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“Money doesn’t change men, it merely unmasks them.” -Henry Ford
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The end of the year and the holiday season coincide to provide a great opportunity for financial gifting to family members.
Several years ago, my wife and I decided we would not wait until we were deceased, but would instead provide financial gifts to our children while we were still alive. This outlines the concept of giving with warm hands versus giving with cold hands.
When my last parent passed away in 2020, I received an inheritance. My parents’ net worth was reasonable, and even with four other siblings, my share of my parents’ estate was six figures. As generous as this inheritance was, it did not have the same impact that it would have provided if received earlier in life. If the same amount of money had been provided thirty or forty years ago would have had a much greater impact at a more critical period.
This is a very personal and individual decision. Each person or couple must decide if direct giving now or later will provide heirs with the best opportunity to use the money that is gifted. There are pros and cons of giving with warm hands that will be discussed shortly, but it’s important to have an understanding of basic gifting rules.
In the United States during each calendar year, a person is allowed to give another person a certain amount of money with no tax implications.
For both 2025 and 2026, the maximum gift amount per recipient that does not require filing a gift tax return (Form 709) is $19,000. This is known as the annual gift tax exclusion.
Annual Gift Tax Exclusion
- Per Recipient: You can give up to $19,000 to as many individuals as you want each year without having to file a gift tax return or use up any of your lifetime exemption.
- Married Couples: A married couple can combine their exclusions to gift a total of $38,000 per recipient annually (by electing gift-splitting on Form 709).
- Non-U.S. Citizen Spouse: The annual exclusion for gifts made to a spouse who is not a U.S. citizen is $190,000 for 2025 and increases to $194,000 for 2026.
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Lifetime Gift and Estate Tax Exemption
If you give more than the annual exclusion amount to an individual in a year, you must file IRS Form 709 to report the gift. The amount exceeding the annual exclusion is then subtracted from your lifetime gift and estate tax exemption. You generally will not owe gift tax until you have used up your entire lifetime exemption.
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The lifetime exemption amounts are:
- 2025: $13.99 million per individual.
- 2026: $15 million per individual.
For married couples, this exemption is effectively doubled, reaching a combined $30 million in 2026.
Note: Certain gifts are not subject to the gift tax or the annual limits, including tuition or medical expenses paid directly to the institution or provider, and gifts to a U.S. citizen spouse or a qualifying charity. Consulting with a tax professional is recommended for complex situations or large gifts.
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In the United States, I can give anyone I want a gift of $19,000 each year without filing a gift tax return (Form 709).
IRS Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return, is used by individuals to report transfers of money or property as gifts and to figure any tax owed on those transfers. The person making the gift (the donor) is responsible for filing the form, not the recipient (donee).
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When is Form 709 Required?
You must file Form 709 if any of the following situations apply to gifts made during the calendar year:
- You gave gifts to one person (other than your U.S. citizen spouse) totaling more than the annual exclusion amount. For 2025 and 2026 the annual exclusion amount is $19,000 per recipient.
- You gave a gift of a future interest (where the recipient’s rights to the property start in the future) to any person, regardless of the amount.
- You and your spouse elect to split gifts made to a third party to use both of your annual exclusions, even if no tax is due.
- You made gifts that are subject to the Generation-Skipping Transfer (GST) tax.
- You made gifts to a spouse who is not a U.S. citizen that exceed the special annual exclusion for non-citizen spouses ($185,000 for 2024, $190,000 for 2025).
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Let’s turn this into simple English!
In 2025 and 2026, my spouse and me can each provide a hassle-free gift of $19,000 to ANYONE. That means as a married couple we can provide a combined gift of $38,000.
If we give $38,000 to any one person, we are responsible for filing Form 709.
Does the recipient pay taxes if the amount that is gifted exceeds $19,000 per donor? Even if the amount exceeds $19,000 in a calendar year, the recipient does not pay taxes. However, the excess amount is deducted from the lifetime gift and estate tax exemption. In 2026, this amount will rise to $15 million per person.
For example if this year I give each of my children $119,000, $ 19,000 of that amount will be considered a non-reportable gift. The remaining $100,000 would not be immediately taxed, but would reduce the lifetime gift and estate tax exemption by $100,000 and would need to be reported on Form 709. No taxes would be incurred until excess gifts and the donor’s estate at death combine to exceed the current ceiling of $15 million. If this amount exceeds $15 million, estate taxes are then levied.
Fewer than 0.2% of U.S. estates currently exceed a value of $15 million. This means that exceeding the lifetime gift and estate tax exemption is a problem for roughly 680,000 Americans (340,000,000 x .002 = 680,000.)
The vast majority of Americans will not cross this threshold, so the problem of whether or not to gift is more psychological than financial for most of us.
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Pros and Cons of Giving With a Warm Hand
Pros
Immediate impact– Givers can see the immediate impact of their gifts on the recipients. Giving with warm hands also provides immediate feedback on how these gifts are used. In the podcast titled GIFTING TO GRANDCHILDREN, it was noted that there were concerns about giving grandchildren large sums of money. Giving with warm hands provides the benefit of being able to immediately see how monetary gifts are utilized.
Control over the terms of the gift– a giver can provide guidance and surety that their wishes are carried out. This is in juxtaposition to giving with cold hands where a person‘s wishes are dictated by estate documents and cannot be altered.
Better outcomes– studies have shown that giving in person can provide better outcomes and social behavior. The studies suggest that giving in person (with a warm hand) can positively influence the behavior of the recipient.
Tax Advantages– giving with a warm hand annually provides more strategic flexibility. Annual gifts can be tailored to suit individual tax situations, and can help avoid gift and estate tax exemption conflicts.
Flexibility– giving while alive offers more individual flexibility. Giving can be tailored to suit individual needs, such as converting loans to gifts. Giving can be tailored to suit specific individual financial situations.
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Cons
Gifts are irreversible– generally speaking, gifts given over a person‘s lifetime are irreversible. Although beneficial in most cases, needs and behavior can change over time which can potentially cause problems. It can also be a problem if the recipients’ needs are not understood, or are misrepresented.
Spendthrift behavior– large cash infusions can lead to poor spending decisions and financial mismanagement. Children and grandchildren may not be familiar with handling larger amounts of cash and may not use it wisely. Presenting them with large cash gifts only fuels mismanagement.
Altered family interactions– large amounts of cash that appear suddenly can alter interactions between parents and children, or between siblings. The larger the cash gift, the greater the chance that it can alter interactions between family members.
Tax implications– even though it is a potential problem for a very small portion (less than 0.2%) of the population, large gifts have the potential to create tax problems for recipients whose donors have large estates.
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Final Thoughts
In the podcast titled GIFTING TO GRANDCHILDREN, it was noted that direct giving is not the only way to provide financial gifts to children and grandchildren.
Direct giving is one of the easiest and least complicated ways to benefit family members.
After careful consideration, my wife and I decided to provide gifts to our children and grandchildren on an annual basis.
We feel we are providing our children and grandchildren with extra money when it will be most useful, and probably most needed.
We feel that direct giving with warm hands gives us the best opportunity to enjoy the positive aspects of giving to our children and grandchildren, and gives us some assurance that the money we provide will be used wisely.
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