Gifting to loved ones while you’re alive: What you need to know.

Gifting money or assets is a significant financial decision that can greatly impact your loved ones' lives and financial futures. According to Vox, a generational wealth transfer is coming soon, although the amount of money reportedly being passed from older generations to younger ones varies: Forbes reports $30 trillion over many years, CNBC mentions $68 trillion in 25 years, and The New York Times confirms the variety of these assessments, but puts it at around $15 trillion over the next decade.

Whether you choose to gift assets while you're alive or leave a legacy through a will or estate plan after you've passed away, it's important to carefully consider the implications of each option. Gifting money depends on several factors, including your financial situation, estate planning goals and the needs of your loved ones.

Understanding your financial stage and goals.

Inheriting assets is often the default situation; it’s what typically happens when a loved one passes away. On the flip side, gifting is a way to accelerate that giving and do so in your lifetime.

When considering gifting assets to a loved one or charity, start by understanding where you currently stand in your financial journey and identify your goals. You want to make sure you're not threatening your own financial security and are financially secure to be able to gift.

In 2023, an individual can gift up to $17,000 annually to anyone, and any additional amount involves using part of your lifetime federal gift tax exclusion, which is $12.92 million. This means a married couple could gift up to $34,000 annually without having to tap into that exclusion. This annual exclusion is a “use it or lose it” — it doesn’t roll over into the following year.

If you have an estate that is at least in the eight digits, you may already be participating in an annual gifting program, either outright or in a trust to children or grandchildren. You can consider using a significant amount of the lifetime estate exemption while you’re still living versus waiting, at which point there will be a higher taxation upon death.

It’s also important to consider how a gift could fit within your overall financial plan and identify your priorities. Is this something that would be fun if it worked out? Perhaps you’re trying to help a loved one with an important milestone, such as purchasing a home or graduating from college.

Identifying priorities and communicating objectives.

Once you’ve identified your priorities, it’s important to clearly communicate those intentions with the recipient. Many people miss this step because they don’t want to be seen as a burden, but recipients often want to know what the gift is for.

For example, if you’re focused helping a child, grandchild or other person pay for education, setting up a 529 account may be an appropriate way to help. Some choose to create a trust or custodial account, which is another avenue to consider when considering gift giving for minors. If you intend to support charitable causes, a donor-advised fund can be an effective choice. It’s key to speak with a trusted advisor to help navigate which option is best suited for your intentions and understand the nuances along the way, including tax implications.

The pros and cons of gift giving.

Giving to a loved one or charity can make a positive impact and promote joy for both the gifter and recipient, but it’s not without its pros and cons. In addition to being able to see the positive results of your gift in action, gifting can help reduce the size of your taxable estate.

However, gifting also entails potential complexities, especially regarding tax implications and control over the assets. Communication and transparency throughout the process are essential to avoid misunderstandings and ensure the desired outcomes. It’s also critical to make sure all parties are on the same page.

Gifting can often be more than just a financial decision; it can impact relationships. For example, if you’re gifting assets to a married child, it will have implications for their significant other. Some may choose to stipulate what the gift is for — and who it’s intended to help.

What kind of gift you give also matters. Gifting cash is a straightforward way to help out a loved one, but gifting stocks has tax implications. Keep in mind that whatever you give, the recipient will take on the same responsibilities you had with the asset.

Potential tax considerations.

Tax implications are a crucial factor in deciding when and how to gift. You can utilize the annual gift exclusion to save on state taxes, but be aware of potential capital gains taxes when gifting assets that have appreciated in value. When a gift’s value exceeds $16,000, the giver (not the recipient) is responsible for reporting it on their taxes. Inheritances aren’t typically taxed on federal returns, but any income generated from them may be, including dividend payouts from inherited stock. Some states also collect a state inheritance tax.

If you own stock that you purchased at a lower price than its current value, you could gift it to an adult child rather than cash. Your children can either keep it or sell the stock, but when they do sell it, they will have to pay the taxes based in the gain. This can be a win-win strategy if they’re in a lower tax bracket than you, and it will result in your family keeping more of the profit by paying less in taxes when selling the stock.

Additionally, gifting high-dividend stock not only keeps you from having to pay taxes on the gain, but also transfers the taxable dividend stream to your loved ones. These strategies are best used with adult children to avoid a “kiddie tax,” which is tax levied on unearned income (investment income from interest, dividends and capital gains) of children under the age of 19 or full-time students under 24.

At the end of the day, it’s essential to evaluate both your financial situation as well as the recipient’s situation and communicate effectively to prevent any tax-related issues and ensure compliance.

If you’re considering charitable giving, setting up a donor-advised fund (DAF) may be one option to consider. A DAF is an account where you can deposit assets for donation to charity over time. You receive a tax deduction for making contributions, a sponsoring organization manages the account, and you advise on how to invest the assets and where to invest them. These types of accounts can provide immediate income tax deductions and potentially reduce capital gains taxes or estate taxes. It’s also a way for children to continue to carry out your philanthropic wishes after you’ve passed away.

The positive benefits of seeing your gift in action.

The old saying of “giving is better than receiving” often rings true for those who are able to gift during their lifetime. Research suggests gift giving, particularly when the recipient is a loved one, even activates key reward pathways in our brains and promotes happiness. Many people want to be able to see and enjoy the ways loved ones will benefit from their generosity.

Not only are you able to witness the positive benefits of something that’s important to you come to fruition, but if it doesn’t work out originally the way you planned, you can adjust your approach and communicate with loved ones to help them reach their goals. A good rule of thumb when gifting to children is to start with something reasonable and communicate your wishes, see how your loved one handles it, and then adjust as needed as they mature.

Plus, for charitable contributions, establishing a DAF allows you to see the impact of your philanthropic efforts while you’re alive and maintain your intended legacy after you pass away.

Emphasizing communication and planning.

Whether you choose to gift assets while you're alive or leave a legacy through an inheritance, transparency is key. However, it’s a step that’s often one of the hardest because it may be that you’ve never spoken about finances before. Clearly communicate your objectives to the recipient and consider involving professionals to help navigate the complexities effectively.

Your CommercePremier banker can guide you through this process, helping you access a team of knowledgeable professionals to tailor the best approach for your unique circumstances. Remember, a well-informed and well-planned gift can make a lasting positive impact on the lives of your loved ones.