By Bhakti Shah, JD, CPA, Partner and Laura Rodriguez, JD, Supervisor
Planning for the future is one of the greatest gifts you can give your loved ones. The 2017 Tax Cuts and Jobs Act (TCJA) increased the lifetime federal estate and gift tax exemption to $13.99 million per U.S. taxpayer for 2025, or $27.98 million per couple. However, these inflated lifetime exemption amounts are slated to expire at the end of 2025, potentially dropping to pre-TCJA levels of around $7 million per U.S. taxpayer.
There is uncertainty surrounding future tax laws and it may not be until late this year, or even sometime in 2026, before we have clarity. Monitoring developments and mitigating the risk of rushed last-minute planning is key. Now is the time to explore gift and estate planning strategies, as state laws can differ from federal and factors like inflation and asset growth may lead to tax consequences over time.
Below are key strategies to consider – because acting today can help protect your family’s tomorrow.
Transfer Assets as Outright Gifts to Beneficiaries
Each year, the IRS sets an annual gift-tax exclusion, which is an amount that allows taxpayers to transfer assets to an unlimited number of individuals as an outright gift, tax free. Note that this is in addition to the lifetime exemption that the IRS also sets. For 2025, the annual gift tax exclusion is $19,000 per recipient.
Translated: As a taxpayer, you can transfer assets up to $19,000 in value to as many people as you’d like without utilizing any lifetime exemption. If the annual gift tax exclusion is not utilized each year, it will be lost and the assets retained may be subject to future estate tax.
Benefits of Outright Gifting: By gifting an asset directly to a beneficiary today, the asset will be removed from your taxable estate (as the donor), along with any potential future appreciation. Any appreciation would be subject to capital gains tax when sold by the beneficiary, but the capital gains rate is significantly lower than the potential 40 percent estate tax that may otherwise be applied to the appreciated assets. Because assets that a beneficiary inherits receive a stepped-up cost basis under the current law, this strategy may require further analysis on the interplay between estate-tax and income-tax consequences.
Make Direct Payments to Education Institutions or Medical Providers
Payments that you may make directly to educational or medical institutions on behalf of others are exempt for gift tax purposes and do not count toward the annual gift tax exclusion amount. Accordingly, you could pay for a friend or family member’s college tuition while also gifting the same individual assets up to the annual exclusion amount and not incur a gift tax.
Benefits of Direct Payments to Higher Education: Not only would this reduce your taxable estate, it would also preserve your lifetime exclusion.
Super-Fund a 529 College Savings Plan
The IRS treats transfers to 529 plans as gifts. As a taxpayer, you could, therefore, transfer assets to a 529 account each year up to the annual exclusion amount, which would steadily build over time to cover higher-education expenses. There would be no gift tax incurred, provided the contributions are within the annual exclusion per recipient.
Another strategy would be to transfer a lump-sum amount to a 529 plan that is equal to five years’ worth of annual exclusions ($95,000 in 2025) — which is referred to as super-funding. The IRS allows treating this super-funding as if made ratably, or evenly, over a five-year period.
Translated: A married couple can transfer $190,000 to a 529 plan in 2025 and avoid the potential gift tax.
Benefits of Super-Funding a 529: In addition to the gift and estate tax savings of super-funding a 529 plan, the investment potential due to compounding interest rates serves as another advantage.
Transfer to Irrevocable Trusts
By transferring assets to irrevocable trusts, the assets would be removed from your taxable estate in the same manner as an outright gift.
However, a benefit of funding a trust over gifting outright is that it provides you the ability to maintain some control over how and when the assets can be accessed or used. This strategy is useful if you’d like the assets to be passed on to future generations or when a beneficiary is unable to manage the assets for themselves.
Irrevocable life-insurance trusts are another great example of trust planning, as they are considered to be irrevocably transferred to the trust if certain requirements are satisfied.
Benefits of Transferring to an Irrevocable Trust: Transferring assets to an irrevocable trust provides the opportunity for future wealth to pass to beneficiaries, tax-free. Also, by placing a life insurance policy in a trust, for example, the proceeds payable upon the taxpayer’s death will not be subject to future estate tax, even though the current value of the policy will be applied against your remaining lifetime gift and estate exemption.
No One Size Fits All
In determining the best way to take advantage of the current lifetime exclusion provided by the 2017 TCJA, it is important to remember that there is no one-size-fits-all model in estate planning. Techniques will vary depending on your wealth, objectives, life expectancy, family dynamics, domicile and many other factors. While lifetime gifting can be a great strategy to reduce your taxable estate, it’s equally important for you to retain sufficient assets to continue to live comfortably.
For additional strategies, along with potential benefits and drawbacks, see another recent article here.
Contact Us
While our objective was to provide you with a glimpse into a few gift and estate tax saving strategies, there are many nuances applicable to each of the approaches we discussed.
If you have any questions or would like to discuss further, please contact your PKF O’Connor Davies client service team or:
Bhakti Shah, JD, CPA
Partner
BShah@pkfod.com | 908-956-0464
Laura Rodriguez, JD
Supervisor
LRodriguez@pkfod.com | 914-341-7025