Lifetime Gifts - Should I Make Them?

Should You Consider Making Lifetime Gifts?

For many people, sharing their financial success with those they love brings a strong sense of satisfaction. Whether it’s paying for a child’s higher education, helping a child buy a home or start a business, or providing a supplementary income during a child’s career start-up years, making gifts to children or grandchildren can be very rewarding. Lifetime giving can also be a powerful estate planning technique for individuals with large estates.

Benefits of Lifetime Giving

A well-planned program of lifetime gifts can save estate and gift taxes, preserve more of your assets for your family and other heirs, and help ensure that your property goes to the people you want to have it.

The nature of your gift — and your personal planning objectives — will determine the right gift-giving approach for you. As you develop your gift-giving strategies, you’ll want to keep these important tax-related points in mind:

Gift Taxes

A federal unified tax credit allows you to transfer up to $13.99 million of assets during your life without incurring gift taxes in 2025 (This exemption is scheduled to drop after 2025). However, under the federal transfer-tax system, gift and estate taxes are related. Using your unified credit during your lifetime will essentially reduce the amount you can transfer to your family or other loved ones estate tax free at your death.

2025 Gifting Limits

There is a way to make lifetime gifts without incurring a gift tax liability or using any of your unified credit. The federal tax law provides a gift tax annual exclusion that allows you to give up to $19,000 each year to as many individuals as you want. If your spouse joins in the gift, you can give up to $38,000 annually to each individual. Over a period of years, a series of tax-free gifts using the exclusion can add up to a significant amount. (The $19,000/$38,000 figures are for 2025). The IRS periodically adjusts the amount of the gift tax annual exclusion for inflation.)

The tax law also allows you to pay another person’s medical expenses or school tuition on a gift tax-free basis. You must pay the medical provider or the educational institution directly. There are no restrictions on the amount of expenses you can pay, and your payments will not count against the annual exclusion limit. We’ll provide more details on exclusions for payment of medical expenses and qualified education expenses below.

Estate Taxes

If your estate is large enough to have exposure to Federal estate taxes, gifting assets during your lifetime can be a powerful way to reduce your taxable estate. When you make lifetime gifts, you remove the gift property (along with any future appreciation in the property’s value) from your estate for estate tax purposes. Reducing the value of your taxable estate could prove to be very beneficial.

If estate taxes are not your primary concern, making gifts to your children and grandchildren while you are still alive allows you to see them enjoy those gifts and the benefits they bring in real time. A well thought-out estate and financial plan can help you develop a gifting strategy that balances potential estate tax savings with your income needs and living expenses during your lifetime and retirement years.  Some different gifting strategies are discussed in more detail below.

Income Taxes

If you give assets to a child, it may result in an overall family tax savings. However, while a child is under age 19 or is a full-time student age 19-23, the child’s unearned (investment) income above $2,700 is taxed to the child at his or her parents’ income tax rates if those are higher than the child’s rates. (The $2,700 figure is for 2025 and is subject to annual inflation adjustments.) This “kiddie tax” provision only applies to a child age 18 or who is a full-time student age 19-23 if the child’s earned income doesn’t exceed one half of his or her support. Once a child reaches age 24, however, the kiddie tax no longer applies.

Your Gift-Giving Options

If you decide you want to make a gift, there are several ways you might go about it.

Outright Gift

You can give money, securities, or other property directly. You’ll want to make sure the family member or friend is old enough under state law and mature enough to handle the gift property.

Custodial Account

If your gift is to a young child, an adult is required to oversee the gift assets for the child. You choose the custodian. It can be yourself, the child’s parent or guardian, a friend, or anyone else you choose. The custodian manages the account assets for the benefit of the child until he or she reaches the age of legal majority — generally either 18 or 21, depending on state law.

Trusts

Young children and even young adults typically aren’t prepared to handle large sums of money. Making your gift through a trust protects your gift and can provide professional asset management.

Giving a gift through a trust allows you to make certain that the purpose of the gift is fulfilled and guards against improper handling of the gift. When you create a trust, you set the conditions for the gift. For example, you can specify:

  • How long you want the trust to continue
  • How much trust income will be paid to the beneficiary
  • How frequently the income will be paid
  • When and how the trust assets are to be distributed
  • When a trust is set up for a minor child, some of the flexibility normally found with a trust may be restricted if the trust is to provide tax benefits. Still, even with the tax law restrictions, a trust is often the gift-giving method of choice.

