How to give financial gifts to loved ones

Take taxes, trusts, and legal factors into account in your giving.

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Key takeaways

  • Know the pros and cons. Gifting can help reduce the size of your taxable estate, but it can have other potential tax implications and may result in at least some loss of control over gifted assets.
  • Consider setting up an irrevocable trust when gifting to minor children, as this may allow for the retention of more control of the assets, even after your death.
  • If you want your children to continue to carry out your philanthropic wishes by giving money to deserving charities after you have passed, consider a donor-advised fund.

Giving to a loved one or charity can be one of life's greatest joys. But when it comes to gifting, there are some key issues, including potential tax implications, that you'll want to keep in mind in order to make the most of your gift.

Because gifting is irrevocable, it’s important to ask yourself: How does gifting fit into my overall financial picture and financial health? Does it make sense to give up this money? Could it cause financial struggles or issues in the future?

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Understand the basics of what you can give

In 2023, each person may gift up to $17,000 each year to any individual. Any amount beyond that will involve using part of your lifetime federal gift tax exclusion, which is $12.92 million per person in 2023. A married couple could therefore give $34,000 to each of their children and grandchildren and anyone else each year without beginning to use that exclusion. If you do exceed the annual exclusion amount, you'll need to file a gift tax return and track the amounts given each year.

Consider the potential impact of capital gains taxes

Next, think of the income and capital gains tax consequences for the beneficiary of the gift. Not all gifts are treated equally. If you gift cash, generally there are no income tax consequences for the recipient, though there could be gift and estate tax implications to the donor. But if you give appreciated securities, the capital gains taxes can be significant. Also, note that the tax treatment varies widely depending on the recipient.

Consider a hypothetical $17,000 gift of cash to a grandchild. They get to keep the entire $17,000 and can choose how to use it. However, if your gift is $17,000 of Apple stock and the recipient sells the stock with a gain, it becomes a taxable event. After the sale, the grandchild would owe a capital gains tax and possibly state taxes.1

A correct cost basis—the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends—is the key to resolving how much is owed when a stock received as a gift or inheritance is sold.

Learn about the different types of trusts

A trust is a legal entity that can help expand your options when it comes to managing your assets—whether you’re trying to shield your wealth from taxes or pass it on to your children. Trusts are increasingly used by families from a range of economic backgrounds, not just the wealthy.

Irrevocable trusts (often called "irrev trusts") can be used to remove assets from a wealthy investor’s estate, which can be useful for estate tax minimization. They can also be beneficial to a donor considering gifting to minor children, as irrev trusts allow for more donor control of the assets, even after the donor's death. By setting up an irrev trust, donors can direct how they want the money to be managed and specify how it can be distributed and when it should be withheld, even if that happens after the donor's death. Irrev trusts can also be used as a vehicle to transfer assets to an adult child in cases where the same kinds of control are needed.

There are many other advantages to using an irrev trust. The assets held in them can enjoy some degree of protection from lawsuits, creditor claims, and divorce settlements, so long as the trust is structured properly. It can thus help ensure that the assets end up where you want them to go, with fewer unforeseen risks.

Another option to consider for gifting to minor children is utilizing a custodial account such as those established by the Uniform Gift to Minors Act and the Uniform Transfer to Minors Act (UGMA/UTMA). A custodial account allows you to make gifts to an account invested in the child’s name, and the assets in the account can be used for any expense for the benefit of the children.

There are pros and cons to both custodial accounts and irrev trusts. Your financial advisor can help you decide which is the most appropriate for your situation.

Read Viewpoints on Is a trust right for you?

Focused on education? Think about a 529 plan account.

If your focus is largely on helping a child, grandchild, or other person pay for education expenses, consider using a 529 savings account. A big plus with this type of account is that you and your spouse can front-load 5 years' worth of your annual exclusion gifts. Together, you could give 5 times the combined total of $34,000 for 2023, or $170,000, to each of your children or grandchildren without touching your lifetime federal gift tax exclusion, which for couples is currently $12.92 million.2 Note, however, that after taking advantage of this front-loading feature, you won’t be able to make gifts under the annual exclusion to the same beneficiary for 5 years.

In addition, the 2017 tax cuts expanded 529 plans beyond college to now include the ability to fund up to $10,000 in K–12 tuition per beneficiary per year.

Consider a donor-advised fund for charitable contributions

A donor-advised fund (DAF) is a program of a public charity, such as Fidelity Charitable®, that allows donors to make contributions to the charity, become eligible to take an immediate tax deduction, and then make recommendations on distributing the funds to qualified charitable organizations. By making a large donation to the donor-advised fund, one that covers several years’ worth of charitable contributions, you can help make it easier to itemize your tax deductions (if you weren’t doing that already) and thus help make it easier to benefit from a tax deduction on your charitable giving. However, the money does not need to be granted to a charity in the year you make the contribution. You can let the money grow tax-free and you can decide later how the money will be distributed. This strategy of gifting several years’ worth of contributions to a DAF in a single year in order to gain the benefits of a tax deduction is often called "bunching."

Tip: See Fidelity Charitable's 7 charitable tax deduction questions answered

Consider working with a financial advisor to help you get started building a holistic financial plan to reach your goals—which may also include strategies to make financial gifts to people and organizations that you care most about.

Next steps to consider

Learn about the Fidelity Charitable® Giving Account®.

See 5 tax‐savvy ways to make your giving go further.

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