Gifting money within families has long been a way for people to empower loved ones – whether it's to ensure younger family members get a head start in life or to celebrate pivotal life moments like purchasing a first home. While these transactions often resemble inheritances (since they're both about transferring assets between family members), there are also some key differences. As such, they require careful planning and understanding from both donor and recipient.
While an inheritance usually comes as a bittersweet windfall following the passing of a loved one, a monetary gift is a proactive, voluntary gesture during the donor’s lifetime. And just as the beneficiary of an inheritance should reflect on the responsible use and potential tax implications of their newfound assets, so should both donors and recipients of gifts.
When are gifts appropriate?
Family wealth transfer isn’t just about numbers and assets; it’s about generational relationships and legacies. So, determining the right moment and approach for such a gift requires an assessment of your unique situation.
Is the donor financially healthy?
First consider the donor’s financial health. Is the intended gift coming from a place of abundance or surplus? Or could it strain the donor’s plans for retirement or current lifestyle? Are there any debts? No matter how noble the intent, a financial gift doesn’t need to jeopardize the donor's well-being.
Are there terms?
An inheritance detailed in a trust may come with specific instructions or stipulations. Financial gifts within the donor’s lifetime, however, generally don’t. They are simply gifts with no strings attached. To preserve the integrity of the relationship, it is recommended to treat them as such – simply gifts. If there are “terms,” a situation where the donor attempts to exert control over the recipient, it can lead to an unhealthy relationship.
That being said, donors have creative ways to direct certain gifts for specific purposes – like directly paying medical bills 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 doesn't create unintended burdens or misconceptions. This clarity can go a long way toward ensuring a lasting family bond.
Consider technical aspects
When it comes to gifting money or assets within families, there are several technical aspects that are crucial for tax purposes and overall financial planning.
Annual gift exemptions: As of 2023, the Internal Revenue Service allows an individual to gift up to $17,000 to another person without having to report the transaction (or $34,000 from a married couple to an individual). And there's no limit to the number of people to whom you can gift that amount. This isn't solely restricted to monetary gifts – assets like vehicles, stocks, or real estate also count toward this amount.