Smart Gifting: Strategies for Passing Down Wealth

Gifting money to your children and grandchildren is more than just a way of showing them how much they mean to you — it’s a way to contribute meaningfully to their financial futures, helping ensure they have the means to pursue their dreams and take advantage of life’s opportunities. But when it comes to passing wealth down to your loved ones, the strategy you employ can bear significant tax implications for you and for them.

Luckily, there are a number of different financial vehicles to choose from that can help your family manage these taxes more effectively. Each option comes with its own set of potential benefits and considerations, and we’ll discuss some of them here. But first, there are a couple of things you should keep in mind.

Consulting Your Loved Ones Before Gifting

Surprises are delightful, but for financial gifts, it’s wise to discuss your intentions with your children, their spouses, and anyone else who may be impacted. This collaborative approach ensures your gifts complement their values and whatever financial plans they already have in place. In the case of your grandchildren, their parents may have a vision for their financial futures or they may have specific needs your gifts could address more effectively. The last thing you want is for your gift to go underappreciated or fail to have the desired effect.

Navigating Gift Taxes

The lifetime gift and estate tax exemption is one of the ways that the IRS allows for the transfer of wealth from one generation to the next. Currently, you can give up to $12.92 million in your lifetime without your beneficiaries incurring additional taxes, but this amount is set to shrink significantly in 2026.

In addition to there being a lifetime exemption, individuals can gift up to a certain amount each year without incurring extra taxes. This is referred to as the “annual exclusion” and the limit currently sits at $18,000, or $36,000 for spouses filing separately. Gifts that exceed the annual exclusion amount must be reported and the difference will count against your lifetime gift tax exemption. Filing a gift tax return for such gifts is essential for record-keeping, and these records should be retained permanently.

Generally speaking, strategically gifting over time can be more tax-efficient than lump-sum gifting, helping manage your taxable estate and pass on wealth without also passing down a hefty tax bill.

Choosing the Right Gifting Method

1. 529 Plan
   • What They Are: A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. These plans are sponsored by states, state agencies, or educational institutions.
   • Potential Benefits: The earnings in these plans grow tax-free, and distributions for qualified education expenses (like tuition, books, and room and board) are also
   • tax-free. Some states even offer tax deductions or credits for contributions. 529 plan balances can be rolled into Roth IRAs, which lowers the potential risks associated with overfunding the account.
   • Other Considerations: Contributions to a 529 plan are considered gifts for tax purposes. However, they qualify for the annual gift tax exclusion, and you can front-load five years’ worth of contributions in a single year.
2. Individual Retirement Account (IRA)
   • What They Are: IRAs are investment accounts that provide tax advantages for retirement savings. There are several types of IRAs to choose from, including Traditional and Roth.
   • Potential Benefits: Designating children or grandchildren as beneficiaries can allow the funds in the account to continue growing tax-deferred or tax-free (in the case of Roth IRAs) until they are ready to tap into them. A Roth IRA, in particular, may provide your loved ones with tax-free income, since this type of account is funded with after-tax dollars.
   • Other Considerations: Recent legislation has changed the distribution rules for inherited IRAs, and these may especially impact non-spouse beneficiaries. Consult with your financial advisor to determine what rules may apply to your loved ones.
3. UTMA or UGMA Account
   • What They Are: Uniform Transfers to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) accounts are custodial accounts that allow minors to own assets.
   • Potential Benefits: These accounts provide a simple way to transfer property to minors without the need for a trust. The custodian manages the assets until the minor reaches adulthood.
   • Other Considerations: Once the minor reaches the age of majority, they gain full control over the account. Also, these accounts can affect financial aid eligibility for college students.
4. Irrevocable Trust
   • What They Are: Trusts are legal arrangements where a trustee holds and manages assets on behalf of a beneficiary or beneficiaries. As the grantor, you can determine the trustee (or trustees), the beneficiaries, and the goals of the trust.
   • Potential Benefits: This type of trust can offer tax benefits, as the assets in the trust are no longer considered part of your estate, while also providing the assets protection from creditors.
   • Other Considerations: Irrevocable trusts require you to relinquish control of the assets included in them and, once established, the terms of an irrevocable trust cannot be changed.
5. Life Insurance Policy
   • What They Are: A whole life insurance policy provides coverage for the policyholder’s entire life, as opposed to a term life insurance policy, which only covers a specific period.
   • Potential Benefits: Besides the death benefit, these policies accumulate cash value over time, which can be borrowed against. This can provide financial flexibility for the beneficiary.
   • Other Considerations: Premiums for whole life insurance are typically higher than for term life insurance. It’s important to ensure that the policy remains affordable over the long term.
6. Irrevocable Life Insurance Trust (ILIT)
   • What They Are: An ILIT is a trust designed to hold and own a life insurance policy, with the proceeds payable to the trust upon the death of the insured.
   • Potential Benefits: This type of trust keeps the insurance proceeds out of the insured’s estate for tax purposes. They can also provide more control over the distribution of the proceeds.
   • Other Considerations: Once established, an ILIT cannot be changed or revoked. Careful planning is required to ensure that it aligns with your long-term estate planning goals and the needs of your loved ones.
7. Paying for Expenses Directly:
   • Instead of using one of the above vehicles, you can opt to pay for certain expenses directly, such as medical bills or school tuition. Payments made directly to a qualifying institution for someone else’s medical or educational expenses are not subject to gift tax, no matter the amount. This can be a highly efficient way to provide financial support without affecting your gift tax exemptions.
   • However, this method is limited to specific types of expenses and must be paid directly to the institution. It does not provide financial assistance for other types of expenses the beneficiary may have.

Planning Your Gifting Strategy

The right gifting method will depend on your financial circumstances, your goals, and the needs of your beneficiaries. In many cases, you may find that some combination of the products discussed suits you best. Tailoring your strategy like this can allow you to pursue specific educational, financial, or estate planning goals while taking advantage of the different tax benefits.

A financial advisor can provide personalized advice and help you navigate the complex landscape of gift taxes and estate planning so that your gifts not only bring joy but also provide lasting financial benefits.

This material is intended for informational/educational purposes only and should not be construed as tax, legal or investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Certain sections of this material may contain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results. Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption of any kind. Please consult with your financial professional and/or a legal or tax professional regarding your specific situation and before making any investing decisions.

A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. Whether a state tax deduction and/or application fee savings are available depends on your state of residence. For tax advice, consult your tax professional. Non-qualifying distribution earnings prior to 2024 are taxable and subject to a 10% tax penalty. Beginning in 2024, unused 529 plan funds may be rolled into a Roth IRA assuming the following conditions are met: 1) must have owned the 529 plan for 15 years, 2) can only convert funds that have been in the 529 plan for at least 5 years, 3) rollover amount cannot exceed $35,000 and 4) rollovers must be made to a beneficiaries Roth IRA.