Giving to Family: Tax Efficient Gifting Strategies for Your Estate Plan

Strategically gifting to family may decrease your gift and estate tax liability by intentionally lowering the value of your estate, taking advantage of the lifetime estate and gift tax exemption, or removing highly appreciable assets from your estate. By engaging your wealth management team to evaluate your family goals and identify which strategies fit your circumstances, you can maximize the value of family gifts for all involved.

Annual gift exclusion

For tax year 2024, the IRS allows individuals to gift up to $18,000 tax-free to as many recipients as the donor wants. Married couples can give double the amount of the individual exclusion to their chosen recipients, allowing gifts from spouses up to $36,000 in value to change hands without triggering a taxable gift. Any qualified gift over $18,000 in value from an individual or $36,000 from a married couple to one person in 2024 is considered a taxable gift. Triggering a taxable gift requires the donor to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.

The annual gift exclusion amount increases with inflation, but only in $1,000 increments. Prior to 2022, the exclusion amount has gone up by $1,000 generally every 3-5 years. Since 2022, it has increased by $1,000 every year. The annual exclusion only applies to each calendar year. For families, this means donors can give up to the annual gift exclusion to each child, grandchild, sibling, or any other relative each calendar year with no gift tax liability. The annual exclusion can provide a tax-efficient way to celebrate family events like birthdays, holidays, and weddings.

Unlike inherited assets, recipients can enjoy the gift right away. Donors can also coordinate annual gifts to achieve estate planning objectives like potentially decreasing their estate tax liability by lowering the value of their estate.

Accelerated gifting with 529 plans

Making an accelerated gift to a qualified tuition program (QTP) like a 529 plan is a practical option for maximizing how much you can save for your children’s or grandchildren’s education expenses. An individual, or both individuals in the case of a married couple, can each contribute up to five times the annual exclusion amount ($90,000 in 2024) in a single year tax-free to a 529 plan. The gift is considered accelerated because the IRS can treat a lump-sum contribution to a QTP as if it was spread out over five years.

For example, if two parents want to gift the maximum amount without triggering a taxable gift, they could each give $90,000 to their child’s 529 plan in a single year. This means their child would have $180,000 invested that could potentially grow over time. The investment earnings are not taxed while in the account and no tax is due for distributions if they are used to pay for qualified education expenses.  

Some benefits are deferred for both donors and recipients, so it is important to work with an experienced attorney on these strategies early to properly integrate them into your estate plan.

Lifetime estate and gift tax exemption

Strategically using the federal lifetime estate and gift tax exemption is a powerful strategy for achieving tax efficiency when transferring wealth to family members. The 2024 exemption amount is $13.61 million for individuals and is effectively doubled to $27.22 million for married couples as the IRS allows the transfer of the deceased spousal unused exclusion (DSUE) amount to the surviving spouse.

This means the total value of one’s estate plus any taxable gifts made during their lifetime can be transferred without incurring federal estate or gift taxes up to that amount. Unless further legislation is passed, this exemption amount may be significantly reduced as soon as 2026 when the Tax Cuts and Jobs Act (TCJA) estate tax provisions are scheduled to sunset.

Using the lifetime exemption now, at its historically high level, may lower your eventual estate tax liability if the TCJA estate tax provisions are allowed to expire. One could make taxable gifts directly to intentionally use some of their lifetime estate and gift tax exemption. Certain trusts, however, may provide a more structured way to achieve this goal.

For example, married couples might use a spousal lifetime access trust (SLAT) to maximize the value gained from each spouse’s exemption amount. Grantors can generally fund a SLAT up to their available exemption amount to transfer assets to their spouse or other beneficiaries without incurring federal gift and estate taxes. This is especially relevant for highly appreciable assets. Because assets within a SLAT typically appreciate outside the grantor’s estate, funding this type of trust with highly appreciable assets may ultimately decrease the grantor’s federal estate tax liability.

Additionally, a SLAT may allow the beneficiary spouse to receive limited distributions from the trust during their life without sacrificing tax efficiency. It is critical to seek professional assistance, such as the services of an estate planning attorney when establishing an irrevocable trust like a SLAT to ensure the trust is structured according to your goals and complies with any relevant laws. Irrevocable trusts can be difficult to amend, so careful consideration is required when establishing this type of trust.

Gift tax exclusion for qualifying medical and tuition expenses

The medical expense exclusion is another way to give a gift to family members without triggering a taxable gift. Certain conditions must be met to ensure the gift is not taxable.

The payment must be made directly to the care provider and be solely used for qualifying medical expenses as defined by the IRS. Donors can also pay for health insurance premiums on behalf of another individual under the medical expense exclusion, but any payments donors make for medical expenses that are later reimbursed by the recipient’s insurance company do not qualify.

Similarly, gifts that qualify for the educational expense exclusion also are not subject to the gift tax. The gift must be paid directly to a qualifying educational institution and exclusively used for tuition. It cannot be used for expenses such as books or room and board.

Paying for someone’s tuition directly means missing out on potential asset growth, which is a key feature of a 529 plan. However, direct contributions can be a viable option for those looking to immediately give a gift to a family member.

Contributing to a family member’s medical or tuition expenses can be meaningful gifts that also lower the taxable value of the donor’s estate. If minimizing transfer taxes is a priority, medical and educational exclusion gifts may be an effective strategy to consider as part of your overall estate plan.

Gift strategically with Commerce Trust

If you are considering gifting assets to your family, seek the guidance of experienced professionals to ensure you are leveraging the estate planning benefits available to you.

At Commerce Trust, your private wealth management team can identify tax-efficient strategies for gifting that meet your individual needs and circumstances and align with your comprehensive estate plan. Contact Commerce Trust today to learn more about how our estate planning, trust administration, and tax management^* professionals collaborate to execute a customized plan that is unique to you.

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*Commerce Trust does not provide tax advice to customers unless engaged to do so.

The opinions and other information in the commentary are provided as of August 14, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust is a division of Commerce Bank.

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