I've been thinking about knitting etiquette for awhile now - basically since my Grandfather died. I knit him a few things, especially in later years, to show him I love him and to wrap him in love while he recovered from various ailments.
This was brought to light again when I saw someone was giving away two handknit sweaters on Freecycle. I didn't message her for them though - most people are pick up only and I don't want them that bad.
Here's my knitting etiquette for when knits are no longer being used:
Do you know the hand knitter? If you do, he or she should be offered their knits back first.
The knitter may know someone else who could use the items or may want them for their collection. You will get the knitter's gratitude, and possibly even more knits in the future, because you thought of the love and work that the knitter put into the item and wanted to send it to a good home.
Please tell the knitter when you offer his or her work back to them what your alternate plans for the items will be (hand-me-down in the family.) Personally, I would take an item back rather than have it go to goodwill. Some knitters will be happy to let it go to goodwill where it will warm someone who needs it. Either way, by showing consideration for the handknit item, your knitter will be touched, and you will likely get more handknits in the future.
This was a little bendy in November when my grandfather died. My mom brought my knits back to me, but Dad claimed Grandad's alpaca socks for himself before they even made it out of my Mom's suitcase. I was fine with that on one condition - that my father not felt the socks like he did the other two pairs I made for him. The alpaca scarf that came back to me, I regifted to my Uncle John, who is getting married to my Aunt Lori. She taught me how to knit.
I'm lucky to belong to a family where handknits are prized possessions.