What You Need to Know Before Making Financial Gifts

I was recently corresponding with an 88-year-old reader who had decided to hire a financial advisor. After years of enthusiastically managing his investments on his own, he had determined it was time to get some help. The advisor he eventually hired recommended that he dramatically streamline his holdings, and he also suggested that the investor consider making some lifetime gifts, among other things.

The reader said he was delighted by the idea of helping young loved ones get off on a solid financial footing, and I was tickled to hear about it. The default is to pass assets to family, friends, and charity after death, but by then your loved ones’ own financial fortunes may be pretty well set: 51 is the average age when someone inherits money, and more than a fourth of people who inherit assets are over age 61. Smaller financial gifts earlier, whether to assist with a home down payment, additional education, or student loan payoff, can make a bigger impact.

If you have gifting to loved ones on your mind, either because it’s the holiday season or because you’re doing legacy planning, here are some considerations to keep in mind related to tax treatment and logistics.

Gifting Logistics

Unless you’re writing a check from your bank account, the logistics of gifting funds can get a bit complicated. If you want to gift from your IRA because that’s where your money is, your only option is to sell a chunk of it to raise the funds, then pay any taxes due, then write a check. That’s not terrible, so long as you understand the tax implications of the sale; IRA withdrawals are typically subject to ordinary income tax, along with penalties if you’re not yet 59½; you could also trigger some knock-on tax effects like the income-related monthly adjustment amount. In other words, gifting from your IRA isn’t as seamless as making a qualified charitable distribution from your IRA or naming someone as a beneficiary of your IRA.

Things can also get tricky if you want your financial gift to go toward an investment account for someone else. It’s straightforward if you’re giving a gift to an adult with an eye toward setting them on an investing path: The recipient will have to set up the account, whether an IRA or a taxable brokerage account, and you can then write a check or transfer funds directly to the financial institution.

If you’re giving an investment gift to a child, you’ll have to do so through a 529, UGMA/UTMA, or IRA (if the child has earned income). A 529 is best if you know the money will be tapped for college; not only will the money compound on a tax-free basis and skirt taxes upon withdrawal for qualified higher-education expenses, but you’ll typically be able to receive a state tax break on a contribution to your home state’s plan.

Funding an IRA, meanwhile, can be an effective way to ensure that a young adult fully benefits from compounding for retirement, and the IRA wrapper offers tax benefits to boot. The tricky aspect is that the young person needs to have earned enough compensation (that is, from work) in a given year to cover the amount of the IRA contribution that you’re making on their behalf, though the contribution doesn’t have to come directly from the young adult’s own coffers.

Finally, a UGMA/UTMA is an open-ended way to save for minor children; there are no strictures on how the money is ultimately used (which can be a drawback if you want the money to go toward college), and the assets can be invested in almost anything. Note that UGMA/UTMA assets are also a negative from the standpoint of financial aid calculations.

Gift Tax: A Nonissue for Most

The single-biggest point of confusion in the realm of lifetime gifts and taxes is how the gift tax works. Many people mistakenly assume that large gifts can cause them to pay gift tax, but that’s usually not the case.

If you give $19,000 or less to any one individual in a single year, you fly completely under the IRS’ radar; the gift tax exclusion amount for 2025 is $19,000, so there are no reporting or tax requirements for gifts of less than that amount. (The exclusion amount is staying the same in 2026.) Married couples can effectively give twice that amount with no tax or reporting requirements. For example, you and your spouse could give your daughter and son-in-law $76,000 in a single year—$19,000 from each of you to each of them. Likewise, supersavers for college can steer $95,000 into a 529 plan in a single year, provided they make no further 529 contributions for the following four years. Such individuals have effectively used up their gift-tax exclusion amount for the next five years ($19,000 times five).

And even if you give a gift in excess of $19,000 to an individual in a single year, it’s not automatically subject to gift tax. Rather, anyone exceeding the gift-tax threshold in a single year must file the gift tax return form, and that excess amount counts against their lifetime exclusion amount. Only when those excess amounts (combined with the value of the individual’s estate) exceed the lifetime exclusion amount—currently nearly $14 million—does anyone actually owe taxes on those gifts. As you can surmise, the gift tax actually affects a very small subset of very wealthy individuals and should definitely not be a barrier to giving for most people.

Tax Benefits Are Limited

By the same token, because the lifetime gift/estate tax exclusion amount is currently so high, avoiding estate tax shouldn’t be a major motivation for most people to gift assets to individuals during their lifetimes—at least for now. Of course, the estate tax exclusion has been much lower in the past and could go lower again: It was just $2 million as recently as 2008, for example. Moreover, some states levy their own estate taxes, and in most cases, they’re lower than the federal threshold.

In contrast with making gifts to qualified charities, you won’t be able to earn a tax deduction on your gift to an individual. This is true regardless of whether you’re giving cash, investments, or tangible property like real estate. The exception is if you’re making a contribution to a 529 college savings plan; you may be eligible for a state tax deduction or credit. But as with charitable giving, making a difference is the bigger goal when giving to individuals; saving on taxes is secondary.

In a similar vein, gifting appreciated assets is unlikely to remove the taxes due on the gains, though it will shift the tax burden to the recipient. That stands in contrast to the benefits of gifting appreciated assets to charity during your lifetime (or after), or earmarking them for individuals to receive after you die.

When someone receives investment assets from you during your lifetime, they also receive your cost basis in the asset; when they sell, they’ll be responsible for the difference between that cost basis and the eventual sale price.

For example, if you gift shares of a stock that you paid $10 for and it’s now worth $100, the giftee would owe taxes on the $90 per share in appreciation if they sell. If the gift recipient is in a low tax bracket—meaning a 0% long-term capital gains rate applies—there wouldn’t be any capital gains taxes due upon the appreciation; if the gift giver is in a higher tax bracket, such a gift can make good tax sense.

By contrast, the taxes due on securities that your loved ones inherit after your death will be based on the asset’s price at the time of your death—the cost basis in that asset “steps up” to that level. Similarly, if you donate appreciated investment assets to charity during your lifetime or after, none of that amount will be taxable. That helps explain why people often transfer highly appreciated assets after death—via wills and beneficiary designations—or gift them to charity rather than to loved ones during their lifetimes. But here again, that’s probably not a good enough reason to favor other types of giving if your loved ones could benefit from your help sooner.