Smart ways to gift money to children

Amid rising prices and an uncertain economy, more than 60% of Americans are planning on giving money as a gift this holiday season instead of a traditional present, according to a recent survey from MassMutual.

Giving small amounts of money in cash or via a gift card is easy enough, but some parents are thinking about making more significant financial gifts to their children or grandchildren, either in connection with the holidays or as part of a broader financial plan.

If you’re thinking of giving this type of gift, here are five things to keep in mind:

1. Prioritize Your Own Financial Health and Goals First

Even if your children are struggling with money challenges, it’s important to ensure you have your own financial house in order before giving cash gifts.

“You want to make sure you’re not depleting your own finances or retirement assets or altering your financial picture by making this gift,” Connor Spiro, senior financial consultant at John Hancock in Boston, says. “Then you can start to think about the details of how to do the giving.”

It may help to check in with a financial planner to get a second opinion regarding whether you can make large financial gifts without sacrificing your current or future lifestyle — and if so, how much you can comfortably give.

[READ: 6 Common Retirement Goals.]

2. Keep Annual Limits in Mind

For tax year 2022, parents can each take advantage of their annual gift tax exclusions of $16,000 per child (that number goes up to $17,000 in 2023). For a family consisting of two parents and two children, parents could together give each child $34,000 for a total of $68,000 — without filing a gift tax return.

“Most people are not able to give those kinds of gifts every year, so it’s a one-time thing to help with a big event like buying a house,” Brett Anderson, president of St. Croix Advisors in Hudson, Wisconsin, says.

[READ: Tax-Efficient Family Gifting: An Advisor’s Guide.]

3. For Larger Gifts, Talk With a CPA

For gifts above the annual gifting exclusion amount, the gift givers (in this case the parents) would need to file a gift tax return, and the gift would count toward their lifetime gift tax exemption, which is $12.06 million in 2022 and $12.92 million in 2023. Many states also have a lifetime gift tax exemption, often at a far lower level.

It’s worth noting that unless Congress changes current law, the estate tax limit will be halved in 2026. While it’s likely that lawmakers will extend the higher estate tax, high net worth families concerned about the estate tax might consider accelerating their transfers of wealth.

“It’s not certain that there won’t be much lower gift and estate tax limits in the future,” Greg Lawrence, certified financial planner and founder of Lawrence Legacy Group in Estero, Florida, says. “So, people might want to take advantage of the higher limits now.”

4. Consider Your Gift Part of Your Estate Plan

One of the benefits of annual gifting is that it’s a tax-efficient way to move money from a parent’s estate to their children or grandchildren.

[READ: States With Estate and Inheritance Taxes.]

“The biggest reason for having a strategy for annual gifting is that in the end it’s going to help you save on estate taxes,” Mary McDonald, LPL financial advisor with Avidia Investment Services in Hudson, Massachusetts, says.

Plus, many parents prefer giving cash gifts annually rather than leaving their children a large inheritance because it affords them the opportunity to see the children use the money to improve their lives.

5. Talk About Your Plan With the Gift Recipient

Giving significant monetary gifts to your children is an important financial planning opportunity for both generations. By letting your children know how much you’re planning to give them (whether it’s via gifts now or in your estate), they can make more informed decisions about their own financial plans. If you want the money to go toward a specific goal, such as a home down payment or a grandchild’s college fund, this is also a good time to discuss that.

“You want to talk while everybody is on this side of the dirt and everybody is clear-minded and able-bodied,” Andy Smith, executive director of financial planning at Edelman Financial Engines in Santa Clara, California, says. “You want to be as transparent as possible about what you’re planning to accomplish.

More from U.S. News

Estate Planning Tips to Keep Your Money in the Family

Do-It-Yourself Estate Planning Mistakes

Gift Tax: Tax Rules to Know if You Give or Receive Cash

Smart Ways to Gift Money to Children originally appeared on usnews.com

Update 12/08/22: This story was published at an earlier date and has been updated with new information.

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