Give While It Matters: A Smarter Approach to Gifting to Adult Children
One of the more interesting financial planning “challenges” is reaching the point where spending more money doesn't materially change your own enjoyment.
I recently had a conversation with a retired client who finds herself in exactly that position. Her investments have continued to compound, and even after intentionally increasing travel and other discretionary spending, she is still spending considerably less than her resources could support.
That led us to a different question:
If the money is eventually going to her children anyway, when would it have the greatest impact on their lives?
Her sons may eventually inherit several million dollars. But if that inheritance arrives when they're in their 60s—after they've paid for homes, raised children, funded college and accumulated substantial retirement savings themselves—another few million dollars may not change their lives nearly as much.
A smaller amount received today could.
That doesn't mean parents should jeopardize their own retirement to help their children. But once we've established that the parents have more than enough, gifting can become less about estate planning and more about using family wealth when it has the greatest utility.
The $19,000 Gift Tax Misconception
One of the most common misconceptions I hear is that you cannot give someone more than the annual gift tax exclusion without owing tax.
For 2026, the annual federal gift tax exclusion is $19,000 per recipient.
But $19,000 is not a limit on how much you can give.
It's primarily a threshold for determining whether a gift begins using part of your lifetime gift and estate tax exemption and whether a gift tax return may need to be filed.
Under current law, the federal lifetime basic exclusion amount is $15 million per individual, subject to inflation adjustments. For most families, therefore, giving more than $19,000 does not suddenly create an immediate gift tax bill.
Consider a simple example.
Suppose Mom and Dad want to give their married son and daughter-in-law money. Each parent has a $19,000 annual exclusion for each recipient.
That means they could give:
- $38,000 to their son ($19,000 from each parent), and
- $38,000 to their daughter-in-law.
That's $76,000 transferred to one household in a single year without using any of the parents' lifetime exemption.
If they have two married children, the same strategy could potentially transfer $152,000 annually across the two households.
There are technical rules around gift splitting and Form 709 reporting, so larger gifting strategies should be coordinated with a CPA or estate attorney. But the important planning point is that the annual exclusion should not automatically become an artificial ceiling on family generosity.
Sometimes Giving Earlier Is More Valuable Than Giving More
Imagine two scenarios.
In the first, a 40-year-old receives $50,000 from a parent. They use the gift to increase their 401(k) contributions, fund Roth IRAs where eligible, contribute to their children's 529 plans and invest the remainder.
In the second, that same person inherits $2 million at age 67.
Obviously, $2 million is worth more than $50,000. But the marginal impact on the recipient's life might actually be greater from the earlier gift.
At 40, that money could help a family simultaneously save for retirement, educate children, build an investment portfolio and create some breathing room in their monthly cash flow.
At 67, they may already have a paid-off home, a well-funded retirement portfolio and financially independent children.
The earlier dollars also have decades to compound.
For example, $50,000 invested for 25 years at a hypothetical 7% annual return would grow to roughly $271,000. Of course, actual investment returns will vary and aren't guaranteed.
The goal isn't necessarily to maximize the inheritance.
It may be to maximize what the family's wealth can accomplish.
Giving Doesn't Have to Mean Funding Lifestyle Inflation
One hesitation I sometimes hear from parents is that they don't want gifts to discourage saving or simply finance a more expensive lifestyle.
That's reasonable.
A gifting strategy can instead be structured around behaviors the family already wants to encourage.
For example, parents could provide gifts that allow adult children to:
- Maximize workplace retirement plans. A child could increase 401(k) contributions substantially while using gifted money to offset the resulting reduction in take-home pay.
- Fund Roth IRAs when eligible. For younger family members, decades of potential tax-free growth can make Roth assets especially valuable. Higher-income households may need to evaluate whether direct or backdoor Roth contributions are appropriate.
- Build taxable investment accounts. This can create long-term wealth outside of retirement accounts and provide flexibility before retirement age.
- Fund 529 accounts for grandchildren. Larger 529 contributions can also qualify for a special five-year gift-tax election, allowing several years of annual exclusions to be used upfront, subject to the applicable rules and reporting requirements.
- Pay down high-interest debt.
- Build an emergency fund or prepare for a future home purchase.
In other words, gifting doesn't have to be, "Here's $50,000—go spend it."
It can be part of a multigenerational financial plan.
Don't Forget the Income Tax Arbitrage
There is another layer that deserves attention: Who will ultimately pay tax on the family's money?
The answer isn't always obvious.
