6 Rules for Gifting Money to Family

Are you considering making a gift to a family member? Whether it's contributing to a child's or grandchild's higher education costs, helping with a down payment on a home or providing support for a parent who needs additional care, gifts can be a meaningful way to share your wealth and make a difference in the lives of your loved ones, says Scott Collins, Business Advisory Consultant and Wealth Planner at First Citizens Bank.

A financial gift to a minor can help teach kids basics about money and even the stock market. For older kids, you may choose to help with educational expenses. Even adults can benefit from financial gifts that give them the freedom to pay off debt or save for the future. And if you think you might owe estate taxes one day, Collins says gifting during your lifetime may also help reduce the tax burden on your estate.

Here, he shares six rules for gifting money to a family member.

1 Don't overcommit

It's natural to want to help your children, parents or other family members when they're in need. But before you do, it's important to make sure you aren't jeopardizing your own financial security, Collins says. In a recent Bankrate survey, half of the respondents said they were sacrificing their own retirement savings to help their children financially.

Sit down with your financial advisor to make sure you're on track to reach retirement and other financial goals. Also be careful not to set a precedent. After all, you want your family members to develop strong money habits of their own, like creating their own emergency fund so they don't turn to you every time they have a financial need.

2 Consider family dynamics

If you're gifting money to a family member, consider how much input you want to have. If you have certain conditions on how you want them to spend the money, Collins suggests making the intention clear from the start. Because most people want to treat all of their children and grandchildren as fairly as possible, he also advises giving equal amounts simultaneously to everyone—even if you originally planned to provide financial support to one child.

However, there are times when you may want to make an exception. For example, you may have a child going through a difficult situation—like a job loss, divorce or costly medical crisis—and you'd like to step up and support them.

In these situations, it's ideal to be as transparent as possible to all children. Explain to everyone why you're providing the support, and let them know that you'll be there for them if they ever have a similar financial need. Similarly, it's a good idea to check with a grandchild's parents before sending a financial gift to explain your reasoning and make sure it's acceptable.

According to a 2021 MagnifyMoney survey, an investment gift may be well received. A whopping 65% of Americans said they'd want an investment as a holiday gift, while about 30% said they planned to give an investment as a gift.

3 Know the annual gift exclusion amount

Under IRS rules, you can gift up to $16,000 in cash and assets to someone in 2022 without any tax implications. A married couple filing jointly can give away double this amount, for a combined $32,000 per year. You can give the same amount to as many people as you want in the same year without worrying about taxes, Collins says.

If you give more than the annual gift exclusion amount to someone, it doesn't necessarily mean you have to pay taxes on it immediately. It just means you need to file IRS Form 709 to disclose the gift. The amount you give above the annual gift exclusion will count against your lifetime gift exclusion—the amount the government lets you give away during your lifetime without a gift tax.

For example, let's say you give your child a $25,000 gift in 2022. The first $16,000 isn't taxable because of the annual exclusion. The remaining $9,000 counts against your lifetime gift exclusion.

In 2022, the lifetime gift exclusion was $12.06 million for individuals and $24.12 million for those filing jointly. You'll need to be careful as you plan for future years, though—the lifetime exemption is currently scheduled to shrink annually until it drops to $6 million for individuals in 2026, or about half what it is today.

There are some exceptions to the rule, like if you're paying for someone's medical expenses or school tuition. In these instances, as long as you pay the healthcare system or school directly it shouldn't count against your annual gift exclusion. Talk to your financial advisor and tax professional to make sure you understand how a gift like this may impact your taxes.

4 Consider offering a low-interest loan instead

If you're considering a gift above the annual gift exclusion—or you want to give a family member an opportunity in the short-term future without a long-term financial hit to you—you may want to consider offering a low-interest loan for a big purchase like a car or home. A loan can be a way to lend a hand to a family member while also ensuring they learn some financial discipline, Collins says.

If you can offer a lower interest rate than what's on the open market but a higher interest rate than what you'd get from putting your money into a short-term savings vehicle like a CD, the arrangement could be a win-win for you both.

The IRS does have some requirements for intra-family loans—including a minimum interest rate—so make sure to work with a financial advisor and tax professional when setting up the loan to ensure it meets these guidelines, Collins says.

5 Investigate tax-advantaged accounts

If you want to help a family member with their future retirement or college costs, the most effective way could be to contribute to a tax-advantaged account like a Roth IRA or 529 college savings plan.

As long as they've earned income, you can help your children set up a Roth IRA. If they're still minors, you'll have to open a custodial IRA. You can contribute either an amount equal to your child's earnings or $6,000 a year, whichever is smaller. The money will grow in the account tax free, and distributions won't be taxed as long as they're used for retirement or qualified education expenses like tuition. If they've had the Roth IRA for 5 years, they also can withdraw up to $10,000 without penalty to put toward buying their first home.

If you know you want to contribute to a family member's educational expenses, consider opening or contributing to an existing 529 college savings plan. The money grows tax deferred, and distributions are tax free as long as they're used for education expenses.

In general, both types of gifts count toward your annual gift exclusion amount for that person. However, a special tax provision allows you to jumpstart a child's or grandchild's 529 account by donating up to five times the annual exclusion amount in a single year. When you do this, though, you can't make annual gifts to the child for the next 4 years unless you file a gift tax return.

6 Consider all forms of financial gifts

As you consider financial gifts to family members, don't forget that cash isn't the only option. You can gift stock to a teenager, for example, which may teach them about the stock market and other aspects of money while also allowing them to watch the gift grow over time. You'll want to consider other implications of this type of financial gift, however. When the recipient sells the stock, for example, they may have to pay capital gains taxes on any appreciation in value.

Similar thinking should be made if you're considering gifting valuable art or other property. In each of these situations, talk to your financial advisor about the potential impact, and don't forget to consider what may be most useful to the recipient.

Ultimately, providing financial gifts to family members can create stronger bonds and give recipients a leg up as they move through their own financial journey. Consider these rules, and talk through your plans with your financial advisor and tax professional before making any final moves. In the end, you'll be more likely to make smart decisions that benefit others while still achieving your own goals.