Gifting Money to Family

My extended family draws names for Christmas gifting each year. The annual draw happened last week, which feels like the official gesture that Christmas is on it’s way. Now we start thinking of gift ideas and wish lists. And then everything snowballs from there toward the season.

With my mind already on Christmas gifting, I want to share some strategies for gifting money to the generations after you. I realize handing someone a check isn’t the most meaningful way to say “Merry Christmas.” So this advice isn’t necessarily for an assumed Christmas gift but to help you plan if you’d like to make a gift in 2019. 

Since there are more considerations and complications surrounding parents gifting cash to their minor children, this article is primarily for people interested in gifting money to their adult children and minor grandchildren. 

If you’re considering a substantial gift to your grown children or grandchildren, it’s likely because you have built an estate that has outpaced your lifestyle, which is a great place to be. You can see this article on Too Much Cash to make sure you’re prepared to move on to gifting your estate. 

Gifting Cash

The best way to gift to your adult children is to just give them cash. The IRS has some rules on how much money you can gift to someone in a year. They call this the annual exclusion amount. Essentially you can give $15,000 to any person (this is the 2019 limit) in a year with no tax consequences. You can actually give any amount you want, but if you give more than $15,000 it will count against the amount you can leave tax-free when you die. And you’ll need to submit a specific tax form each year from now until your death to track this, so it’s best to generally just stay within the annual exclusion limit.

If you are a married couple giving to a child who is married, you can each give $15,000 to each person. So you could essentially give up to $60,000 per year to your child and his/her spouse with no consequences.

There is an exception to this rule if you are paying for someone else’s school tuition or medical bills. In those situations you are not limited to $15,000 per year. You can give as much as you like. There are some specific rules you need to follow, so research this more before you gift this way. Or reach out to me so I can help!

You may ask if it is better to give cash or investments. When you are giving to charity it is best to give appreciated investments, but when giving to a person you want to give cash. If you give an investment, the person receiving the investment keeps the same basis you had, which will just lead to more taxes later.

Mortgage Holding

Another popular way to give to children is to essentially “be the bank” for their mortgage. You could “loan” them the money to pay off their mortgage and become the mortgage holder. If you do this there are a few important things to remember. First, you want to have a valid promissory note that each party signs. Second, you want to file the promissory note and a lien on the property. Third, you have to charge a reasonable interest rate. You can’t do a 0% loan or it is considered a gift. Each month the IRS publishes the Applicable Federal Rates (AFRs), which is the minimum rate you need to charge on loans so they are not considered gifts.

You can really multiply wealth through generations using this strategy. You can offer your child a low interest rate with no closing costs to refinance with you. When you charge them a lower interest rate than the bank would charge, you give them the opportunity to invest the extra cash they have left over.

Another benefit is that the interest they pay is going back into your family estate instead of an outside bank. So that money will eventually be redistributed back to your kids. 

If you are interested in doing a family loan, there is a company called National Family Mortgage that has a lot of good information on this. They can also set up and service the loan for a fee.

Giving to Grandchildren

If you would like to give to a grandchild, I prefer to use 529 college savings accounts for this. You can be the owner of the account, or you can make their parent the owner. The gift to the account is considered to be made to the beneficiary (grandchild) no matter who the owner is. This account is protected from creditors in many states, and the investments in the accounts can grow tax free if used in the future for qualified higher education expenses (as defined by the IRS). And maybe the best part is that the grandchild (beneficiary) never actually controls the account. The owner of the account controls it.

Another way to gift to a grandchild is by opening an investment account called a UTMA account (Uniform Transfer to Minors Act). This is an investment account that the parent controls until the child reaches the “age of majority,” which is either 18 or 21 depending on what state you live in. At that point the child has full control of the account.

If you are in a place to be considering these options, I hope you know you are very fortunate. It’s definitely a “first world problem” to figure out the best way to gift money. But it’s something to be handled carefully and intentionally. I love working with families and helping their wealth last for generations. If you have questions about gifting, give me a call! I’d love to help. 

Disclaimer: Although giving money to your child can build family wealth, giving money to a child who is bad with money can lead to big problems and lots of heartache. I do not recommend that. Begin teaching your kids about money when they are young!