Making lifetime gifts is a valuable planning strategy and a fulfilling personal experience. Your legal and financial professionals can provide more information about lifetime gifts.

Tax-Free Gifting Opportunities

Annual exclusion gifts

These are present-interest gifts that qualify for the $19,000 per person exclusion from Federal gift taxes in 2025. A gift is considered a present interest if the recipient has all immediate rights to the use, possession, and enjoyment of the property or income from the property.

With annual exclusion gifts, you can give away up to $19,000 in cash or property value to an unlimited number of recipients without incurring a tax and without eroding your $13.99 million lifetime exemption amount. Married couples can choose to “split” gifts by filing Federal gift tax returns, which allows them to effectively double the amount of cash or property value per recipient (up to $38,000). It is important to note that the annual exclusion is per recipient – it is not the sum total of all of your gifts. That means, for example, you can give $19,000 in cash or property value to each of your children and grandchildren, and $19,000 in cash or property value to each of their spouses, etc., all in the same year, without any gift tax exposure. This gifting strategy can be repeated every year and keeps 100% of the value of those gifts within your family for immediate use and investment.  

If this strategy works for your family and the gifts are repeated, after several years this could result in the transfer of significant value to your family members without any gift taxes ever being paid.

Exclusion for Payment of Medical Expenses

In addition to annual exclusion gifts, generally, expenses for medical care and medical and dental insurance premiums that are paid directly to the provider are excluded from the definition of taxable gifts. Medical care includes expenses incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, or for the transportation primarily for and essential to medical care.

The medical exclusion does not apply to amounts paid for medical care that are reimbursed by the patient’s insurance. If payment for a medical expense is reimbursed by the patient’s insurance company, then your payment for that expense, to the extent of the reimbursed amount, is not eligible for the medical exclusion and you are considered to have made a gift to the patient of the reimbursed amount.

Exclusion for Payment of Qualified Educational Expenses.

A gift tax exclusion is also available for any amount paid on behalf of an individual as tuition to a qualifying educational organization for that individual’s education. It is important to note that this exclusion is limited to tuition and does not include books, supplies, room and board, or similar expenses which do not constitute direct tuition costs. The tuition payment must be made directly to the educational institution to qualify for the gift tax exclusion; it cannot be a gift to the student to reimburse them for their costs and expenses. In that scenario, it would be considered a gift to the student and subject to the annual exclusion rules discussed above.

Thankfully, this exclusion is not limited to college tuition. Private school tuition for primary or secondary schools is also eligible for the exclusion. In some cases, tuition to pre-primary schools may also qualify, if the school is considered an educational institution rather than simply a day care provider. 

Large (Taxable) Gifts

In addition to making smaller, tax-free gifts, you may want to consider making larger gifts to your loved ones. While it comes with some cost (you will need to prepare and file gift tax returns, the gifts will count against your lifetime gift and estate tax exemption amounts, and you lose the step-up in basis that would otherwise occur if you held the property until your death), there are still benefits to consider.

First, and perhaps most importantly, you will be removing future appreciation in the value of the gifted property from your taxable estate. This could be incredibly important for families with large concentrations of appreciating illiquid assets that they wish to keep with the family, such as ownership interests in a successful closely-held business. In that example, in addition to completely or partially removing an appreciating asset from your taxable estate, making a lifetime gift of business interests to the next generation might be a key component of your ownership and management succession plan.

To make these large gifts, there are a number of different gifting strategies, such as grantor retained annuity trusts and qualified personal residence trusts, installment sales, and gifts of partial interests, which leverage actuarial factors and valuations to limit or even eliminate any negative gift tax consequences. This approach is somewhat more complicated and requires the assistance of planning professionals, but in many circumstances it is more beneficial to all parties involved than making an outright gift.

By developing a gifting strategy as part of your overall estate plan, you have the ability to transfer your hard-earned wealth to your children and grandchildren in a tax-efficient manner. You also maintain the ability to control how and when your family receives these gifts, which allows you to take your family’s personal financial situation and demographics into consideration.

For more information, please reach out to any of the professionals from Trust Point.

Related Posts

I’m Interested in Your Services Question about my 401(k)