Gifting for Estate Planning: What to Know

Estate planning allows you to have a say in where or to whom your assets go once you pass. However, one of the challenges is that anything you pass on through your estate may be subject to state and federal taxes. For this reason, it’s common to gift property, money, or other assets to heirs before you pass, allowing you to minimize any tax burden.

While gifting can be useful and, in some cases, essential, it’s not always as easy as it sounds. In many cases, the government will still want to know about anything you pass down. In this article, we’ll explain how giving money away may benefit one’s estate plan. This includes an outline of why it’s important and what implications it may have on an estate’s taxes. You’ll also learn key benefits and potential disadvantages that this strategy may present.

What Is Gifting?

For estate planning purposes, gifting is the act of simply handing assets off to beneficiaries before one’s passing. Also note that this process, in this case, is any transfer that doesn’t require anything in exchange or quid pro quo. One may gift a variety of items, including:

• Cash
• Real estate
• Personal items or property, such as a car, art, jewelry, or other belongings

The primary motive for one to give gifts is to help minimize the tax burden on one’s estate. An individual may also do so to directly hand off property to someone, rather than leave it up to the executor to carry out their wishes once they pass.

Marguerita Cheng, CFP, CRPC, CSRIC, RICP, CEO of Blue Ocean Global Wealth and expert contributor for Annuity.org, explains that gifts “are an important part of the estate planning process for both the giver and the recipient.” When one gives while they’re alive, it allows them to “help the giver reduce taxes on their estate and see the positive impact their wealth has on their loved ones.” It also helps them “minimize family disagreements by ensuring that wealth is distributed consistent with their desired outcome.”

Moreover, one might give a lifetime gift to “help a loved one achieve an important financial goal, such as pursuing higher education, purchasing a home, or starting a business.” While one is alive, it makes it easier for them to pick and choose where they want their money to go now. Then, they’re able to get the joy of seeing the impact of their giving.

Tax Rules and Implications for Gift Giving

In terms of taxes, as mentioned above, the benefits are twofold. First, gifting assets may reduce taxes one’s estate owes because it decreases the value of the estate. This may drop an estate below the federal tax threshold which, as of 2024, equates to $13.61 million. Additionally, one may pass off items to heirs without incurring any taxes.

While gifting can be highly beneficial, you should be aware of the annual gift tax exclusion. As of 2024, individuals may give no more than $18,000 per recipient tax-free. For married couples, this number jumps up to $36,000. Note that this limit may vary each year, so be sure to keep track of it before committing to giving anything to avoid any tax hit. Keep in mind that the donor typically pays taxes if they go over the exemption.

As an example of the annual exclusion, imagine an individual with three children and two grandchildren. If this person gave each beneficiary a maximum amount of $18,000, they’d be able to gift a grand total of $90,000.

The lifetime gift tax exemption is another important rule to consider. This is a cap on the amount of money you may gift to individuals throughout your life before incurring taxes. In 2024, the lifetime exemption tops out at $13,610,000 per person. As with the annual tax exclusion, this number may vary yearly.

According to the United States Internal Revenue Service (IRS), the rule of thumb is that “any gift is a taxable gift.” There are, however, exceptions to this rule which the IRS specifically names. Below are types of gifts that aren’t taxable:

• Any gift to your spouse.
• Gifts/donations to a political organization.
• Paying for another person’s tuition or medical expenses.
• Gifts that are below the annual and lifetime exemption.

Benefits of Gifting Assets

By gifting assets to beneficiaries while you’re still alive, you can both minimize estate taxes and realize the full impact of your generosity. The annual and lifetime tax exemptions allow you to carve out a large portion of your overall estate, especially if you begin planning far in advance.

As Cheng pointed out earlier, gifting assets is beneficial for both you and the recipient. When you simply leave funds for a beneficiary through your estate, you leave everything up to external forces to ensure your wishes are carried out. However, if you gift something yourself, you’re able to ensure one receives exactly what you want them to. Additionally, you may also be able to assist them with their new windfall where you otherwise wouldn’t be able to.

Another potential benefit of gifting funds is that it may lessen family strife after you pass. In the case of a large estate, there may be ensuing drama among family members about who gets what. When you begin giving away assets before your death, you are directly giving money to those you want to receive it. This leaves fewer questions about what your wishes are.

Potential Downsides

Gifting, while an effective way to reduce the tax burden on one’s estate, can offer some challenges you should consider. First, understand that when you give away money, it must be done smartly and carefully to avoid any legal or tax issues. Going over the annual and lifetime tax exemptions can cause one to incur expensive taxes. Additionally, giving away too much of your own money may impact your bottom line while you’re still alive.

Cheng identifies a recipient “not [using] the money as the giver anticipated” as another important downside. Gifts are “irrevocable,” which means you have no control over the funds once it’s in the hands of a beneficiary. For this reason, it’s crucial to be confident that a recipient can handle their new windfall responsibly before you give anything to them.

How a Professional Can Help

Gifting money requires you to carefully keep track of several laws and regulations to avoid any issues. It’s also key to ensure you do so in a way that’s most beneficial to your current finances and estate. This makes a financial advisor and/or a tax professional a valuable asset during this process.

A financial advisor who specializes in estate planning can ensure you avoid any unnecessary mistakes and advantageously use gifting. Per Cheng, a professional “can help the clients understand the advantages and disadvantages of lifetime gifts,” as well as “collaborate with the client’s estate planning team to ensure the client develops, monitors and implements both an estate plan and wealth transfer strategy consistent with their goals and objectives.”

It’s important to work with a financial advisor who aligns with your goals. To find a high-quality professional, we recommend using this free matching tool, which will connect you with up to three vetted experts in your area based on your needs.

Additionally, it may make sense to work with a tax planner, such as a certified public account (CPA). These individuals can assist you with preparing important documents and staying compliant with IRS regulations. They may also represent you on your behalf if any issues arise.

Frequently Asked Questions

Can your estate tax burden be reduced by giving gifts?

By gifting money to family members or other recipients, you can shrink your estate’s value, reducing the taxes it may owe. In some cases, gifts may take your estate below the federal threshold, allowing it to avoid up to 40% in taxes.

Is a $10,000 gift to a family member tax deductible?

Gifts are typically not tax deductible on your federal return. A $10,000 gift to one person, however, is free of any taxes because it falls below the annual tax exemption, which is $18,000 as of 2024.

Does paying for tuition or medical expenses count toward gift tax exclusion?

No, any payments made for another person’s tuition or medical expenses won’t count toward the annual or lifetime gift tax exclusion.