How to Give Financial Gifts to Loved Ones Leaving a Legacy

When it comes to giving financial gifts to loved ones, it's important to consider various factors such as taxes, trusts, and legal considerations. While gifting can bring joy and help reduce the size of your taxable estate, it can also have other implications, like tax consequences and the loss of control over certain assets.

Below are some key points to keep in mind to make the most of your financial gifts.

Know the Pros and Cons

Gifting can help lower your taxable estate, but it may have other tax implications and reduce your control over the gifted assets. If you're considering gifting to minor children, establishing an irrevocable trust may allow for more control of the assets, even after you pass away. Additionally, if you want your children to continue supporting your charitable efforts, consider setting up a donor-advised fund.

Gifting Limits in 2024 

For 2024, individuals can gift up to $18,000 per year to any recipient without using their lifetime federal gift tax exclusion, which stands at $13.61 million per person. For married couples, this limit doubles to $36,000. If you exceed these limits, you’ll need to file a gift tax return and track the amount used toward your lifetime exclusion.

Capital Gains Tax Implications

When gifting appreciated assets, such as stocks, consider the potential capital gains taxes for the recipient. For example, if you gift cash, the recipient generally won't face any tax issues. However, gifting appreciated assets like stocks can trigger capital gains taxes when sold by the recipient. It’s important to understand the tax implications before making such gifts.

Using Trusts for Gifting

Trusts, especially irrevocable trusts, are a great way to manage and distribute assets. By using an irrevocable trust, you can maintain control over how and when the assets are distributed. This is particularly useful when gifting to minor children or adults who may need extra guidance in managing the assets.

Trusts can also offer legal protections, shielding assets from potential creditors, lawsuits, or divorce settlements if structured correctly.

Custodial Accounts for Minors

Another option for gifting to minors is setting up a custodial account through the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). These accounts allow you to make gifts to a child, with the assets being used for their benefit. Your financial advisor can help determine if a custodial account or trust is the best option for your situation.

Consider a 529 Plan for Education

If you're focused on helping with education costs, a 529 savings plan might be a great fit. This account allows you to front-load 5 years of annual exclusion gifts, allowing you and your spouse to contribute up to $180,000 in 2024 for each child or grandchild without affecting your lifetime exclusion. Additionally, 529 plans now cover up to $10,000 in K–12 tuition annually.

Donor-Advised Funds for Charitable Giving

A donor-advised fund (DAF) allows you to make a charitable contribution, take an immediate tax deduction, and distribute the funds over time to charities of your choice. By contributing several years' worth of donations in a single year, you may benefit from itemizing deductions. Plus, the funds can grow tax-free until you're ready to distribute them.

Work with a Financial Advisor

Gifting can be an important part of your overall financial plan. A financial advisor can help you develop a strategy that aligns with your goals, whether you’re giving to family, friends, or charitable organizations.

Giving financial gifts can be one of life’s most rewarding experiences, but it’s essential to consider the financial and tax implications to ensure you’re making the most of your generosity.

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