The Baby Boomer generation holds $76 trillion in wealth, according to the Federal Reserve, much of which won’t be passed down to their children until the Boomers pass away. But not everyone waits for the reading of the will. Many among the one percent give money to their children regularly over long periods of time—with both direct cash payments and sophisticated trusts, which can disburse family wealth over multiple generations. Gifting is, in short, an excellent estate planning tool.
Richa Singh, a consultant with the Family Business Consulting Group in Denver, helps ultra-high-net-worth families manage their finances.
“Have you seen the show Succession? That’s what we deal with day in and day out,” she says.
“Ultra-high-net-worth families will put money in a trust with clauses that unless the beneficiaries graduate from college and have a steady job, they will not get the money,” says Singh.
One family in her practice was more inventive. The grandfather started a business that created tremendous wealth. His sons worked in the business and inherited everything. When it came time for the children of the sons to be given assets, the parents instead offered to invest in any business they chose.
“One of the business plans was to invest in crypto,” says Singh, “and it was very successful. Another went into designing wallpaper. Another opened a restaurant. It allowed their children to find their own identity but still have the same entrepreneurial spirit that the parents have.”
Of course, you don’t have to be super rich to help the kids. You can even get quite creative about it.
CORRECTION: This column erroneously said the lifetime gift tax exemption applied “per parent per child” and that a married couple with two children could give away more than $50 million over their lifetimes. They can’t. The total exemption is $13.61 million for an individual and $27.22 million for a married couple. The exemption limit is due to expire in 2025, when the individual is expected to be limited to about $7 million and the couple to about $14 million.
1. If you give money to your adult children now it won’t burden them with taxes
You and your spouse can each give up to $18,000 a year to each of your children tax-free. Even larger gifts typically only count against your lifetime exemption, without your children owing taxes on the gifts. If you give more than $18,000 a year, however, you must report it to the IRS, although you will not have to pay any tax on the gift and neither will the recipient.
2. The taxes paid by the really rich are less onerous than you think
First things first: Gift taxes are imposed on lifetime transfers that exceed the exemption limits, and estate taxes are imposed on transfers at death that exceed the exemption limits — currently $13.61 million (set in the 2017 Tax Cuts and Jobs Act that’s scheduled to expire next year).
A married couple can give away more than $25 million over their respective lifetimes without owing gift taxes. The exclusion is portable between spouses, so if your spouse passes before you do, both exclusions are combined.
After the exclusion is met, federal gift taxes are progressive, rising to a top rate of 40%. Example: If you leave an estate of $14.61 million or give that much over your life, the IRS will expect a check for $345,800. The limits and taxes apply regardless of when you give — now or after you die.
3. Taxes may become more onerous in 2026
Before the 2017 tax law, the lifetime exclusion was $5 million per parent. After the law sunsets in 2025, the exclusion is expected to be about $7 million unless Congress acts to extend or change the law.
4. But wait, there’s more
Remember the $18,000 annual limit? Well you can give that amount to as many people as you wish; they don’t even have to be related. Say both of your kids want to buy houses. You and your spouse can give each child and their spouses $18,000 each — $72,000 per couple, for a total of $288,000.
You can avoid the $18,000 limit altogether if you put money into a 529 education savings account or make direct payments to educational institutions or medical providers. These payments do not count against the annual gift tax limit.
5. Don’t forget about state taxes
Twelve states (plus the District of Columbia) have an estate tax, which is a tax paid by the estate following death. Six states have an inheritance tax, which is paid by the specific beneficiaries who inherit after you die. Maryland has both. Children and spouses are generally exempt from inheritance taxes.
6. Consider the tax implications of giving anything other than money
If you give your children assets that have appreciated since you bought them — shares of stock or a piece of real estate, for instance — your children will be on the hook to pay the capital gains taxes when they sell those assets.
“When you give them appreciated securities, you are giving them the gain as well,” says Colleen Carcone, a director in the wealth planning strategies group at TIAA. However, if you wait until you die to give the kids stocks or real estate, they will not have to pay on the gains achieved in your lifetime. They receive the “stepped up” value.
7. Don’t let your money fall into the wrong hands
If your adult children have creditors, they can go after the gifts, if not structured properly. Wealth managers advise putting the gifts into a type of trust that would protect assets against creditors.
A “spendthrift trust” is meant for beneficiaries who may be likely to sell assets prematurely; trustees have strict controls over when and how they can disburse assets. Discretionary trusts leave control with the trustees, while irrevocable trusts are also controlled by trustees, with the added feature that the terms cannot be changed without consent of the beneficiaries unless under a court order.
All of these vehicles protect assets against creditors. “We want to think about the child’s situation,” says Carcone. “If they are in the midst of a divorce, we may want to do a trust for the child’s benefit.”
8. Communication is crucial
According to research from the financial services company Edward Jones, 35% of Americans do not plan on discussing wealth transfer with their families. That’s a mistake. “Nobody likes talking about death or divorce,” says Alexander Evans, an estate planning attorney in Madison, Wis. But experts agree that having those difficult conversations early and often can be beneficial. Make sure your children understand what you are giving them and why to prevent conflict later.
9. Put everything in writing
Even a well-intentioned gift can lead to disastrous, unintended consequences, says Mary Kate D’Souza, co-founder and chief legal officer of Gentreo.com, an estate-planning website.
A story from her past haunts her: A retired couple with four children wanted to plan for the care of their disabled daughter after their deaths. They made arrangements to sell their home and use the proceeds to build an addition to another daughter’s home, where the disabled daughter and the parents would live. The plan was for the able-bodied daughter to care for her sister after the parents were gone.
But just a few months after they all moved into the new addition, the second daughter started an eviction process. “The daughter argued that the money was a gift. The parents were heartbroken. There could have been a contract that would have protected the parents,” says D’Souza.
10. Psychology and family dynamics play a role
“Money is an overloaded idea,” says Michael Garfinkle, a clinical psychologist and psychoanalyst in New York City. “It can substitute for affection.” And it can stunt a grown child’s growth. Garfinkle recalled one wealthy client who, over time, gave millions of dollars to an adult son. The son never learned to stand on his own.
“He’s not happy. He can’t sustain relationships. He hasn’t found a career,” says Dr. Garfinkle. “It’s really a question of to what extent do you signal to your children the skills they need to survive.”
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
