Mitigate taxes and benefit your loved ones with a lifetime gifting strategy.
A thoughtful estate plan can and should ensure the orderly distribution of your assets after you’re gone. But it can also allow you to make a big impact while you’re still alive. Through a strategy of lifetime giving, you can help secure your loved ones’ futures, protect your assets and ease the tax burden on you and your estate.
In collaboration with the rest of your estate planning team, we will help you decide which lifetime gifting strategies fit your situation and overall financial goals.
In this article:
How the annual gift tax exclusion works
Under what’s known as the annual gift tax exclusion, you can currently give up to $18,000 ($36,000 for married couples) to as many people as you would like — each year — without incurring a federal gift tax liability.
If your gift to any person exceeds the annual gift tax exclusion amount, however, that still doesn’t necessarily mean you will owe any taxes (though it does mean you will need to report the gift to the IRS).
That’s because the additional amount counts toward your lifetime gift and estate tax exclusion amount, which is the combined taxable amount you can transfer during your life and via your estate free from gift and estate taxes. As of 2024, the lifetime exclusion amount is set at $13.61 million for individuals, and married couples can combine their exclusions to allow the transfer of up to $27.22 million potentially free from federal gift and estate taxes.
Learn more: Advanced estate planning: Strategies to reduce the taxable value of your estate
How the lifetime gift and estate tax exclusion works
The best way to understand the exclusions — and how they affect one another — is to look at a potential example:
Suppose you — as an individual, not as a married couple — have two children and two grandchildren you want to give money to this year. You give each of your children $50,000 and each of your grandchildren $15,000. Because the gifts you gave to your grandchildren are less than the $18,000 per person annual exclusion, you do not need to report the gifts to the IRS, and the $30,000 total will not affect your lifetime gift and estate tax exclusion limit of $13.61 million.
Because the $50,000 you gave to each of your children is over the annual exclusion, however, you will need to report those gifts to the IRS. What’s more, the $32,000 you gifted over the annual gift tax exclusion for each child will correspondingly reduce your lifetime gift and estate tax exclusion by a total of $64,000. That will leave you with the remaining ability to transfer up to approximately $13.546 million free from federal taxes during your life — or through your estate after you die. Note that in either case, no actual federal gift tax is paid.
There is one important consideration to these rules: The $13.61 million exclusion is a large increase from the previous lifetime exclusion limits, and unless Congress makes it permanent, it is set to expire at the end of 2025, when it will revert to half of the amount – so approximately $6.805 million, adjusted for inflation.
What to know about spousal rules
Under the unlimited marital deduction, any amount of assets may be transferred to your spouse during your lifetime — or at death — without incurring either federal gift or estate tax, provided you are both U.S. citizens. In other words, any estate taxes that might be due upon the death of the first spouse can be avoided by leaving the entirety of the estate to the surviving spouse. (The provision does not cover individuals who are in registered domestic partnerships, civil unions or other similar formal relationships recognized under state laws but not denominated as a marriage.)
Spouses can also take advantage of the Deceased Spousal Unused Exclusion Amount (DSUEA). This means that when one spouse dies, any unused portion of that spouse's estate tax exclusion amount is added to the surviving spouse’s gift and estate tax lifetime exclusion.
Learn more: Strategies for unique estate planning situations
Understand unique provisions for educational and medical expenses
529 plan strategy
Under special rules for 529 college savings plans, you can contribute up to five times the maximum allowed under the annual gift tax exclusion to a plan in one year without gift tax consequences. In 2024, that’s $90,000.
Known as “superfunding,” these contributions can reduce your taxable estate and provide the chance to help a child’s college savings grow at a much faster rate. However, fully taking advantage of the five-year spread means you will not be able to give additional gifts to the student during the five-year period without filing a gift tax return. If the annual gift tax exclusion amount stays at the same level, any gifts to the student during that five-year period will also cut into your lifetime gift and estate tax exclusion amount. As an added benefit, contributions to 529 plans that are unused can fund a Roth IRA for the beneficiary, as of 2024. (Beneficiaries of 529 plans in place for 15+ years can transfer assets from a 529 plan to a Roth IRA subject to contribution limits and a lifetime limit of $35,000. The income qualification for a Roth contribution does not apply.)
Direct payments to medical and educational institutions
Another strategy allows you to make payments directly to qualified educational institutions and health care providers. If you make payments on behalf of someone else for direct expenses of tuition or medical care, you preserve both your annual gift tax exclusion and your lifetime gift and estate tax exclusion, though there are some limitations:
- For payments to an educational institution, only payments of tuition qualify. Living and other expenses (including supplies, room and board, etc.) don’t qualify.
- Payments must be made directly to the institution or medical provider. Giving money to individuals (or a trust for the individual) to use for the same purpose does not qualify.
Learn more: Estate planning and charitable giving: Strategies to make an impact with your estate
Consider using trusts
Certain types of trusts can also be effective tools to use as part of a lifetime giving strategy.
An irrevocable trust, for example, is one way to transfer wealth out of a taxable estate and can be especially effective for managing the tax implications of appreciating assets. Irrevocable trusts generally cannot be altered once they have been established. They allow you to set certain rules and determine how assets will be invested and distributed — requiring a beneficiary to graduate from college before having access to funds in the trust, for example — to ensure assets are protected from misuse.
For those living in states with high income tax rates, consider the location of your trust — known as its situs. The situs dictates which state laws will have jurisdiction over the trust and determines how the trust will be administered and taxed. In some instances, this can be very favorable for beneficiaries. However, laws can change, so consult a tax professional before deciding on your trust's situs.
Learn more: High-net-worth estate planning: When to consider advanced trusts in your plan
How to use the “step-up” in basis rule to your advantage
For those who expect their estate to fall under the gift and estate tax exclusion amount, it’s generally better to transfer certain assets — including cash and anything expected to have minimal appreciation — as gifts during your lifetime, while transferring highly appreciated assets as part of your estate.
That’s because assets distributed as part of an estate are given a “step-up” in basis, meaning the cost of an inherited asset is assumed to be the fair market value on the date of the decedent's death, which is what determines the taxes owed, if any, when the asset is sold.
Due to that step-up in basis, you can often minimize capital gains taxes owed on highly appreciated assets transferred though an estate if sold soon after being inherited. Note that certain assets, such as IRAs, qualified plans, and annuities, generally do not receive a step-up in basis.
Learn more: Strategies for unique estate planning situations
Start your giving while living strategy
If lifetime gifting makes sense for your estate plan, we will work with you and your estate planning team to determine the strategies that benefit your estate, reflect your values and make sense for you and your loved ones.