Our clients often say that they would like to gift to their children now, before they pass, when their children are building a foundation and can significantly benefit from the added support. Gifting money to family members can be a great way for high-net-worth individuals to transfer wealth to future generations. However, it’s important to approach the process with a well-informed strategy to ensure that you’re maximizing the benefit and minimizing potential concerns. At Janiczek Wealth Management, we believe that it is important to consider the tax implications, affect to your overall financial plan, as well as the psychological consequences on the recipient when gifting money to family members.
Gift Tax Considerations
One of the primary considerations for high-net-worth individuals when gifting money to family members is the gift tax. The gift tax is a tax on the transfer of property or money from one person to another without receiving something of equal value in return. Currently, the annual exclusion amount for gift tax is $17,000 per recipient. A married couple filing jointly can each give $17,000 ($34,000 total) to an individual in one year without incurring a gift tax. It’s also worth noting that the gift tax is applied on a per-person basis, which means that you can give up to $17,000 to multiple individuals (i.e., married couple) without being subject to gift tax. If you exceed the annual exclusion amount, you may be subject to gift tax and need to file a gift tax return. The gift tax rate can be as high as 40% and is based on the fair market value of the gift at the time it was given. It is important to note that most individuals will never actually pay the gift tax after filing a gift tax return for lifetime gifts over the annual exclusion amount; these gifts will simply decrease their gift and estate exemption amount as explained below.
Gift and Estate Exemption and Portability
Another consideration when gifting money to family members is the gift and estate exemption and portability. The gift and estate exemption is the amount of money that an individual can gift during their lifetime or via their estate at death without having to pay gift or estate tax. Currently, the gift and estate exemption is $12.92 million per individual or $25.84 million per couple. However, if Congress doesn’t act before 2026, the current $12.92 million exemption per individual reverts back to the 2017 exemption amount which was $5.49 million, indexed for inflation (estimated to be $6.8 million in 2026).
Portability, on the other hand, allows the unused portion of a deceased spouse’s exemption to be transferred to the surviving spouse. This means that a surviving spouse may be able to use their deceased spouse’s unused exemption in addition to their own.
The gift and estate exemption and portability can provide a significant opportunity to maximize a gifting strategy, especially in light of the pending significant decrease to the exemption amount in 2026 if Congress doesn’t act. By taking advantage of the larger gift and estate exemption now, high net worth individuals can gift significant sums of money to family members without being subject to gift or future estate tax.
Psychological Impact of Gifting to Kids
While gifting money to children can have a positive impact on their financial wellbeing, it can also have a negative emotional impact. The impact of gifting money to children can vary depending on a number of factors, including the amount of money given, the age of the child, and the purpose of the gift. The impact of a monetary gift on older children can be complex. If children are given large sums of money without any guidance or expectations, it may lead to a sense of entitlement or a lack of motivation to work hard and achieve financial independence. They may also fail to learn important skills such as budgeting and saving. Others, however, may understand that the gift offers an opportunity to establish a financial foundation and save or spend the money wisely. Ultimately, whether gifting money to children has positive or negative motivational impacts depends on how the gift is structured as well as the values and drive of the recipient.
Gifting money to children through a trust can provide direction on how the money is to be utilized as well as protection in the case of a subsequent failed marriage as an example. A trust can be structured in a way that ensures that the money remains within the family and is not subject to any potential claims from a spouse or partner of the child. Additionally, a trust can be designed to provide ongoing financial support to the child while also incentivizing them to achieve certain goals, such as completing their education. Some choose to tie the gift to milestones, like additional education or purchasing a home. This can help children develop a sense of responsibility while also providing them with the resources they need to achieve their goals.
Overall Financial Planning Strategy
At Janiczek Wealth Management, we believe that a comprehensive financial plan, that takes into account your broader financial goals, strengths, and weaknesses, will provide clarity on appropriate gift amounts, the long-term impact on your lifestyle and estate of such gifts, and the optimal timing for the generational transfer of wealth given the everchanging estate tax landscape. Your gifting plan should align with your estate planning and legacy goals, include asset protection, and involve working closely with your wealth manager, tax professional and estate planning attorney. By taking a comprehensive approach to financial planning, high net worth individuals can ensure that they’re making the most of their wealth and building a secure financial future for themselves and their family members.
Gifting money to family members can be a powerful tool to support loved ones and transfer wealth to future generations. However, it’s important to approach the process with a well-informed strategy that takes into account the potential tax, asset protection, and overall financial planning implications, and most importantly the consequences on your child in terms of emotional and financial wellbeing.
At Janiczek Wealth Management, we specialize in working with high-net-worth individuals and their families to develop comprehensive financial plans and investment strategies that address all aspects of their financial goals and objectives. If you’re considering gifting money to family members or would like to discuss your broader financial planning needs, we encourage you to contact Cathy Wegner, Director of New Client Engagements at 303-339-4480 or email@example.com or complete our contact form to schedule a consultation.