How to gift money to family members
Giving financial gifts to your children, family members, and loved ones is a great way to help set them up for their future. Whether you’re writing a check, sharing stock, or gifting property, the IRS has rules in place for how much you can give without having to pay taxes on the gift. This article can help you understand the pros and cons of financial gifting — and the implications of doing so — by telling you about:
How much you can give
What counts as a financial gift
Tax implications
Other options for transferring wealth
Why people take advantage of family financial gifting rules
Generally speaking, any time you give money to someone without expecting it to be paid back, you’re gifting money to them. And there are plenty of reasons to make a financial gift to a family member.
Perhaps the most common is to help children get a head start in life. That could include providing funds to help adult children with expenses like child care or rent, or covering major milestones like purchasing a first house or college tuition, paying for a wedding, or starting a new business. People also give money to provide financial support in times of hardship.
Some families also use financial gifts specifically for estate planning purposes — to help ensure the assets they've worked hard to build up are distributed according to their wishes after they pass away, without unnecessary taxes.
Minimizing estate taxes
When a person passes away, there are taxes that need to be paid by the estate (from the person who passed away), not the person inheriting assets; similarly, gift taxes are paid by the person giving the gift, not the person receiving it.1 The tax rate for both is significant — up to 40%.
Currently, relatively few estates (or gift givers) end up having to pay taxes, because there is a very high “combined exemption” for lifetime gifts and estate assets, which is set at $13,610,000 for 2024.2 This simply means that if you don’t gift the $13,610,000 limit in your lifetime, you don’t pay taxes. However, this limit is set to expire: On January 1, 2026, the exemption will revert to $5 million, adjusted for inflation.3
While the exemption threshold may be raised again later, if things stay as they are, a huge number of households could end up owing taxes. Consider: if you own a small business, a farm, or rental properties, your net worth — and eventual estate could be well over $5 million, especially since it’s not just cash but the total value of assets gifted that will contribute to that lifetime limit (and can be taxed). Even middle-income homeowners with well-funded retirement accounts could find themselves over the limit. And depending on which state you live in, you could face further estate and gift taxes.
That’s why many parents who want to leave a legacy to their loved ones start while they are still alive — by strategically gifting money to children and other family members. When done correctly, these wealth transfers can help reduce estate taxes in the future.
How much can you give?
When making a financial gift, the IRS has an annual exclusion limit of $18,000 per person from an individual and $36,000 from a married couple as of 2024. This means you can give each child up to $18,000 in financial gifts (or $36,000 as a married couple) without having it count against your exemption for lifetime gifts and estate assets.
Furthermore, a couple can gift up to $72,000 to two children, up to $108,000 to three children, and so on. So, consistent financial gifting over a number of years can reduce the chance that an estate will surpass the lifetime exemption limit.
Of course, you can also give more than the annual $18,000/$36,000 exclusions, but if you give more than that amount, you typically have to file the gift tax return Form 709 so the IRS can track those gifts and apply them to your lifetime estate and gift tax exemption.
What counts as a gift?
A financial gift generally includes any transfer of property or assets from one person to another without receiving “full consideration” (payment, repayment, or something of equivalent value) in return. Things that count as a financial gift generally include:
Monetary gifts: Cash or checks.
Property transfers: Real estate, vehicles, artwork, or other tangible assets.
Financial assets: Stocks, bonds, or other securities.
Forgiveness of debt: Canceling a loan someone owes you can be considered a gift.
Below-market sales: Selling something for significantly less than its fair market value may be partly considered a gift.
Interest in a business: Transferring ownership shares or interests in a business.
These are some of the main examples, but there are other situations that count as taxable gifts, such as the creation of certain types of trusts. That’s why it’s important to consult with a tax law expert to understand what rules apply to your specific situation.
It's also important to note that some things don't typically count as taxable gifts, such as when tuition or medical payments are made directly to an institution, gifts to a spouse, and contributions to qualified charities.
Some tax implications to be aware of
Depending on the situation, financial gifts can have tax implications for both the person giving the monetary gift and the person receiving it. It's important to consult an expert to understand which tax rules apply to your situation.
Financial gifts and estate transfers may not impact either person's income tax, but they can lead to other types of "taxable events." Case in point: selling a gift after it appreciates in value can trigger capital gains taxes. For example, if a parent gives a child stock they bought for $100, and the child sells it for $1,000, they may owe capital gains taxes (CGTs) on the $900 profit. By contrast, cash gifts don’t trigger capital gains: if someone gives you $1,000 it will always be worth $1,000. (But if you deposit it to your bank account and it earns interest, the interest may be taxable.)
It's also important to note that you can't avoid federal gift and estate taxes by "skipping a generation" and giving assets directly to grandchildren due to the generation-skipping transfer tax (GST). While the rules around GST are complex, they are essentially designed to ensure that generation-skipping transfers are appropriately taxed.
Finally, don’t forget that these are just federal gift tax laws. Different states have their own estate and gift tax laws in place, so consult with an estate planner or qualified tax expert for more information on how best to handle your unique situation.
Other options for estate planning and wealth transfer
If you want to transfer assets to family members or loved ones, gifting money directly is often the easiest solution. There are, however, a variety of other options to consider.
