As parents, we want the best for our children, which often includes providing financial support when they need it. Whether it’s helping with paying for college, purchasing a first home, or simply giving a monetary gift, gifting to adult children is a common practice. However, it’s important to approach this generosity carefully, especially when ensuring equity among family members and navigating potential tax implications.
In this guide, we’ll explore important factors to consider when gifting equally to kids from parents, including when one child requires more financial assistance. We’ll also delve into the world of tax-advantaged gifting, estate planning, and tax exemptions to help you make informed decisions about gifting to your adult children.
UNDERSTAND YOUR GOALS
Before delving into the specifics, it’s essential to clarify your objectives when gifting to your adult children. Are you looking to provide financial support for specific needs? Do you want to create a fair inheritance for all your children? Are you simply trying to share your wealth while you’re alive by doing activities together, like ice skating at the National Mall?
Understanding your motivations will guide your decisions and help you tailor your gifts accordingly.
EQUAL VS. EQUITABLE GIVING
One of the most common dilemmas parents face is how to ensure fairness, especially when their kids’ financial situations differ. It’s important to distinguish between two main approaches to gifting: equal and equitable gifting.
Equal gifting means giving the same amount to each child, regardless of their individual needs and circumstances. This is typically the simplest way to approach gifting and can help avoid conflicts over the perceived favoritism that may arise. While this approach may be best at preventing resentment among siblings, it’s possible one child may not receive the full amount of support they need.
In contrast, equitable gifting takes into account individual circumstances to ensure each child receives a fair share. For example, one child may be financially stable, while another faces significant expenses like student loans or medical bills. In such cases, equitable gifting may involve providing more financial support to the child in need while still giving a smaller gift to the financially stable child.
This approach acknowledges the disparities among family members and strives for fairness. However, it can cause conflict among siblings since they do not receive equal amounts.
You’ll want to weigh the pros and cons when deciding which approach to take.
LEVERAGE TAX-ADVANTAGED STRATEGIES
Gifting money to your adult children can have tax implications, both for you and the recipients. To maximize the benefits while minimizing the tax burden, consider the following strategies:
Annual gift tax exclusion: In the United States, an annual gift tax exclusion allows you to gift a certain amount of money to each child without impacting your lifetime exclusion (more on that below). This limit is $17,000 per donee in 2023 and will increase to $18,000 in 2024. This means a married couple can jointly gift up to $34,000 to each child in 2023. Anything above this amount will require filing a gift tax return to track the reduction in your lifetime exclusion.
Lifetime gift tax exclusion: Beyond the annual exclusion, the federal lifetime gift tax exclusion allows you to gift a more substantial amount without paying gift tax. This is $12,920,000 per person in 2023. Your lifetime exclusion will decrease dollar for dollar if you give above the annual exclusion. This exemption can be complex and subject to change, and some states have differing exclusion amounts, so it’s advisable to consult a financial advisor or tax professional for guidance.
Education and medical expenses: Some education and medical expenses are not considered gifts and will not impact your annual or lifetime exclusions if you pay the organization directly. For example, if your child needed surgery costing $30,000, you could pay the hospital directly and still gift the same child an additional $17,000 (the annual exclusion) without negatively impacting your lifetime exclusion.
529 college savings plans: If you’re considering gifting for education purposes, then 529 college savings plans offer tax advantages worth utilizing. Contributions to these plans grow tax-free and can be withdrawn tax-free when used for qualified education expenses. Additionally, starting in 2024, you can roll over some excess funds in 529 accounts to a Roth IRA for the account beneficiary. Roth IRAs operate similarly to 529s from a tax perspective without the restriction of being used for qualified education expenses, making them great gifts to give to your children.
Estate tax planning: Gifting money to your adult children can also be a part of your overall estate planning strategy. Reducing the size of your estate through strategic gifting can help minimize estate tax liabilities. For example, if you expect to have an estate that is larger than the lifetime exclusion amount, you can gift up to the annual exclusion amount every year to reduce your estate and stay within the lifetime exclusion limits.
CONSIDER THE IMPACT OF GIVING ON YOUR FINANCES
While your intentions may be noble, it’s important to assess the impact gifting will have on your own financial well-being. Make sure overly generous gifts do not compromise your financial security. You can get a loan to help pay for college; however, you can’t get one to pay for retirement.
OPEN COMMUNICATION
Open and honest communication is key to navigating the complexities of gifting to adult children. Talk to your children about your intentions, financial situation, and the reasons behind your gifting decisions. This can help prevent misunderstandings, jealousy, or resentment among siblings. When everyone is aware of your plans, it’s easier to maintain harmony within the family.
DOCUMENT YOUR GIFTS
To avoid any disputes or misunderstandings, you should keep good documentation of your gifts. Keep records of the amounts, dates, and purposes of the gifts. This can help you keep track of your annual and lifetime exclusion amounts, as well as how much each child has received. This documentation can be invaluable in estate planning to help ensure your wishes are carried out as intended.
If you want to learn more about the estate planning process, see our post “Estate Planning Strategies for Your Aging Parents.”
SEEK PROFESSIONAL GUIDANCE
Gifting to adult children involves complex financial and legal considerations, all of which can have an impact on your own financial well-being. To make informed decisions and navigate the intricacies of tax-advantaged gifting, it’s highly recommended to consult with a qualified financial advisor or estate planning attorney. They can provide personalized advice tailored to your circumstances and goals.
IN CONCLUSION
Gifting to adult children is a meaningful way to support your family members while ensuring their financial well-being. However, it requires careful thought, planning, and communication.
By understanding your goals, embracing equitable gifting, leveraging tax-advantaged strategies, and seeking professional guidance, you can more confidently navigate this process.
Remember that the key to successful gifting is to balance your generosity with your financial security, ultimately creating a legacy of financial stability and fairness for your adult children.
Discuss your situation with a fee-only financial advisor.
References:
• IRS - Frequently Asked Questions on Gift Taxes
• IRS - What’s New - Estate and Gift Tax