Blog

Making Gifts to Your Children or Grandchildren

By Rick Imhoff, CFP ®

Under the new tax laws, an individual can give to another individual up to $15,000 per year without having to file a gift tax return.  As a married couple, you can gift $30,000 to an individual and avoid filing a gift tax return.  With the now higher gift and estate tax limits, it is unlikely there will be any gift tax to pay if you give more than the $15,000 or $30,000 per year to an individual but it is a good idea to file the return if the gift exceeds those amounts in a calendar year.

Making gifts during your lifetime is a good way to reduce the value of your estate, especially if your estate exceeds the new estate tax limit of $11.2 million per individual, but it also gives you the opportunity to see how the recipient handles the gift.  This may help when creating or updating your estate plan.

For example, let’s say you gift $10,000 to each of your two children, Ben and Anna.  Ben uses the entire $10,000 to buy an ATV and a trailer to haul it around.  Anna invested $5,500 into a Roth IRA, paid off the $3,500 remaining on her student loan, and opened a savings account with the remaining $1,000.  Both Ben and Anna are good kids but based on how they each handled this initial gift, it may not be a good idea to give Ben his inheritance outright.  It may be better to place part of all his inheritance in a trust and paid out to him over time.

Of course, you should not change your estate plan based on a one-time gift.  Next year, if you again give both Ben and Anna $10,000 and this time Ben used half of his gift to start a college fund for his two children and invested the other half in a mutual fund, then you might overlook the ATV and trailer purchase.  On the other hand, if he spent the second-year gift on a down payment to buy a new pick-up truck and borrowed the balance over a seven-year period, you might see a pattern developing on how Ben handles extra or large sums of money.  

Speaking of starting a college fund, if you want to make a significant gift to help pay for Ben and Anna’s children’s college education, you can make a total of five years’ worth of gifts in one calendar year when contributing to a 529 Plan for each of them.  For example, you can give a maximum of $150,000 to one grandchild’s 529 Plan and not have to file a gift tax return.  This would be $15,000 per donor, $30,000 per couple, times five years to reach the maximum.  Of course, you can make a significantly smaller contribution, but this would be the maximum.

The benefit of funding an Illinois 529 plan is that you also get a state income tax deduction for up to $10,000 for an individual or $20,000 for a couple filing jointly, for the contribution.  In addition, the funds grow tax free inside the 529 Plan if the funds are later withdrawn for qualifying educational expenses.

You can also help your children save for their retirement.  In the example above, you can make a $5,500 gift to both Ben and Anna by sending the gift directly to their Traditional or Roth IRA.  By sending your gift directly to their IRA, they don’t have a chance to do something else with it.  Of course, they can always withdraw the funds after you make the contribution, but if they do, you don’t have to fund it in subsequent years, maybe giving them the incentive to leave it in the IRA.

It’s important to note that you do not get an income tax deduction when you make a gift to another individual.  You only get a deduction when you make a gift to a qualified charitable organization, unless you send the gift to a 529 Plan in a state that provides a deduction such as Illinois.  

The individual receiving the gift does not have to pay taxes on the gift.  If you make the gift to their Traditional IRA, they would be able to deduct the contribution on their income tax return.  Of course, there is no up-front income tax deduction when contributions are made to a Roth IRA.

Making gifts during your lifetime to your children and grandchildren have many benefits with proper planning.  We would be happy to help you in making the best gifting decision for you and your family.