What to Consider When Gifting Money to Your Children

If you’re financially secure, you may prefer to share your wealth during your lifetime, rather than after your death. That way, you can see the value it provides to the people you care about. 

You may want to give money to your children, grandchildren, nieces, nephews or others. Your generosity could help them pay for a home, ease their childcare burden, allow them to travel or help finance their education.

When it comes to gifting money, there are several things you need to keep in mind.

Gifts That Are Not Taxed

How much can parents gift a child? You can give your children, or any other recipients, up to $17,000 per year without having to pay taxes on it. If you’re married, you and your spouse can each give the same person $17,000, which means they can receive $34,000.

Regarding the rules of gifting money to family, the money you pay to support your child isn’t considered a gift. Typically, you don’t need to worry about the money you spend on a child for food, clothing and general expenses if that child is under the age of 18, in college or has special needs. 

If you are supporting an adult child and might exceed the $17,000 limit thus incurring a gift tax, you may be able to structure the money so it isn’t considered a gift. For example, you might pay your child to help in a family business, do household chores or maintain the yard.

You can also make unlimited gifts for medical care or education expenses. In these cases, you need to make the payments directly to the medical care provider or educational institution. So, for example, you can pay your niece’s $60,000 tuition if you like as long as you pay the money directly to the school and not to your niece.

Keep in mind that selling something for well below market value is considered a gift. You can’t sell a $500,000 home to a child for $1,000 to get around the gift tax.

If you have to pay taxes on the gift, those taxes are your responsibility, not the responsibility of the recipient. The tax rate on gifts ranges from 18 to 40%. Learn more about how gift tax may impact you. 

What’s the Purpose of the Gift?

You may be giving money to children or other family members for a specific reason. For example, you may want to contribute to the down payment on a home or help finance a promising start-up. 

Before giving the gift to your loved one, you may want to characterize it differently. For example, you may want to characterize it as a loan or investment in their future.  

If you’re giving money to children under the age of 18, you may want to set up a Uniform Gifts to Minors Act (UGMA) account. These accounts hold the money for the child. You can name yourself, someone else or a financial institution as the custodian for the account. That way, you or the named custodian can make decisions on the child’s behalf until they’ve reached the age of majority to have control of that account.  

You may also want to set up a trust for your child that is a minor. With a trust, you can set up a timeline for when your child receives the money, so they are mature enough to manage it. You can also restrict what the money is used for. For example, you might want it spent only on education, housing and medical care.

Get Advice on Financial Gifts

When you’re figuring out the best approach to gifting money to the people you care about, there are a lot of things to consider. Before you transfer any dollars, talk with a Farm Bureau financial advisor about the options that meet your goals and best help the people you want to support.