Many people traditionally reserve most of their gifting for their legacy. However, a proactive approach to gifting allows you to start building that legacy today. As the saying goes, "It's better to give with a warm hand than a cold one." Giving generously while you’re alive can be more meaningful and impactful. This strategy offers several advantages: You can witness the effects of your generosity, maintain greater control, support loved ones when they need it most and potentially reduce income, gift and estate taxes.
Because gifting objectives vary, your strategy should be part of a comprehensive financial plan that considers your liquidity needs, portfolio allocation, income tax optimization and estate planning. For many, building a legacy through lifetime gifting can be more beneficial than waiting to bequeath assets after passing.
Gifting to individuals
Understanding gift tax rules is fundamental. These rules prevent taxpayers from sidestepping federal estate taxes by gifting assets before death. In 2024, individuals can gift up to $18,000 per person annually, or $36,000 for married couples, without needing to file a gift tax return. In 2025, the gift tax exclusion rises to $19,000 for individuals and $38,000 for married couples. Amounts above these thresholds are reportable and reduce your lifetime gift and estate tax exclusion.
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For example, if you gift $19,000 to one person in 2024, $1,000 counts against your lifetime exclusion, while the remaining $18,000 is excluded from your estate. The 2024 estate tax exemption is $13.61 million per taxpayer (rising to $13.99 million in 2025), so no gift tax is owed until cumulative reportable gifts exceed this amount. After death, any remaining exclusion reduces your estate's taxable value, with estates exceeding this exclusion facing a 40% tax rate.
So, what qualifies as a gift? The IRS defines a gift as a property transfer where no equal value is received in return. This includes cash for down payments, adding a tenant to real estate, selling property for less than fair market value, paying someone else's debt, providing interest-free loans or forgiving previous loans. Certain transfers are exempt from gift tax, such as the annual exclusion per recipient, gifts to your spouse and direct payments for tuition or medical expenses.
Understanding the value of your gifts is important for effective estate planning. Proper appraisals are necessary for gifted assets, especially closely held businesses or real estate. Underreporting a gift’s value can lead to IRS scrutiny and affect your lifetime exclusion.
When to make gifts
Lifetime gifting can effectively reduce your taxable estate and income tax while allowing you to see the joy your generosity brings. Gifting $18,000 annually (or $19,000 starting in 2025) to multiple family members can significantly lower your estate’s value, especially considering potential asset appreciation. (Keep in mind that the individual lifetime exemption of $13.61 million is set to be halved at the end of 2025, due to the expiration of provisions in the 2017 Tax Cuts and Jobs Act. Therefore, it may be prudent to consider making gifts sooner rather than later.)
Be cautious when gifting appreciated assets during your golden years. Unlike inherited assets, which receive a step-up in basis at death (adjusting the cost basis to the fair market value on the date of death), gifted assets retain the donor’s original cost basis. This can lead to significant capital gains taxes for the recipient if they sell the assets later. For example, parents who gift their house to their children may inadvertently subject them to substantial taxes if the house is later sold.
Strategies for gifting
Funding education. One common gifting strategy is funding a child's education through a Section 529 college savings plan. The IRS permits front-loading contributions, allowing you to contribute more in a single year without affecting your lifetime gift tax exemption. You can “superfund” a 529 plan with up to five years' worth of contributions at once. This means an individual can contribute up to $90,000 in 2024 (or $95,000 in 2025) to a single 529 plan. However, any additional gifts to that beneficiary during the five-year period may trigger gift tax implications.
Support with buying a home. Another strategy to consider is assisting family members with real estate purchases. According to the latest data from the Case-Shiller U.S. National Home Price Index, the median home value has risen by 4.2% annually over the past year, marking another new all-time high. With rising home values, many young people face challenges in buying homes. It can make sense to use your wealth to help your children buy their first home, either by contributing to a down payment or purchasing the property outright. To avoid exceeding the $18,000 annual exclusion, you can structure this support as an intrafamily loan.
To avoid having a loan between family members classified as a taxable gift, you must first establish an interest rate. The IRS mandates that any loan over $10,000 must include a minimum interest rate. Specifically, an intrafamily loan must bear interest at a rate equal to or greater than the Applicable Federal Rate (AFR) to avoid being deemed a taxable gift. The AFR is published by the IRS on or around the 20th of the preceding month.
If you do not specify an interest rate, the IRS will impute one. As of November 2024, these rates range from 4% to 4.15%, depending on the loan term, which is significantly lower than current mortgage rates.
The joy of giving in your lifetime
Gifting personal wealth to loved ones provides both personal and financial benefits. However, it requires careful execution as part of your overall financial strategy. To maximize these benefits, act decisively. Evaluate your gifting strategy now. The rewards of generosity can be substantial — both for you and those you care about.
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