4 Ways to Gift Money to Family and Minimize Taxes

Posted on: 18 February 2021


After a lifetime of earning your money, do you want to help friends and family with it? One key element of giving money or assets to others is to minimize the tax effects both to yourself and the receiver. After all, if your gift is eaten up by taxes, it does less good to either of you. So, how can you give while ensuring the lowest tax bill? Here are a few ways.

1. Use the Gift Tax Exclusion.

American taxpayers are allowed to gift up to $15,000 (as of 2021) annually to other individuals without paying any gift tax. A couple who files jointly can double this amount. If you keep your gifts under this threshold, you have no tax consequences and you aren't even required to report the transaction to the IRS. You may also be able to use lifetime exclusions. 

2. Pay Some Expenses Directly.

Another easy way to gift money is to bypass the receiver and pay institutions directly. You may pay tuition directly to a college or university or pay medical expenses directly to the provider without contributing to the gift tax exclusion. Payment of such expenses allows you, in particular, to support younger heirs without giving control of the funds to parents. 

3. Use an Irrevocable Trust.

Trusts are a valuable estate planning tool, but they're excellent ways to minimizes taxes for everyone. In an irrevocable trust, the assets you want to involve are transferred to the ownership of the trust with you as trustee. Trusts pay their own taxes. Some trusts can further be set up to minimize their value to reduce any taxes. The trust may either distribute assets after you die or after a set period of time. 

4. Make a Low-Rate Loan.

Family loans must be handled correctly to avoid taxation, but they can provide large amounts of money for things like buying a home or starting a business without it becoming taxable income. The key is to stipulate a reasonable interest rate—although it's often lower than other forms of loan. To remain tax-free, a loan cannot be an outright gift, but it can be stretched out a long time. 

Want more ideas to help your family and friends financially? Start by discussing your goals and interests with a local wealth management service. With additional assistance, you can come up with a plan that benefits everyone. Make an appointment today.