A common assumption is that retired parents are in a higher tax bracket because they have accumulated substantial wealth. But wealth and taxable income aren't the same thing.
In the case that prompted this discussion, the client's adult children are actually in higher marginal income tax brackets than she is.
That matters particularly when we're talking about traditional IRA assets.
Most non-spouse beneficiaries who inherit traditional retirement accounts are now subject to the SECURE Act's 10-year rule, meaning the inherited account generally must be completely distributed by the end of the tenth year following the owner's death. Taxable distributions from inherited traditional retirement accounts are generally included in the beneficiary's gross income.
Imagine inheriting a $2 million IRA while you're in your peak earning years.
You already have a high salary, bonuses and perhaps investment income. Now you have a large inherited IRA that must ultimately be distributed within a relatively short period.
A significant portion of those distributions could potentially fall into high marginal tax brackets.
That raises an interesting planning question: Would it make sense for the parent to intentionally recognize some of that IRA income during retirement at lower tax rates? Perhaps.
Depending on the circumstances, strategies might include additional IRA withdrawals, Roth conversions, charitable distributions, or spending IRA dollars while gifting other assets.
Importantly, simply withdrawing money from an IRA and giving the cash to children doesn't eliminate income tax. The parent still owes the applicable income tax on the distribution.
But if Mom can recognize income at a lower marginal rate than her children are likely to pay later, intentionally accelerating some taxable income may deserve consideration.
The objective isn't simply minimizing Mom's taxes this year. It's minimizing taxes across the family over multiple generations.
The Asset You Give Matters Too
Not every dollar is interchangeable.
Cash, appreciated investments, Roth assets and traditional IRA assets can all have dramatically different tax consequences.
For example, appreciated securities gifted during life generally carry the donor's cost basis with them. By contrast, many capital assets inherited at death may receive a basis adjustment under current tax law.
That means giving highly appreciated stock during life solely to reduce the size of an estate could unintentionally sacrifice a valuable tax benefit.
Traditional IRA assets present almost the opposite problem: they generally represent future taxable income rather than assets eligible for the same type of basis adjustment.
This is why a good gifting strategy shouldn't begin with:
"How much can we give?"
It should begin with:
"Which assets should we keep, which should we spend, which should we give, and which should ultimately be inherited?"
Those are very different questions.
Protection Can Be Just as Important as Tax Planning
There is also a difference between giving money to your children and giving money for the benefit of your children.
Writing a large check is simple. But once assets are transferred outright, the parent generally loses control over them.
For larger amounts, families may want to explore using trusts or other estate-planning structures rather than making unrestricted gifts.
Properly designed trusts may provide varying degrees of protection from future creditors, lawsuits or divorce while still allowing assets to be used for the child's benefit.
A trust can also establish parameters around when and how money is accessed. That doesn't necessarily mean keeping an adult child on a financial leash. In many cases, the child can have substantial control while the trust structure provides protections that wouldn't exist if the assets were simply held in the child's individual name.
The appropriate design depends heavily on state law and individual circumstances, so this is an area where financial planning and estate planning should work together.
Creating a Family Gifting Plan
For families who have accumulated significantly more than they are likely to spend, I increasingly like the idea of treating gifting as an ongoing part of the financial plan rather than something that happens accidentally at death.
That might mean establishing an annual gifting budget.
Perhaps a couple decides that, after maintaining sufficient reserves and accounting for future healthcare, long-term care and other contingencies, they are comfortable gifting $50,000, $100,000 or more each year. Then we can revisit the strategy annually.
Did the portfolio have a particularly strong year?
Are the children buying homes?
Are grandchildren approaching college?
Is one generation temporarily in a lower tax bracket?
Should gifts go directly to children, into 529 plans, into investment accounts, or into trusts?
The answers can change over time.
Wealth Is a Tool, Not a Scorecard
Successful investors spend decades learning to accumulate.
Eventually, though, the planning problem changes.
The question is no longer simply, "How large can we make the portfolio?"
It becomes:"What do we want this money to accomplish?"
For some families, leaving the largest possible inheritance is exactly the right answer. For others, there may be tremendous value in watching their children and grandchildren benefit from the family's wealth today.
Helping a 40-year-old aggressively fund retirement, educate their children or build an investment portfolio may ultimately have a greater impact than adding another few million dollars to their balance sheet at age 65.
And there's one advantage to lifetime gifting that doesn't appear anywhere on a financial projection:
You get to be there to see the impact.
Ready to align your giving strategy with your goals? Schedule a call today.
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