Giving money to friends and family can involve gifts or loans that can carry emotional baggage and ignite tax concerns. But there are ways to give significant money that address both issues.

“Often these arrangements are informal and emotions play an outsized role,” said Michael Garry, founder of Yardley Wealth Management in Yardley, Pa., and author of "The Smart Person’s Guide to Financial Planning & Investments."

“With gifts you don’t need any formality, though gift tax returns may be required to be filed—and they rarely are." he said. “They usually know there is a gift tax but don’t know what the current annual exclusion amount is or what it means."

This year, individuals can give up to $16,000 using their annual exclusion without gift tax consequences. The lifetime gift tax exclusion is $12.06 million. Both the annual and lifetime exclusions are double for married couples who file taxes jointly.

What advisors and clients need to be acutely aware of, said Craig Richards, managing director and director of Tax Services at Fiduciary Trust International, “When a family member or friend asks for money and it’s given to them, if not discussed and agreed to explicitly, the question becomes, ‘Gift or loan?’"

If giving a loan, the lender must make sure that it is properly structured to ensure that isn't perceived as a gift by the IRS, advisors note.

“Loans between individuals generally should be in writing, stating the terms of the loan, and interest should be charged minimally at a rate published by the IRS,” he said. “If this minimal amount of interest is not charged, the loan could be considered a gift loan and have gift tax consequences.”

Exceptions, he added, include de minimis loans of up to $10,000 between individuals.

“In most cases, the gift tax return just reduces the taxpayer’s lifelong exemption and no tax is due,” said Rob Seltzer, a CPA at Seltzer Business Management in Los Angeles. He also added noted that paying tuition or medical expenses are not considered reportable gifts.”

Some clients understand gifting rules well, as it’s part of their annual gifting and estate planning strategy. “Others are not as aware,” Richards said. “Initially, many individuals may be taken aback by these rules and cannot conceive why they can’t give without having to worry about filing a gift tax return or be concerned about having to pay gift tax. The need to charge a specific interest on a loan to a family member or dear friend may also seem unconscionable to some folks.”

One big misconception is that the recipient is going to have income tax repercussions. “The second biggest misconception is that most people think they are going to have to pay federal estate taxes,” Garry added. “Most estates won’t have federal estate tax liability.”

“Before giving money to friends and family, you need to be sure that you can financially afford to do so and that you’re going to be emotionally prepared for whatever way the recipient plans to use the gift,” Garry said. “If there are strings or a contract on what they’ll use it for, it’s not a gift.”

“The best vehicle to give depends on your goals and situation and that of your recipient,” Garry said. “If you think you’re near your life expectancy and won’t live too long, then cash might be best. If you give an asset that has cost basis, like a property or stock, the tax consequences differ depending on whether you pass it by gift or at your death. If you give a gift, the recipient gets your cost basis. If you pass it at your death, the cost basis steps up to the value on the date of your death.

“If you’re 98 and want to give your stock that you bought for $1 million that’s now worth $10 million to your daughter, it would probably be better to wait to give it at your death,” Garry said. “If she inherits it, she won’t have embedded gains.”