Lifetime gifting is a powerful strategy if you’re looking to transfer wealth efficiently, reduce estate taxes, and support loved ones or charitable causes. Whether planning to help your children with significant life expenses, contribute to a grandchild’s education, or leave a lasting philanthropic impact, strategically structuring your gifts can maximize financial benefits while ensuring your legacy aligns with your values. In a previous blog, we looked at “How and When to Pass Down Assets to Your Loved One.” In this post, we look more in-depth at lifetime gifting strategies, including tax implications, different gifting vehicles, and strategies to ensure your generosity aligns with your overall financial plan.
Why Consider Lifetime Gifting?
Many people assume that wealth transfer only occurs through an estate after death, but lifetime gifting offers several advantages:
- Reducing estate taxes – Gifting assets while you’re alive can help lower the taxable value of your estate, potentially reducing estate tax liability.
- Helping loved ones when they need it most – Lifetime gifts can assist family members with major expenses like education, homeownership, or starting a business.
- Philanthropic impact – Charitable giving during your lifetime allows you to see the benefits of your generosity while also providing potential tax advantages.
- Asset appreciation outside your estate – Transferring assets now means any future growth occurs outside your estate, reducing the taxable value of your remaining assets.
Understanding the Annual and Lifetime Gift Tax Exclusions
Annual Gift Tax Exclusion
Each year, you can gift up to a certain amount per recipient without triggering gift tax reporting requirements. In 2024, the annual gift tax exclusion is $18,000 per person. This means you can give up to $18,000 to as many individuals as you’d like without affecting your lifetime exemption. For married couples, this exclusion is effectively doubled. If both spouses give separately, they can collectively gift $36,000 per recipient annually without tax consequences.
Lifetime Gift and Estate Tax Exemption
In addition to the annual exclusion, there is a lifetime gift and estate tax exemption, which allows individuals to transfer a significant amount of wealth tax-free over their lifetime. For 2024, this exemption is $13.61 million per individual ($27.22 million for married couples). Any gifts beyond the annual exclusion count against this lifetime exemption.
Lifetime Gifting Strategies to Consider
Direct Gifts to Family and Loved Ones
One of the simplest ways to transfer wealth is through direct gifts. Whether you’re helping a child buy a home, assisting with student loans, or providing financial support for a growing family, gifting assets outright can provide immediate benefits. However, it’s important to consider how these gifts fit into your overall financial plan. While gifting can be generous and impactful, it should not compromise your own financial security in retirement.
Paying for Education and Medical Expenses Tax-Free
You can pay tuition and medical expenses directly to the institution or provider without it counting against your annual or lifetime gift tax exclusion. This strategy allows you to provide meaningful financial support while preserving your gifting allowances for other uses.
- Education – Tuition payments made directly to a school (college, private school, etc.) are exempt from gift taxes. However, payments for books, room and board, or supplies do not qualify.
- Medical expenses – Payments made directly to a healthcare provider for medical bills, insurance premiums, or long-term care services are also gift-tax exempt.
Establishing and Funding a 529 College Savings Plan
529 college savings plans offer a tax-efficient way to help fund education expenses. Contributions to a 529 plan count as gifts but can be front-loaded using a special five-year election rule, allowing you to contribute up to $90,000 per beneficiary ($180,000 for couples) in a single year without exceeding annual gift limits. These funds grow tax-free and can be withdrawn tax-free for qualified education expenses.
Gifting Through Irrevocable Trusts
For those with significant wealth, irrevocable trusts can be a valuable tool for structuring gifts while maintaining control over how assets are distributed. Once assets are placed in an irrevocable trust, they are removed from your estate, potentially reducing estate taxes and protecting wealth from creditors or legal claims. These trusts allow you to designate beneficiaries and set terms for how and when they receive assets, ensuring that gifts are used responsibly over time.
Charitable Giving Strategies
For those who want to make a lasting philanthropic impact, charitable giving can be an essential part of a wealth transfer strategy. Lifetime charitable contributions not only support meaningful causes but can also provide significant tax benefits, including income tax deductions and reductions in estate taxes. By using structured giving vehicles, you can maximize the efficiency of your charitable gifts while ensuring they align with your overall financial and legacy goals. Here are some popular strategies to consider:
- Donor-Advised Funds (DAFs) – A DAF allows you to contribute to a charitable fund, receive an immediate tax deduction, and recommend grants to your preferred charities over time. This approach provides flexibility in timing your charitable donations while maximizing tax benefits.
- Charitable Remainder Trusts (CRTs) – A CRT is an irrevocable trust that provides income to beneficiaries—often yourself or your family—for a specified period before the remaining assets are donated to charity. This strategy allows you to support a cause while generating income and potential tax advantages.
- Qualified Charitable Distributions (QCDs) – If you’re 70½ or older, you can donate directly from an IRA to charity, satisfying required minimum distributions (RMDs) while avoiding taxable income.
Considerations When Implementing a Gifting Strategy
While gifting can be an effective financial strategy, it’s essential to consider the long-term implications:
- Maintain Financial Security – Ensure you retain sufficient assets for your retirement needs before making significant gifts.
- Balance Family Dynamics – Consider how gifting may affect relationships among beneficiaries and clearly communicate your intentions.
- Document Large Gifts – Keep records of significant gifts to avoid tax complications later.
Final Thoughts: A Thoughtful Approach to Gifting
Lifetime gifting can be a valuable tool for transferring wealth, reducing estate taxes, and making a meaningful impact on your loved ones and community. Whether you’re giving directly to family, funding education, leveraging trusts, or supporting charities, strategic planning ensures that your generosity aligns with your long-term financial goals. At Northern Way, we help individuals and families develop comprehensive gifting strategies tailored to their unique financial situation. Contact us today to explore how lifetime gifting can fit into your broader wealth management plan.
Disclosure: Information provided is not intended as tax or legal advice and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.
