What's the Best Way to Give a Financial Gift?

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. It's graduation season and you may wish to help new grads in your life with a financial gift. Joining me today to share some thoughts on giving financial gifts is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine. Thanks for being here.

Christine Benz: Hi, Susan. It's great to be here.

Dziubinski: Let's start by clearing up a misperception that some people might have about the gift tax. You say that most people--most givers--will never pay the gift tax. Walk us through it.

Benz: Right. Each of us has what's called a lifetime exemption amount that encompasses gifts given during our lifetime as well as assets that we might leave behind and plan to give to our heirs after death. So, we have this lifetime exemption amount. In 2021, if someone were to die in 2021, that exemption amount is over $11 million for individuals, it's $23 million for married couples. So, most people are not dying with the states or giving amounts that are in excess of these thresholds. Separately, there is what's called an annual gift tax exclusion amount, and that's $15,000 in 2021. This is the thing that really trips people up, where if they are giving large gifts, they think that they may somehow trigger the gift tax. In actuality, if you happen to give a very large gift to an individual that is over that $15,000 threshold, what would happen is that you would be required to file a gift tax form, but you are not subject to gift tax. It merely means that you've given this large gift and it counts toward that exemption amount that I referenced earlier. So, lots of confusion about this. Be generous and know that even if you are giving large amounts in a given year, you probably will never end up paying gift tax.

Dziubinski: Christine, the stock market has enjoyed some substantial gains over the past several years in general. Some investors might think about gifting appreciated stock. What are the pros and cons of that?

Benz: Well, a couple of pros are that if you do have appreciated stock, you can really reduce risk in your portfolio either by gifting it to individuals or to charity. It's kind of a twofer that you are reducing risk by scaling back on concentrated positions and you are helping someone else. The other potential advantage to this particular strategy is that if you have these assets in a taxable account and the gift recipient happens to be in a lower tax bracket than you are, that person will pay taxes, even if they turn around and sell those securities, they will pay taxes at a lower rate than perhaps you would. So, those are the big pluses to the strategy. If there is a disadvantage, I suppose that it's a little bit more cumbersome, a little bit more complicated than giving cash or writing a check.

Dziubinski: And speaking of cash, what are the pros and cons of going with gifting good old-fashioned cash?

Benz: Well, the pro, as I said, would just be the simplicity of it. It's certainly easier for the recipient to receive a check and then they can direct the proceeds to whatever they choose. Another potential benefit to giving cash is if you are in the opposite situation where you have a losing stack in your portfolio, well, you could sell that stock, book the loss, and use the loss to offset gains in your portfolio or even offset ordinary income. Those are a couple of the positives. The negative would be that if you do have appreciation, and many investors find themselves in that position where they have highly appreciated securities, and the gift recipient is in a lower tax bracket, you are not availing yourself of that opportunity to do a little bit of tax arbitrage by potentially paying taxes or having the gift recipient pay taxes at a lower rate than would be the case if you divested of the security yourself.

Dziubinski: Now, what about the idea of funding a Roth IRA on behalf of a child or a young adult? Is this an idea that's worth considering?

Benz: I think it's a terrific idea. I love the idea of getting young people started saving for retirement early. And the really nice thing about a Roth IRA is that it's a really flexible vehicle and that those contributions can be withdrawn at any time and for any reason, which is such an attractive feature, especially with young people with multiple goals beyond retirement. The name of the game, though, is that if you are setting someone up with a Roth IRA, if you are giving them a gift with an eye toward having them fund a Roth, they need to have earned income. They need to have at least enough earned income to cover the amount of that contribution. If your child or grandchild or relative has been full-time in school, they may not have that earned income. So, that would be a potential reason why you could not take advantage of it. But otherwise, it's a great strategy.

Dziubinski: And lastly, Christine, you say that when you give a financial gift, it's also a great idea to use that opportunity to give some financial advice. How would you go about doing that?

Benz: I love the idea of either writing down your own philosophy or some strategies that you've successfully used to set yourself up for financial success in your own life, or perhaps share a favorite financial book or two or maybe a column that really made an impact on you during your own investment career. Just get a little bit creative and think about some of the things that have been formulative in your own financial success. And if you are giving a financial gift, do take that extra step of imparting a little bit of wisdom along the way.

Dziubinski: Well, Christine, these are great ideas for helping the next generation get their money house in order early and start investing. We appreciate your time.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.