How gift tax rules affect your estate plan

03/2025

Giving gifts to your loved ones is an important part of most estate plans, but without proper planning, you could end up giving more money than needed to taxes. When estate planning, you need to pay attention to the annual gift tax exclusion and the lifetime gift and estate tax exemption limits.

The annual gift tax exclusion is the amount that you can give to each individual annually without your gift counting towards your taxable amount. The current limit is $19,000

The lifetime gift and estate tax exemption is calculated only with the gifts that exceed the annual gift exclusion. The current limit is $13.99 million.

Many people won’t have to worry about this because their assets are below the limit. However, this limit is scheduled to be reduced at the end of 2025. Understanding the rules and consequences can help you avoid unnecessary taxation. Keep reading how the rules apply to different scenarios.

How gift tax rules apply to married couples, and when to use gift splitting:

Charles and Blaire are a married couple in their 70’s that want to gift away some of their estate now. Charles gives $17,000 to his cousin as a graduation gift. Blaire gives $25,000 to her niece for her upcoming wedding, and $5,000 to her friend as a gift for his new house.

Charles and Blaire do not want to use gift splitting, so the individual limits apply.

Since Charles’s gift is under the $19,000 limit, it does not count towards his lifetime exclusion limit.

Blaire’s gift to her niece is $6,000 over the annual gift limit ($25,000 – $19,000 = $6,000.) She needs to report this to the IRS on Form 709. The $5,000 given to her friend is under the annual threshold, so this will not count towards her lifetime exclusion total. With other gifts she’s given throughout the years, this reportable $6,000 brings Blaire’s lifetime exemption to $2.7 million. Because she is still under the $13.99 million limit, Blaire does not pay taxes for the gift.

Now, let’s say Charles and Blaire do agree to use gift splitting.

Gift splitting is an option that married couples have that allow them to gift double the annual amount to each individual. For 2025, this is $38,000.

Once again, the gifts given were in the amount of $17,000, $25,000, and $5,000. Because none of these individuals received over $38,000, Charles and Blaire will not need to count this towards their annual exclusion limit (which is $27.98 million for married couples that gift split.) However, they do still need to file Form 709, and both spouses must agree to it.

Exceeding the lifetime exemption limit:

Let’s use another scenario. Daniel is in his 90’s, and he decides that he wants to give away most of his estate before he passes. He gives $1,019,000 to each of his 14 children. For each person, he is over the annual gift tax exclusion limit by $1,000,000 ($1,000,000 – $19,000 = $1,000,000.) Total, this adds $14,000,000 to his lifetime exemption limit.

This is the first time Daniel has contributed to his lifetime exemption, so he will have to pay taxes on $100,000 ($14,000,000 – $13,900,000 = $100,000.) The gift tax rate ranges from 18%- 40%, depending on the amount over the limit. In this case, Daniel is subject to a 28% tax, making his tax liability $28,000 ($100,000 * 38%).

Exceptions to the gift tax rule:

Here’s another scenario involving exceptions to the gift tax rule.

Serena wants to pay for her granddaughter’s college. If Serena pays the tuition directly to the university, she is able to pay an unlimited amount without triggering the gift tax rules.

Let’s say Serena’s granddaughter is only in middle school, and she doesn’t know where she wants to go to college. Serena wants to gift the money now. She can contribute the same limit, $19,000, to a 529 plan without hitting the annual gift tax limit. If Serena contributes more than this, it will count towards her lifetime exclusion.

Now, let’s imagine Serena’s granddaughter is a senior in high school. Serena wants to contribute everything that she is willing to give now, rather than over the next four years. Serena can choose to “superfund” a 529 plan. This means she can contribute up to 5 years’ worth of contributions at one time, without triggering the gift penalty. For 2025, this would be $95,000 ($19,000 * 5). The caveat is that Serena could not gift more money to her granddaughter in those 5 years, or it will count against the lifetime gift tax exemption.

Another way that Serena would not be subject to gift tax rules is if she pays for medical bills directly for someone else.

Extra tax applies when you give a gift by skipping a generation:

One other exemption to look out for is the generation-skipping transfer tax (GSTT). This tax applies to transfers from a grandparent to grandchild, or to anyone that is more than 37.5 years younger than the transferor. It applies to assets or property, and it has the same limit as the lifetime gift tax exclusion ($13.99 million for 2025.) Transfers may be subject to both the gift and estate tax and the GSTT. No matter the amount over the threshold, a 40% tax payable by the grantor applies. Take this example:

Nathaniel already has exactly reached the $13.99 million gift tax exemption. He wants to gift $300,000 to his grandson. This $300,000 is first taxed at the gift tax rate of 34% (remember, the gift tax rate is variable based on the amount of the gift.) This makes it $198,000 ($300,000 – (34% * $300,000)). Then, $198,000 is subject to the GSTT rate of 40%. Nathaniel’s grandson is left with $118,800 (198,000 – (40% * $198,000)).

The future of the lifetime gift tax exemption:

These considerably high limits for the gift tax exemption are not scheduled to last for much longer. The current provisions are set to sunset at the end of 2025. If Congress does not act to change the law, limits will adjust back to an inflation-adjusted $5 million, which is expected to be about $7 million. To take advantage of the current, higher limit, you can act now to work it into your estate plan.