How to Make the Most of Annual Exclusion Gifting in Your Estate and Business Planning
With all the talk this year about the potential reduction in the estate and lifetime gift tax exemption amounts, it can be easy to overlook the power of annual exclusion gifting as a tool in your estate planning and business succession planning. Understanding how annual exclusion gifts work can greatly benefit your estate plan, allowing you to reduce your taxable estate while providing support to loved ones. Annual exclusion gifts can also be a powerful tool in beginning the transition of ownership in a family business.
What is Annual Exclusion Gifting?
Annual exclusion gifting refers to the Internal Revenue Code provision that allows individuals to gift a certain amount, in cash or in kind, to as many people as they choose each year without incurring a gift tax. The annual exclusion amount is inflation adjusted and changes from time to time. For 2025, the exclusion amount is set at $19,000 per recipient. This means you can give $19,000 to as many individuals as you wish (up to everything you own) without affecting your lifetime gift tax exemption or triggering any tax consequences. For example, if you and your spouse have three children who are all married and each of those children has three children of their own, you could make annual exclusions gifts to those 15 people totaling $570,000 in value without incurring any gift tax consequences, including the use of any of your exemption amount.
How do we arrive at that number? First, you and your spouse can each gift $19,000 to each of your three children ($57,000 from you and $57,000 from your spouse or $114,000). Second, you can do that again to each of the children’s spouses (another $114,000). Then, you can each do it again to the nine grandchildren ($171,000 from you and $171,000 from your spouse or $342,000).
By regularly taking advantage of the annual exclusion gift, you effectively decrease the size of your taxable estate. At $570,000 per year in our example, in just five years you would have gifted $2,850,000 in value without using any of your lifetime exemption amount. In addition to being tax free, gifts within the exclusion limit do not require you to file a gift tax return.
Strategic Considerations
What are some of the strategic considerations in using the annual exclusion gift. First, it is important to understand that the gift must be of a “present” interest. This means that the recipient must have an immediate right to the use, possession, or enjoyment of the property or funds being gifted. For example, a gift to a trust that does not pay out until a later date will not qualify as an annual exclusion gift. It is important to have the beneficiaries of the gifts understand the long term objectives of the gifting so they can act consistently.
Second, not all gifts are created equal. Cash gifts are easy, but there isn’t a lot of bang for your gifting buck. A gift of $19,000 in cash is just that a gift of $19,000. A gift of a percentage of a closely held business that had received a discount to the value may be worth 20% to 40% more than that. In addition, you are not only gifting the value, but the future appreciation.
Third, while a gift tax return is not required, there may be reasons for filing the return anyway. For example, if you give a cash gift of $19,000, there is no reason to file the return as it is unquestioned that the gift is at or below the limitation. But if you are gifting an asset that is hard to value, such as an interest in a business, the filing of the return may make sense. A properly filed gift tax return will trigger the running of the statute of limitations on any audit of the gift. After the expiration of the limitation period, the IRS can only challenge the return and assess more taxes if there was fraud or if there was missing information or information that was substantially misstated.
What Can Be Gifted?
As long as it is a present interest, the gift can be of almost any asset. Cash, stocks, closely held business interests, real property, etc. You can also make gifts to things like ABLE accounts for individuals with disabilities or 529 accounts for education. Utilizing the annual exclusion is a practical way to support family members, by providing financial assistance during significant life events (weddings, home purchases, etc.).
It is important to note that payments made directly to educational institutions for tuition or to medical providers for health expenses are not subject to the annual exclusion limits. This means you can contribute towards these expenses without limit, providing additional support without tax implications.
Planning Tips
Keep Good Records. Even if you are not filing a gift tax return, maintain good documentation for clarity and future reference.
Review and Adjust. Estate planning should be reviewed regularly, especially after significant life events (e.g., marriage, births, deaths) or changes in the law. Adjustments to your gifting strategies should be done from time to time to maximize benefits.
Consult a Professional. Engage with estate planning attorneys, tax advisors, and financial planners to ensure your strategy aligns with your overall financial goals and complies with current laws.
Annual exclusion gifting is a powerful, often underutilized strategy that can help individuals manage their estate tax liability, provide for succession of a family business, and provide meaningful support to loved ones. By leveraging the annual exclusion, you can make significant strides in your estate and business planning efforts, minimize potential estate taxes, and foster goodwill within your family. As with any strategic financial planning, it's essential to stay informed and consult with qualified professionals to make the most of your gifting strategy.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.