What You Need to Know Before Gifting Money to Family

By Tom Williams, CFP®, CPA, Financial Advisor

It’s common for parents to put the needs of their children ahead of their own. But while their generosity is admirable, gifting too much or in the wrong way can cause unintended consequences.

According to a recent Bankrate study, 43% of surveyed parents said they have sacrificed their own retirement savings to help their adult children. A July 2020 report by Edward Jones and Age Wave found that 71% of surveyed retirees were willing to offer financial support to their family, even if it meant jeopardizing their own financial future.

If you are considering gifting money to your children, keep these considerations in mind:

#1. Don’t Overcommit

Think through the long-term implications of making gifts, particularly larger amounts. If helping one child could be construed by your other children as an invitation to ask for the same, make sure you can truly afford to gift that same amount to all your kids. Talk to your advisor first to ensure your gifts are reasonable, and don’t compromise your own financial freedom.

#2.

Set Boundaries on Supporting Family Members

If a family member asks for help paying their bills or supporting their small business, make sure you have clear discussions about how far your support will extend. Can you better structure the financial support as a loan instead of an outright gift? Have you set clear boundaries upfront about what is and is not an acceptable amount of support down the road?

#3.

Structure Gift Giving Appropriately

Keep in mind the 2023 tax rules for gift-giving. Every taxpayer can gift up to $17,000 per person, per year. This is called the annual gift tax exclusion amount. A married couple filing jointly can each give $17,000 ($34,000 total) to the same person in one year with no gift-tax reporting consequences.

If the amount given to one person exceeds $17,000, you must file a gift tax return. That’s because gifts larger than the annual exclusion amount count toward your lifetime gifting limit, which, under the 2023 IRS rules, now stands at $12.92 million. Filing a gift tax return allows the IRS to keep track of your lifetime gifts. When you make a gift of over $17,000 to one person in one year, you must file a gift tax return, but you won’t owe any gift tax unless you hit the lifetime limit amount.

If you’re working with a CPA to file your taxes, making gifts of more than $17,000 to one person can result in additional tax preparation costs. If you can afford to gift more than $17,000 to one person (please talk to your advisor before doing so), try to structure the gift by giving $17,000 this year and another gift the following year to avoid the need to file a gift tax return.

If your child is married, consider splitting a larger gift by giving only $17,000 to your child and any additional amounts to her spouse. And be sure to write separate checks to her and her spouse so that you have proof of only giving within the annual gift tax exclusion amount to each person.

#4. Consider Loans as an Alternative Way to Support

If you are not sure you can truly afford to give money outright, consider structuring a loan to a family member in need.

For example, if you wish to help your daughter start a business, you could choose to provide some part of what she needs by loaning her the funds. Execute the loan in writing with clearly spelled-out terms. A family loan should carry an interest rate that is at least as high as the Applicable Federal Rate (AFR), which is published monthly by the IRS. Your interest payments received must be reported as income. Structuring the financial support this way serves the dual purpose of helping a family member while ensuring that your money will be paid back to support your own needs in the future. It also ensures that the loan won’t be deemed a gift and subject to the gift tax reporting requirements.

While it’s commendable to prioritize a child’s needs, be sure you can do so without compromising your own financial future.

This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique situation.