Annual Gifting

This is a popular time of year for many of our clients to make gifts. Each U.S. citizen has a lifetime exemption they can use to shelter transfers from estate and gift tax (both of which are 40%). The exemption, which is adjusted for inflation each year, is $12.92 million per person ($25.84 million for a married couple) this year. In 2024, the exemption will increase to $13.61 million per person ($27.22 million for a married couple). The generation-skipping transfer (GST) tax exemption tracks the gift/estate tax exemption in 2023 and 2024.

Lifetime gifting can be beneficial because it removes all of the future appreciation on the gifted asset out of an estate. The exemption may be used to make outright gifts, fund new trusts, or add to existing trusts, and gifts can be made using cash, securities, or complex assets, such as an interest in a privately held business or family limited partnership. There are also some opportunities to leverage your exemption if you gift an asset that qualifies for valuation discounts, such as interests in privately held businesses or partnership interests, which are often discounted for lack of marketability and/or lack of control.

An important note: The gift and estate tax exemption was doubled back in 2018 with the Tax Cuts and Jobs Act. That legislation was drafted so that the exemptions will automatically decrease in 2026 absent any action from Congress. Those who are interested in making gifts and have the assets to do so are encouraged to do so sooner rather than later should the exemption amounts decrease in 2026.

The annual exclusion is another way to pass on assets and represents the amount that can be gifted to any person once per year without using gift/estate tax exemption. That amount is $17,000 in 2023 ($34,000 for a married couple) per recipient. The annual exclusion is also adjusted for inflation each year, and it will increase to $18,000 in 2024 ($36,000 for a married couple) per recipient.

Another strategy that does not use any exemption is the direct payment of tuition and medical expenses. These payments do not count as a taxable gift or use any of the exemption amount as long as payment is made directly to the institution. These can be made on anyone’s behalf and are not limited to immediate family members.