Trusts
Trusts may be used for estate planning purposes, as they can help minimize tax implications of transferring wealth, among other benefits. There are many kinds of trusts and ways to set them up for estate planning purposes. Consider asking your estate planning advisor about the following:
Irrevocable trusts: This type of trust cannot be modified or amended after you've created it. Once assets are transferred into these trusts, you (the grantor) lose complete control over them. However, depending on the terms you set, you may still be able to benefit from those assets. For example, if you put your house into an irrevocable trust, the trust can "allow" you to remain in the house rent-free until you pass away. However, that and any other assets are removed from your estate, which can reduce estate taxes and offer additional asset protection from creditors after you pass away.
Intentionally Defective Grantor Trusts (IDGT): This is a type of irrevocable trust that is defective for income tax purposes, but effective for estate tax purposes. In this case, the grantor (you) is responsible for paying income taxes on the trust while you are alive and benefiting from its assets. This can help preserve the value of the trust by limiting or preventing the use of trust funds for paying ongoing taxes.4
Grantor Retained Annuity Trusts (GRATs): This is another type of irrevocable trust that allows you, the grantor, to transfer assets into the trust while retaining the right to receive a series of annuity-like payments for a specified term. When the annuity payments end, your beneficiaries will receive the remaining balance of the trust. This allows you to essentially freeze a portion of your estate's value and shield the appreciation of those assets from your beneficiaries since the grantor is responsible for paying income tax on trust income.5
Note that trusts are not suitable for everyone. They are inherently complex documents that can require significant time and money to set up. There are also ongoing administration fees that can detract from your assets — and if not properly set up, the terms of the trust could restrict your lifestyle in the future.
Custodial accounts
Custodial accounts refer to accounts created by one family member for another. In most cases, they’re created for a child or grandchild. Adults typically control a custodial account for a minor, controlling how the money in it is invested and spent. You can invest in most types of assets.
Money put into a custodial account is considered to be a gift to the beneficiary. However, if the account custodian dies, the balance becomes part of their estate. As a result, it’s typically recommended that grandparents don’t act as a custodian of an account, even if they want to contribute to them.
529 plans
529 plans are designed to save money for a college education. Family members can contribute to this tax-advantaged savings account for a beneficiary, which can then be used to fund a wide range of tuition expenses for K-12, accredited colleges, apprenticeship costs, and even qualifying student loan repayments. And there’s a significant advantage when it comes to gifting: You can generally contribute up to $90,000 per individual or $180,000 per year per beneficiary without impacting your lifetime gift-tax exclusion.
Roth IRAs
A Roth IRA is an individual retirement account that offers tax-free growth and potentially tax-free withdrawals once you retire, as long as you’ve owned the account for at least five years and are 59 ½ or older. You can pass Roth IRAs to your beneficiaries; their withdrawals will also be tax-free. However, there are income restrictions that impact how much you can contribute to a Roth IRA account.
Some people use the “back door” strategy to lower their overall taxable estate by converting a traditional IRA to a Roth IRA, which requires paying income tax on the converted amount. This can reduce the overall size of the taxable estate by the amount of taxes paid.[6] This option can allow you to keep ownership of the funds until after you’ve passed, so you still have access to them if needed.
Real estate
Real estate transfers are considered a type of financial gift. You can choose to give someone land, rental properties, commercial properties, and residential homes, but doing so can have a variety of complex tax implications beyond the estate and gift tax. Real estate tends to appreciate in value over time, which directly impacts how the IRS perceives the value of the gift. At the same time, a property’s fair market value can be difficult to determine without actually putting it up for sale and seeing what offers come in. That ambiguity and the potential for abuse means that real estate gifts may also generate unwanted scrutiny from tax authorities. For this and other reasons, you should always consult with a tax expert before gifting real estate to a relative.
Life insurance
While most people think of life insurance as a way to protect their families’ financial stability in the event of their passing — and that is its primary purpose — there are also several ways to directly and indirectly transfer wealth using life insurance. This is generally done with permanent whole or universal life insurance that provides lifetime coverage while building cash value that can be accessed by the policyholder.7
Example include:
Leveraging tax-advantaged death benefits: Death benefits are paid out income tax- free: Life insurance policies are considered separate from your estate, so payments to beneficiaries after your death are not subject to gift, estate, or income taxes.
Make financial gifts to cover premium payments: Purchasing a policy for a child or grandchild can help ensure their family’s financial security long after you are gone.
Transfer ownership: You can gift a life insurance policy to someone else, allowing them to choose their own beneficiaries and access the policy’s cash value.
Funding education: You can access cash value to pay for a child or grandchild’s tuition.
Charitable gifting: The beneficiary of your policy doesn’t have to be a person — you can leave all or a portion of the death benefit to a religious organization or charitable cause.
The importance of seeking professional guidance
Some forms of financial gifting — in particular, direct gifts of cash — are relatively straightforward. However, in other cases financial gifting can be quite complex. There are income-based restrictions, tax implications, and legal considerations to account for with many different types of financial gifting options.
As a result, it’s almost always advisable to seek guidance when gifting to family. A financial professional in coordination with estate and tax planning professionals can help you determine the best way to provide monetary gifts for those you love by making recommendations for reducing your overall tax burden while ensuring compliance with state and federal tax laws.