What You Need to Know Before Gifting Money to Family
Holidays, birthdays, and other milestones typically inspire generosity and an increased desire to give. Many families use these times to give monetary gifts to loved ones. Let’s face it, the last few years have been tough on many families, and parents and retirees may feel a strong desire to help family members who have recently suffered economic hardship.
It’s common for widows to put the needs of their children ahead of their own. They often feel driven to gift money to their less-fortunate children or grandchildren but may risk compromising their own financial security by doing so. While their generosity is admirable, gifting too much or in the wrong way can cause unintended consequences.
Ready to Hire a Financial Advisor?
Here are the questions to ask.
Whether you are seeking the services of a financial advisor for the first time, or comparing your advisor to someone new, it’s important to ask questions to help ensure the firm you pick fits your needs.
If you’re new to the family gifting process, you may not realize there’s more to it than simply writing a check. It’s important to consider the emotional as well as the tax and legal implications of giving a large financial gift.
Emotional Considerations
Large gifts can bring happiness to recipients, or even relief to family members who need a financial lifeline. But financial gifts can also be controversial—causing jealousy, anxiety, or even anger. The following suggestions may help you determine how best to make these types of gifts:
#1. Don’t Overcommit
While it’s natural to want to help children and family members, think through the long-term implications of making gifts, particularly larger amounts. If other children might believe that helping one child means they can 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 that your gifts are reasonable, and don’t compromise your own financial freedom. Put another way, ask yourself if gifting now will put you in a position to need financial help down the road.
#2. Set Boundaries on Supporting Family Members
If a family member approaches you for help paying their bills or supporting their small business, have clear discussions about how far your support will extend. Can you 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?
A common mistake that parents make is gifting the same amount every year for the holidays. You may be setting the expectation that such gifts will continue forever. Consider having a conversation about why you are gifting to your family member. If you’re providing a one-time gift for support, kindly clarify that. If you don’t want to set expectations for continuing gifts, then make a commitment to stay away from giving on a regular basis, which can help family members become more self-reliant.
Structuring Gifts to Family Members
Gifts to family members have tax implications, so it’s important to understand what they are and to work with a financial or legal professional to structure your gift properly. Here are some answers to common questions about this process, beginning with a look at some common misconceptions:
What are some common misconceptions about gifting money?
A common misconception is that the recipient of a gift has to pay income tax on the gift. Gifts are generally income-tax free to the recipient at the time of the gift. However, if you gift a security, such as a stock or mutual fund, the recipient may have to pay capital gains tax if he or she subsequently sells the security. You transfer your tax basis for figuring capital gains tax to the recipient when you make the gift, so the recipient has the same capital gains implications as you would if you sold the security.
“In-kind” gifts can make sense if the recipient’s effective capital gains tax rate is lower than yours or if the asset has a relatively high cost basis. Remember, assets that you gift away while you are alive do not receive a “step-up” in cost basis when you die. Generally, if you keep the asset in your estate until death, the IRS adjusts the tax basis to the asset’s fair market value on the date of death. Many families benefit from the step-up in basis because it allows them to sell the asset with little or no capital gains tax.
“I see a lot of clients wanting to add a child as a joint owner on their home. They do this to avoid probate or because they know their child will end up with the house eventually. This can cause a lot of problems tax-wise, because you don’t get that step-up in basis, as well as personally if other children are treated unequally because of this gift,” says wealth transfer advisor Alaina Davalos.
If you are charitably inclined, you can transfer securities directly to a charity “in-kind.” This means there will be no capital gains tax for you.
How does the lifetime gift tax exemption work?
In the U.S., you can give away or leave up to $13.99 million (in 2025) without triggering federal estate or gift taxes. (In 2026, the amount increases to $15 million under the One Big Beautiful Bill Act.) If you give more than the exemption amount during your lifetime or death, the IRS applies a 40% tax to the excess.
You may also make smaller gifts during your lifetime without using any of your lifetime exemption. The IRS refers to this rule as the annual exclusion. The annual exclusion of $19,000 (2025) allows you to gift $19,000 in any given year to any donee you wish, without needing to file a gift tax return or use your lifetime exemption amount. A married couple can gift double that amount—$38,000 in 2025.
Gifts above the annual exclusion amount require you to file a gift tax return (Form 709). Filing a gift tax return doesn’t automatically trigger gift tax, because you can apply the “taxable” gift against your lifetime exemption amount. Alternatively, you can elect to pay gift tax on gifts above the annual exclusion at the time of the gift. Once you use up your lifetime exemption, the IRS applies gift tax to all gifts above the annual exclusion.
As mentioned above, the IRS tracks these lifetime “taxable” gifts on Form 709 until your death, at which point the lifetime gifts reduce the applicable estate tax exemption amount in the year of your death.
How can I gift money to family members without incurring estate or gift taxes?
