Using The Annual Gift Tax Exclusion To Help Your Children and Estate Planning
Smart, Tax-Free Ways to Gift Money to Your Adult Kids
Why Gifting Makes Sense
Supporting your adult children financially isn't just a generous act; it can also be a strategic financial planning tool. Building strategies around the annual gift tax exclusion can help minimize estate taxes and help those you love most:
- Reduce Your Taxable Estate: Gifting allows you to lower your taxable estate over time, which can help minimize future estate taxes.
- Experience the Joy of Giving: Witnessing the positive impact of your generosity while you're still alive can be incredibly rewarding. Whether you're helping with a home, education, or providing peace of mind, your support can enable your children to pursue their goals—whether starting a business, raising a family, or saving for the future.
- Annual Gift Tax Exclusion: Thanks to the annual gift tax exclusion, you can gift up to $19,000 per person (or $38,000 per couple) each year without triggering any gift taxes or needing to file a gift tax return. This is a smart way to manage your finances and reduce your taxable estate. Whether it's done as a one-off or part of a long-term strategic plan, it can be highly effective.
Here are some practical ways to utilize that exclusion:
1. Give Them Cash
The simplest and most flexible way to gift is to give cash. You have control over the amount, and your children can use it as they wish—whether to pay bills, invest, or even take a well-deserved vacation.
- You can give $19,000 per person per year or $38,000 if you and your spouse give together.
2. Contribute to a 529 College Savings Plan
If you want to support educational expenses, a 529 plan is an excellent choice.
- You can front-load it with up to $95,000 ($190,000 for couples) in one year per child or grandchild using a 5-year election.
- The funds grow tax-free and can be used for tuition, books, and other educational expenses.
3. Gift Stocks or Investments
Instead of cash, consider gifting appreciated assets such as stocks or mutual funds. The recipient then assumes your cost basis.
- Your child may be in a lower tax bracket, which means they could pay less in capital gains tax when they sell the asset.
- Ensure the total fair market value remains under $19,000 ($38,000 for couples) per recipient.
4. Help with a Down Payment on a Home
Assisting with a down payment can significantly impact your child's financial future, as buying a home is one of the biggest hurdles for young adults. Over the last twenty-five years, the rise in home prices has significantly outpaced income growth.
- Use your annual exclusion to contribute up to $19,000 per parent or $38,000 as a couple.
- If you'd like to give more, you can also gift to their spouse, effectively increasing the amount to $76,000 per year without triggering gift taxes.
- Plan and gift over several years to assist with a larger down payment.
- Helping them purchase a home earlier could lead to years of equity building, less rent, and faster financial stability.
5. Pay Tuition or Medical Bills Directly
Paying tuition or medical bills directly to the provider does not count towards your $19,000 annual limit, making it a powerful bonus strategy.
- You can pay for their hospital bill or a semester's tuition and still give them cash within the annual limit.
6. Help Fund a Roth IRA
If your child has earned income, consider giving them cash to fund a Roth IRA.
- Contributions grow tax-free and can be withdrawn without penalties in retirement.
- The contribution limit in 2025 is $7,000.
7. Set Up a Trust
If you prefer a more structured approach to your gifts, consider establishing a trust.
- You can fund the trust annually using the $19,000 per person limit, which can help with asset protection and long-term planning.
8. Don't Forget In-Laws and Grandkids
Remember, you can gift to anyone, not just your children.
- Consider giving to your child's spouse, effectively multiplying your gift's impact. For example, you and your spouse can gift a total of $76,000 to a married child and their spouse in a single year—all tax-free.
- Grandchildren are also eligible, making gifting an excellent way to build wealth across generations.
Quick Recap (2025 Gift Limits):
What You're Gifting Max Tax-Free Amount Who It's For
Cash or check $19,000 (or $38,000 per couple) Per recipient
529 plan (5-year front-load) $95,000 (or $190,000 per couple) Per beneficiary
Tuition or medical (direct pay) Unlimited (must pay the provider) Must pay the provider
Appreciated assets $19,000 (or $38,000 per couple) Based on fair market value
Bottom Line
Gifting is a meaningful way to support your children and shape their financial future—all while reducing your estate and avoiding taxes. Whether you're helping with a home, funding education, or simply providing peace of mind, your generosity can have a lasting impact.
Need help creating a personalized family gifting strategy? I'm here to assist you!
Please contact Gerry at Linden Wealth Management LLC.
It is important to remember that all investing involves risk. This content is developed from sources believed to provide accurate information and provided by Twenty Over Ten and Linden Wealth Management LLC. It may not be used to avoid any federal tax penalties. Please consult legal or tax professionals for specific information regarding your situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.