Why Smart Gift Giving Is a Key Estate Planning Strategy

Why Smart Gift Giving Is a Key Estate Planning Strategy
When it comes to estate planning, many people think only of what happens after they’re gone. But there’s a powerful strategy you can use today to help loved ones—and potentially reduce taxes in the process: gift giving.

Done correctly, gifting can reduce both lifetime income taxes and future estate and gift taxes. Plus, you get to witness the benefits of your generosity firsthand, rather than making your loved ones wait to inherit.

Why Gift Giving Is More Important Now
While estate taxes aren’t a widespread concern for most families today, that could change. The current estate tax exemption, set at $12.92 million per individual in 2023, is scheduled to be cut in half after 2025 if Congress allows the 2017 tax law to expire.

This potential change makes now the perfect time to evaluate your gifting strategy. Acting sooner rather than later could help preserve more wealth for your family and minimize potential future tax burdens.

4 Ways to Make Tax-Free Gifts
Let’s dive into the four key ways you can give tax-free gifts—and which ones might make sense for your estate plan:

1. Qualified Education and Medical Gifts
One of the most effective tools for tax-free giving is covering qualified education or medical expenses:

Education Gifts:
You can pay unlimited tuition costs directly to an educational institution without triggering gift taxes. These payments must go directly to the school—they can’t cover extras like books, room and board, or be given to the student directly.

Medical Gifts:
Similarly, you can pay unlimited amounts for someone’s medical expenses, as long as payments go directly to the medical provider. Eligible expenses are those defined as deductible medical expenses by the IRS.

Best part? These gifts don’t count toward your annual or lifetime gift tax exclusions.

2. Annual Gift Tax Exclusion
In 2023, you can give up to $17,000 per recipient tax-free ($34,000 for married couples). You can gift this amount to as many individuals as you like—children, grandchildren, friends, even unrelated individuals—every year.

These gifts won’t reduce your lifetime estate and gift tax exemption, and recipients owe no federal taxes on them.

Example:
If you have three children, you could gift each $17,000 annually, removing $51,000 from your estate tax-free. As a couple, that number doubles to $102,000.

Important Note:
To qualify, the gift must be a “present interest” gift, meaning the recipient has immediate control over it. However, tools like the Crummey Trust allow you to retain some control while still qualifying for the exclusion.

3. Lifetime Estate and Gift Tax Exemption
If you’ve already maximized the education, medical, and annual exclusion gifts, you can also make larger tax-free gifts using your lifetime exemption.

For 2023, this exemption is $12.92 million per person (or $25.84 million per married couple). Any gifts exceeding the annual exclusion amount reduce your lifetime exemption—but they remain tax-free until you exceed that threshold.

A Word of Caution:
If Congress lets the current tax law expire after 2025, the exemption could drop significantly. That’s why now might be an ideal time to lock in larger gifts under today’s favorable rules.

4. Spousal Gifts
Lastly, any gifts you make to your spouse are unlimited and completely tax-free, regardless of the amount. While this may not reduce estate taxes as much as other strategies, it’s still valuable to remember that spousal gifts aren’t taxed.

Planning Ahead
Beyond these four methods, there are more advanced strategies available, such as:

Grantor Retained Annuity Trusts (GRATs)
Family Limited Partnerships (FLPs)
Other valuation discount strategies
A qualified estate planner can help determine if these are appropriate for your situation—but be aware, these tools may face restrictions in the future.

Final Thoughts
Gift giving is more than generosity—it’s a smart financial tool that can benefit both you and your loved ones. By making tax-efficient gifts now, you can reduce your taxable estate, potentially lower income taxes, and witness the positive impact of your wealth today.

If you'd like help crafting a gift strategy that fits into your broader estate plan, we’re here to assist.

Schedule a Consultation Today - click here.

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