In addition to making annual gifts under the annual limit, you can make unlimited tax-free gifts without using your lifetime exemption—if you pay tuition directly to an educational institution or pay qualified medical expenses directly to a medical care provider on someone else’s behalf. The IRS refers to these as tuition and medical payment exclusion gifts.
You can also make loans to others, such as children, to assist with major purchases such as buying a first home, as long as you charge an interest rate on the loan that meets or exceeds the appropriate Applicable Federal Rate (AFR), and both parties treat and document the loan as enforceable debt. You may choose to forgive the loan at your death.
Thinking of giving financial gifts to your children, grandchildren, or other loved ones? Watch this eye-opening on-demand webinar where we break down the key rules, limits, and smart strategies around gifting.
What is the difference between gift taxes and estate taxes?
Gift taxes apply to gifts you make during your lifetime, whereas estate taxes apply to wealth transfers at death. Making gifts during your lifetime can remove future appreciation from your estate and reduce your future estate tax exposure. In addition, depending on the type of assets you gift and how you structure the gift, the IRS may allow valuation discounts that lower the gift’s value for tax purposes.
How do I file a gift tax return?
A qualified professional, such as a CPA or an attorney who specializes in estate planning, can assist you with filing Form 709. You must also include a description of the gift(s), the value, and supporting documentation for non-cash gifts, such as a statement or appraisal. The IRS requires you to file Form 709 by April 15 following the year you make the taxable gift, although you may request an extension to October 15.
Are there any state-specific gift tax rules I should be aware of?
A handful of states have a state estate tax. For many of these states, the estate tax exemption amount is much lower than the federal exemption amount, which can cause state estate taxes to be payable on more estates. As of October 2024, 12 states and the District of Columbia have an estate tax that applies at death: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Other states, such as Kentucky, Nebraska, New Jersey, and Pennsylvania, have an inheritance tax, which is a tax payable by the recipient of the inheritance. Maryland uniquely has both an estate tax and an inheritance tax.
You should plan carefully to minimize the effects of state estate tax since the threshold to pay state estate taxes is much lower. State estate taxes may cause some families to relocate to lower-tax states.
How can I use trusts to manage gifting and taxes?
One type of trust commonly used to manage gifts and plan for estate taxes is an irrevocable trust. As the grantor (the person who creates the trust), you can set it up to be effective during your lifetime or at death. If it’s in force while you’re alive, you may transfer assets into the trust using your annual exclusion or lifetime exemption amounts. The IRS treats gifts to irrevocable trusts the same as gifts made outright. When you gift assets to an irrevocable trust during your lifetime, those assets—along with any future appreciation—stay out of your estate when you die.
An irrevocable trust must name a trustee and a beneficiary. The trustee is responsible for managing the assets, filing any tax returns, and making distributions to the beneficiary. The trustee can be a spouse, a child, a friend, or a professional company.
You may name a spouse, descendants, or a charity as the beneficiary. Most states generally do not allow you, as the grantor, to name yourself the beneficiary—although some states do. If you create a trust that names yourself as the beneficiary, it’s called a self-settled trust and may offer some asset protection, depending on state law.
The benefit of transferring assets to an irrevocable trust, either during lifetime or at death (in which case the trust is called a testamentary trust), is that you can help provide asset protection (from potential creditors or a divorce) and shelter assets from multi-generational estate taxation in the future if you structure it properly.
“Trusts are the greatest tool we have to create generational wealth. They’re becoming more and more popular as people try to protect the wealth that they’ve worked so hard to build,” says Davalos.
Irrevocable trusts generally have higher effective income taxes, given the compressed marginal income tax brackets that apply to trusts. However, you may be able to structure your irrevocable trust as a “grantor trust” for income tax purposes during your lifetime. With a “grantor trust,” you pay taxes on the income at your marginal income tax rate instead of the trust paying the tax.
Another common estate planning tool is the revocable living trust. A revocable living trust is an alternative to a last will and testament. The main advantage to using a revocable living trust in an estate plan is to avoid probate and to plan for incapacity.
The IRS generally includes assets you hold in a revocable living trust in your estate for estate tax purposes. A revocable living trust typically has no tax advantages or disadvantages. If you place assets into the trust during your lifetime, those assets usually receive the same step-up in basis for income tax purposes as assets that pass by a will.
Why a Revocable Living Trust Outlives You (Literally)
What are the benefits of gifting money to grandchildren?
Gifts to 529 plans can be a great way to provide for income-tax free college funding. 529 plans grow income-tax free, and distributions are also income-tax free if used for qualified higher education expenses. Plus, you may be able to capture a state income tax deduction if you contribute to the sponsored plan in the state of your residence.
Gift Wisely
Giving money to family members can be a meaningful way to help support their goals, but it’s important to approach it with a clear plan. By understanding the emotional, legal, and tax implications, you can make thoughtful decisions that benefit everyone involved. If you’re considering gifting to loved ones, working with a trusted financial advisor can help you navigate the complexities and help ensure your generosity doesn’t jeopardize your own financial well-being.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.