigate the annual exclusion and lifetime exclusion rules, while maximizing the benefit of the gift that is made. Your Shakespeare advisor is here to be your partner through these decisions for your family and financial plan.