Are We Having the Right Conversations About Year-End Gifting with Our Children?

By Michael Schneider on December 27, 2022

There are two main ways most of us make the annual exclusion gifts:

• The first and most traditional is giving someone money directly, usually through a check. The recipient has free reign on what to use the money for; they can spend, save, invest, etc.

• Another way to give money is to gift it into a trust for someone’s benefit. The person making the gift puts the money away to invest and grow over time. In this case, it may help fund future goals while keeping the money outside the beneficiary’s estate. (Note: There are rules for trusts that the trustee adheres to, which may limit how much money the beneficiary can receive and what the funds can be used for).

Questions and Conversations About Year-end Wealth Transfer to Children

There are common questions we have heard from clients as they plan their end of year gifting to kids and some grandkids:

• “Do our kids know why we give them each upwards of $32,000 a year? It is an oddly specific number…”
• “Do they know if they can spend, or should they save and invest the money?”
• “Should I even care? Or is a better question, should I care what they do with the money, and is it worth discussing with them?”

As of today, the annual exclusion gift amount is $16,000 per person; thus, couples can give a single person up to $32,000. Chances are if we give the maximum allowable exclusion gift, we are also concerned about potential estate tax effects.

Talking about money tends to be complicated but using year-end gifting is a good way to start the conversation. The dollar stakes tend to be lower, but the knowledge shared between generations can be quite high. With that in mind, the conversation about wealth becomes more important, specifically family wealth.

Now the question is, which method of gifting is better? Like most things, the answer is, “it depends.”

Let’s look at an example using a family with two parents and two children. For this example, let’s say that the oldest child is already very well off and is earning a good living. The younger child is recently out of school, hasn’t quite hit their stride yet, and is barely making ends meet. Based solely on need, we assume that the youngest child needs cash more than the older sibling. And that the oldest child may prefer the gift to go into a trust.

In both situations, the parents proactively speak with their children about how they would like to receive the gift. Open communication is a good step to create conversation about wealth planning for the parents and their kids.

For each child, it’s an opportunity for the parents to explain why they are each gifting $16,000 and the benefits it provides them from an estate perspective. They can discuss how these gifts reduce their own estate and can help save on eventual estate taxes.

They can also use this conversation to learn more about their children’s financial situations and provide guidance. For instance, take a look at the example below:

Scenario: The youngest child feels like they are struggling to pay bills because they need to save a certain amount each month and doesn’t want to deplete their savings.

Solution: Because the parents are aware of the dilemma, they can help their child save for their long-term goals by putting money away in a trust. This relieves some of the pressure of depleting their savings, thus allowing them to feel more financially comfortable.

For the oldest child, while their own income and investments may be higher than the younger child, their liquidity may still be an issue. In this situation, cash right now may alleviate some immediate stress.

Just because the children preferred the gifts in one form or the other this year, families need to keep the annual dialogue going so that appropriate changes can be made in the coming years.

At the end of the day, conversations between the generations within our families can help us make better decisions. From an estate perspective, it is never too early to start planning for our family’s future. Having the right conversations along the way can make a big difference in how wealth is transferred from one generation to the next.

It is also understandable that parents may not want to share their financial plan or status with their children. They may not necessarily want to tell them how much they will inherit when they pass. With annual exclusion gifts, the focus of the conversation can switch from discussing the parents’ estate to something more tailored to how the children are planning their financial futures. And most importantly, allows parents to provide insightful guidance from their own experience.