A financial gift could make a huge difference in your children’s lives, enabling them to buy a home, pay off debts or adopt a child.
In 2024, you can give up to $18,000 per person to as many individuals as you want without filing a gift tax return (together, married couples can give up to $36,000 to as many people as they want). Gifts that exceed the limit, which is adjusted every year to account for inflation, must be disclosed on IRS Form 709. The amount will be applied against your lifetime exclusion from estate taxes.
The current federal lifetime estate tax exclusion is $13.61 million, or $27.22 million for a married couple. So even if you give away more than the annual limit, it’s unlikely your estate will be subject to federal estate taxes, says Abrin Berkemeyer, a certified financial planner with Goodman Financial in Houston.
Still, staying within the annual limits when possible is a prudent strategy. If the Tax Cuts and Jobs Act isn’t extended when it expires at the end of 2025, the federal estate tax exemption will decline to about $7 million, or $14 million for a married couple.
If you want to be more generous but you’re worried about estate taxes, there are tax-efficient strategies you can use to increase your gifts. Paying tuition bills for a grandchild (or anyone else) won’t count toward the annual exclusion if you make payments directly to the educational institution. Likewise, if you pay the bills for someone’s medical care directly to the health care provider, the money won’t count toward your annual exclusion.
Another strategy is to take advantage of a special provision that allows you to front-load contributions to a 529 college-savings plan for another. You can contribute five years’ worth of the annual gift exclusion in one year without filing a gift tax return. In 2024, that means you can fund a 529 with up to $90,000 per beneficiary, or $180,000 if you’re married. If you make the maximum contribution within those limits, any additional gifts to the individual during the five-year period would count against your lifetime gift tax exemption. But front-loading contributions will give the funds invested more time to compound and grow, creating an even greater pot of money for the beneficiary’s education.
While most family members will happily accept gifts of cash, that’s not the only way to provide them with financial support. If you own investment securities that have increased significantly in value since you purchased them, transferring them to your adult children will reduce the size of your estate—important if you’re concerned about federal or state estate taxes—and could result in lower taxes on capital gains, says Rachel Betzwieser, a certified financial planner with Compass Financial Group in Raleigh.
Financial planners often recommend waiting until you die to leave appreciated securities to your heirs because they’ll receive what’s known as a step-up in basis, which occurs when the cost basis for taxable assets, such as stocks and mutual funds, is “stepped up” to the investment’s value on the day of the original owner’s death. If the recipient turns around and sells those securities right away, he or she won’t owe capital gains taxes on the proceeds.
