Sharing the Wealth – Tax Free Ways to Gift to Children

By Caleb Arringdale

If you have children or grandchildren, there are good reasons for choosing to pass along some of your wealth during your lifetime rather than leaving it all as an inheritance. It can reduce your estate taxes, help your loved ones at a time when they need it most, and it’s highly gratifying. At the same time, you want to be sure your gift doesn’t create unnecessary tax liabilities for either yourself or the recipients.

If you’re interested in sharing the wealth while you’re around to see people enjoy it, here are a few basic ideas and guidelines to follow for gifting money to your children tax free.

Maximize Annual Gift Exemption

In 2022 the annual gift exemption went up to $16K, so you can give a gift up to that amount without any reporting requirements or tax consequences. It’s a per person limit, so if you have an adult child who is married, you can give $16K to them and $16K to their spouse. If they have three children, you can also give $16K to each grandchild.

Specialized Gifting

Federal regulations provide an unlimited exemption to pay for someone’s education or medical expenses. If you have a granddaughter who is going to college or plans to go to medical school, you could pay all or part of her tuition without any tax consequences. If your grandson has medical expenses that aren’t covered by insurance, you are free to pay those without worrying about gift tax implications.

Superfund a 529 Plan

A 529 plan is a tax-advantaged savings plan for education. It’s typically for college savings but it can be used for some tuition costs from kindergarten to graduate school. If your grandchild has a 529 plan, you can contribute up to the maximum annual gift exemption – currently $16K – but you also have the option to “super-fund” it. The tax code allows you to contribute up to five years of the maximum gift exemption in a single year. With the current annual limit at $16K, you could superfund a 529 plan with a one-time $80K contribution, which is a powerful way to jump start a college savings plan. You can only superfund the plan once every five years and you’ll need to fill out a gift tax return since you’re exceeding the annual gift tax exemption amount, but there are no tax liabilities.

Lifetime Exemption/Exclusion

The lifetime exemption is the amount of cash or property the government permits you to give away over the course of your life without having to pay a gift tax. The current lifetime limit is around $12M for an individual and $24M per couple. This means you can exceed the annual gift exemption of $16K and there are no tax penalties up to the $12M/$24M lifetime limits. The only requirement is to fill out a gift tax return each time your gift to an individual exceeds $16K per year. Keep in mind, the dollar amount for the lifetime exemption is set by Congress so it can change. It’s currently scheduled to drop down to $6M in 2026, but that’s four years from now and a lot could happen. Your financial advisor should know the correct exemption amount and help you plan accordingly.

If you have questions or would like to discuss strategies to eventually transfer wealth, contact The Planning Center today. We’re dedicated fiduciaries ready to help you create a plan that achieves your goals on your timeline.

Caleb Arringdale is a Tax Advisor in the Quad Cities office of The Planning Center, a fee-only financial planning and wealth management firm.

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