Giving the perfect gift brings joy, and financial gifts can jump-start the savings of a loved one, reduce your estate size—or both. To help avoid unintended consequences of financial gifts, make a successful gift strategy part of your overall financial plan. That means discussing your intentions with your advisor to help determine whether it’s best to give now or later.
“The purpose for gifting many times goes beyond financial—it’s emotional,” says Aaron Thiel, senior vice president and GenSpring wealth strategist for Truist Wealth. “Empowering family members to do certain things with that money—to accomplish the family’s mission, values, and purpose—and to see that happen while you’re alive, that is very impactful.”
Gift tax 101
Gifts might be subject to a gift tax. But have you considered all the exceptions?
The IRS allows you to gift up to $16,000 per calendar year (in 2022) to any recipient without paying a gift tax. A married couple may give up to $32,000 to any individual. This includes cash or the fair market value of gifts such as real estate, stocks, or art.
Exemptions to this limit include:
- Tuition payments made directly to the educational institution. So you could pay for your grandchild’s full tuition, for example, but not for college housing, dining, or supplies.
- Medical expenses paid directly to a medical provider or to a health insurance company on behalf of somebody else.
- Gifts to your spouse.
The final exemption is the lifetime gift and estate tax. In 2022 the limit is $12.06 million—or $24.12 million for married couples. This is how much you can give during your lifetime or have in your estate at death without paying estate taxes.
If a gift to one individual exceeds $16,000 in a calendar year, you can apply the excess to this exemption. Your estate also can use any remaining exemption to reduce or eliminate estate taxes at death.
Top considerations for gifting methods
You have many options when giving a financial gift. Here are a few of the more common ones:
Consideration: Simple and straightforward, this often is the entry point to gift giving.
Scenario: You write a check, transfer between bank accounts, or give cash.
Transferred investments, such as stock
Consideration: Your cost basis transfers with the gift, which impacts the capital gains tax if the gift recipient sells the investment.
Scenario: You gift a stock that you bought for $10 per share. The gift recipients sell the stock at $100 per share. They are taxed based on the gain of $90 per share.
529 savings plan
Consideration: You can “superfund” five years’ worth of annual gifts at once—a great way to help a loved one get started on funding college expenses.
Scenario: You gift $80,000 (or $160,000 from you and your spouse) to a 529 plan in one year. This means you can’t make any other gifts to the same person for the next four years.
Consideration: Several different trust structures allow you to generally have more control over how the money is disbursed and used.
Scenario: You want to support specific activities, such as entrepreneurial efforts, and determine an appropriate age for the beneficiary to receive the money.
These events need to fall below the gifting limits (or be counted toward your lifetime gift and estate tax exemption).
- Buying a car
- Paying for a wedding
- Giving an interest-free loan