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A recent study by The Williams Group found that seven in ten families lose their fortune by the second generation and nine of ten families lose their wealth by the third generation. With this data in mind, a consistent theme and goal amongst high-net-worth individuals is that of a successful wealth transfer to the next generation. Oftentimes, gifting money to children or grandchildren is a smart way to help strike a balance between helping the next generation without enabling them. An important consideration with this strategy is the avoidance of gift taxes, and gifting as efficiently as possible.
Gifts, generally speaking, apply to the transfer to an individual where full consideration is not received in return. In 2023, an individual can transfer assets valued up to $17,000 annually to a recipient without incurring any gift tax or reporting the gift to the IRS. If the individual is married and the two spouses elect to split gift, they can combine their gift to equal $34,000, again with zero IRS reporting on their tax return.
For example, let’s assume a married couple wanted to give both of their daughters and their spouses the maximum amounts without having to report the gift. They could gift $34,000 to their first daughter and $34,000 to her spouse. On top of that, they could gift another $34,000 to their second daughter and $34,000 to her spouse. All told, in 2023, this couple could hypothetically gift $136,000 to these four individuals without having to report anything to the IRS or be subject to any gift tax.
This above scenario could help the married couple twofold. First, the $136,000 that was gifted is now out of their personal estate for estate tax purposes. If the couple is over the federal estate tax exemption (currently $12.92M per person, but set to reduce to ~$6M per person in 2026), then they are saving 40% on any gifts above that exemption. In this specific scenario, the couple is saving north of $50,000 (each year they complete this 136,000 gift) in estate taxes by simply gifting up to the applicable limits while they are living. On a completely different note, this gifting scenario allows the married couple to see the results of their generosity while they are living. The couple now sees how the next generation reacts to the money received, as opposed to receiving a large inheritance at their death.
Gifting is not exclusive to cash, as anything of value can be constituted as a gift from an IRS standpoint. Shares of a business or an interest free loan are other examples of items that can be considered a gift. Ultimately, certain property is generally better to gift than others. Property that is likely to appreciate, like low basis stock for example, can be a wise asset to gift. The giftee receives the gift at its fair market value and the individual that made the gift is able to rid the asset’s appreciation from their estate, avoiding potential estate tax liability on the asset’s growth. Under the same token, transferring ownership of a life insurance policy can make an excellent gift.
Generally speaking, there are a few exceptions to the $17,000 per individual gifting limit that are important to note. The following items are generally not considered taxable gifts:
Developing a gifting strategy for the next generation can be a wise estate planning technique to lower potential estate tax liability and guide a smooth wealth transfer. It is advised to consult with a trusted estate planning attorney and / or financial advisor before implementing these strategies to ensure they align with your financial plan and goals.
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