Gifting money to children is one of the most meaningful ways parents and grandparents can share their wealth. It can help a child buy a first home, pay for college, start a business, or simply build a foundation for the future. At the same time, gifts raise practical questions: How much can you give without filing a gift tax return? Which account should you use? How will a gift affect your own retirement security and your broader estate plan? Answering those questions well requires connecting tax rules with long-term wealth planning.
If you are thinking about gifts to children or grandchildren, a complimentary, no-obligation wealth and tax review can help you consider how giving fits with your investments, retirement income, and family goals.
Gift Tax Basics in Plain Language
The federal gift tax applies to transfers of money or property when you do not receive something of equal value in return. In practice, most families never pay gift tax because of two key provisions:
The annual exclusion. Each person can give up to a set amount per recipient each year without using any lifetime exemption or filing a gift tax return. Married couples may be able to combine their exclusions through gift splitting. The amount is adjusted periodically, so check current IRS rules.
The lifetime exemption. Gifts above the annual exclusion generally require filing Form 709, but tax is typically not owed until cumulative lifetime gifts exceed a large lifetime exemption that is shared with the estate tax.
Some payments are excluded entirely when paid directly to the institution, such as tuition paid to a school or medical expenses paid to a provider. These direct payments do not count against the annual exclusion.
Wisconsin does not currently impose its own gift tax or estate tax, but federal rules still apply, and laws can change. Our overview of estate and gift tax basics in Wisconsin covers these rules in more detail.
Common Methods of Gifting Money to Children
There is no single best way to give. The right method depends on the child's age, your goals, and how much control you want to retain.
Outright cash gifts. Simple and flexible, but the child gains full control immediately. That may be fine for an adult child and less appropriate for a teenager.
Custodial accounts (UTMA). A custodian manages the assets until the child reaches the age of majority set by state law, at which point the child takes control. Investment income may be subject to the so-called kiddie tax, where some unearned income is taxed at the parents' rate. Income thresholds apply.
529 education savings plans. Contributions grow tax deferred, and qualified education withdrawals may be tax free. Wisconsin residents may be eligible for a state income tax deduction on contributions. Our guide to the Wisconsin Edvest 529 plan explains how it works. Annual limits apply to the deduction.
Roth IRA funding. If a child has earned income from a summer job, a parent may be able to fund a Roth IRA on the child's behalf, up to the lesser of their earnings or the annual limit.
Gifts through trusts. Some families use an irrevocable trust to provide structure and protection. Our article on irrevocable trusts and when families consider one introduces the concept. Any trust strategy should be designed with an estate attorney.
Gifting Appreciated Assets vs Cash
Gifting investments instead of cash can have tax consequences. When you give appreciated stock, the recipient generally takes your cost basis. If they sell, they may owe capital gains tax on the appreciation that occurred while you held it. In contrast, assets transferred at death may receive a basis adjustment under current law.
This difference means it often matters which assets you give and when. A gift of appreciated shares to an adult child in a lower bracket could make sense in some situations, while holding highly appreciated assets for later transfer may be better in others. Coordinating these decisions with tax planning and preparation can help avoid surprises.
Protecting Your Own Financial Security First
Generosity works best when it does not jeopardize your own retirement. Before making large gifts, consider:
Whether your retirement income sources, including Social Security, pensions, and portfolio withdrawals, can comfortably support your lifestyle.
Potential future costs such as health care and long-term care.
How gifts might change your investment allocation or liquidity.
Running projections can help. The Compound calculator lets you explore how savings might grow under different assumptions. Its results are hypothetical and are not a prediction of actual outcomes. A broader wealth management review can put those projections in context with your full balance sheet.
Gifting as Part of a Family Wealth Plan
For many families, gifting money to children is part of a longer conversation about values, responsibility, and legacy. Parents in Eau Claire might start small gifts early to teach saving. Grandparents in Oshkosh might prioritize education funding. Business owners in Sheboygan might combine gifts with succession planning.
Our article on generational wealth planning discusses how families prepare the next generation to manage wealth. Communication matters as much as the dollars. Explaining why you are giving, and what you hope the gift accomplishes, can help children use it wisely.
Because gifts interact with wills, trusts, and beneficiary designations, coordinate any significant gifting strategy with an estate attorney as well as your tax and financial professionals.
Next Steps for Families
Gifting can be a powerful way to support loved ones, but it works best when it aligns with your tax situation, investment strategy, and estate plan. There is no guarantee that any gifting approach will reduce taxes, and the right method depends on your circumstances. Families in Wausau, Racine, and across Wisconsin and surrounding areas can request a complimentary wealth and tax review to talk through a thoughtful plan for giving.
Frequently Asked Questions
Do I have to pay tax when gifting money to children?
In most cases, no. Gifts within the annual exclusion generally require no gift tax return, and larger gifts typically use part of your lifetime exemption rather than creating an immediate tax. Check current IRS rules for the applicable amounts.
Does my child pay tax on a gift they receive?
Generally, the recipient does not owe income tax on a gift. However, income earned on gifted assets, and gains from selling gifted investments, may be taxable to the recipient.
What is the difference between a custodial account and a 529 plan?
A custodial account can be used for any purpose benefiting the child, and the child gains control at the age of majority. A 529 plan is designed for education expenses and offers potential tax advantages for qualified withdrawals.
Can grandparents pay tuition directly?
Yes. Tuition paid directly to an educational institution is generally excluded from gift tax and does not count against the annual exclusion.
Should I talk to an estate attorney before making large gifts?
Yes. Large gifts can affect your estate plan, trusts, and beneficiary designations, so coordinating with an estate attorney and your tax and financial professionals is important.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
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About Compound Wealth
Compound Wealth brings together professionals across tax planning, wealth management, accounting, and business transition services to provide a coordinated planning experience. This collaborative approach supports evaluating financial decisions from multiple perspectives while supporting each client's broader planning objectives.
