This is the fourth blog in a four-part series, designed to help you engage your adult children in conversations about financial planning. Read all of our entries in the "Road to financial independence" series:

Part 1: Budgeting  

Part 2: Starting a new job 

Part 3: Investing 101 

While the first three installments in this series discussed key financial planning concepts to share with your adult children, this fourth installment focuses on more direct financial ways you can provide support.

Continuing with our theme that adulthood is a journey rather than a destination, there may be times when you would like to offer additional support as your children secure their financial independence. In fact, clients often ask, “What is the best way to provide financial support to adult children?” Whether you are looking to provide on-going support or assistance on a more limited basis, there are a multitude of strategies to consider that can help your children financially without triggering any transfer tax. By understanding these strategies, you can select the strategy or strategies that work best for you and your family.

1. Make gifts

One of the ways you can help your adult children financially is by making lifetime gifts to them — either outright or in trust. To minimize or avoid gift tax, you may consider annual exclusion gifts or gifts sheltered by your gift tax exemption.

Annual exclusion gifts: Annual exclusion gifts are a simple but potentially powerful tool to assist the next generation. Each year, you can give up to the gift tax annual exclusion amount ($17,000 in 2023*) to as many recipients as you like. If you are married, you and your spouse together can give twice the annual exclusion amount ($34,000 in 2023). Key characteristics of annual exclusion gifts include:

• Annual exclusion gifts do not count against your gift or estate tax exemption.
• Annual exclusion gifts allow you the flexibility to gift property when you can afford to do so, without compromising your own standard of living.
• If utilized on a regular basis, annual exclusion gifts can provide a significant tax-free revenue stream to the younger generation. 
• If spouses make one or more gifts to a single recipient and the total amount given exceeds the annual exclusion amount, they may need to file a gift tax return to “split” the gift between them.
• Only certain gifts to trusts will qualify for the annual exclusion, so it is important to work with your attorney before transferring any amounts to a trust.

Gift tax exemption: In 2023, an individual can give up to $12.92 million* worth of assets during life and at death to individuals or trusts without incurring transfer tax. If you would like to make gifts to your children (or to trusts for the benefit of your children) over and above the annual exclusion amounts described above, you may use part or all of your gift tax exemption to shelter that gift from any transfer taxes. While no tax will be due, the amount of the gift reduces the amount that may be given tax-free at death, and the gift will need to be reported on a gift tax return for the year of the gift. That return is generally due by April 15 of the following year.
 

2. Pay medical and educational expenses directly

Without using your annual exclusion or gift tax exemption, you can pay for educational, dental and medical expenses for the younger generations and incur no transfer taxes as long as you pay the provider directly. Paying these expenses for your children or other family members has the following benefits:

• Payments for education can cover any educational stage — from preschool to graduate school.
• Medical expenses can include not only actual health expenses but also health insurance premiums.
• There is no limit to how much you can spend on medical and educational expenses for others.

It is important to note that if your adult children are relying on you to fund these expenses now and into the future, it’s a good idea to ensure that your estate plan contains provisions covering these expenses in the future.

3. Lend money

If you want to boost the financial security of your adult children, but also want them to pay you back for the financial assistance, then you can lend money to them. For example, you may want to lend money to your children to help them start a business or to help them purchase their first home.

Under rules set forth in the Internal Revenue Code, an individual can make loans to family members at lower rates than commercial lenders without the loan being deemed a gift. Key characteristics of an intra-family loan include:

• An intra-family loan allows you to assist the younger generation financially without using your annual exclusion or gift tax exemption.
• A bona fide credit relationship, including formal loan documents and the payment of interest, is established.
• Wealth can be shifted if the loan assets are invested by the borrower and earn a higher return than the required interest rate.
• Interest is paid within the family rather than to a third-party lender.

Planning note: If you are specifically interested in helping a child purchase a home, listen to our recent Helping with a Home Purchase podcast.

Conclusion

There are many variations to the strategies outlined above, as well as additional planning opportunities for helping your children financially. This planning can be complex, so it’s important to work with a qualified professional.

We hope you’ve enjoyed our “Road to financial independence” blog series. In case you missed our earlier pieces, we covered budgeting, starting a new job and investments. For even more information for you or your children on financial independence or other planning topics, reach out to your CIBC Private Wealth advisor.

 *The annual exclusion amount is projected to be $18,000 in 2024 and the gift and estate tax exemption is projected to be $13.61 million in 2024.

Leslie Kehoe is a senior wealth strategist for CIBC Private Wealth in Atlanta with 25 years of industry experience.