The holiday season brings more than just festive cheer; it’s also a chance to add a lasting impact to your gifts. While expressing love and appreciation through thoughtful presents is central to holiday giving, this time of year also presents an opportunity to make your gestures even more meaningful with strategic gifting and smart financial planning.

In 2024, the IRS allows you to gift up to $18,000 per person without incurring any gift tax. For married couples, this limit doubles to $36,000 per recipient, providing an excellent way to support loved ones financially while also reducing your taxable estate.

These annual gifting limits allow you to be both generous and strategic, creating a legacy that goes beyond the holiday season. By taking advantage of the current gift tax exemptions, you can make this season of giving both heartfelt and financially wise, meeting personal goals while enhancing the financial well-being of those you care about most.

Understanding the Expanded Gift and Estate Tax Exemptions

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly raised the estate and gift tax exemptions to unprecedented levels. However, these provisions are set to expire at the end of 2025, after which the exemption could drop to pre-TCJA levels, substantially reducing the amount you can transfer tax-free.

In 2024, you can give up to $18,000 per recipient annually without triggering the need to report the gift to the IRS—a limit known as the annual gift tax exclusion. You can gift this amount to an unlimited number of individuals each year, enabling significant wealth transfer without eroding your lifetime exemption.

Beyond the annual exclusion, the lifetime gift tax exemption allows you to give up to $13.61 million (as of 2024) over your lifetime without incurring federal gift tax. But keep in mind that this lifetime exemption is tied to the estate tax exemption, meaning any portion of the exemption you use for gifts during your lifetime will reduce the amount available for your estate upon your passing.

Taking advantage of these expanded exemptions before the TCJA provisions expire can create significant long-term benefits, allowing you to support loved ones and reduce your taxable estate. With a proactive approach to gifting during your lifetime, you can make full use of the current increased exemptions while securing a more tax-efficient legacy for future generations.

Strategic Gifting Approaches

There are various ways to give meaningful gifts while maximizing the associated tax benefits. Not only does each strategic gifting approach offer unique advantages, but you can often combine strategies to meet your goals more effectively.

#1: Direct Cash Gifts

Cash gifts are a straightforward and versatile way to support loved ones, providing recipients with immediate funds they can use as needed. For larger cash gifts, you can optimize tax efficiency by spreading them across calendar years to maximize annual gift tax exclusions.

For instance, with the recent IRS increase in the gift tax exclusion to $19,000 per recipient for 2025, you could gift $18,000 in December 2024 and then another $19,000 in January 2025, totaling $37,000 within a short timeframe while staying within annual limits. This approach allows you to transfer a significant amount without triggering gift tax reporting requirements.

To maintain compliance and create a clear record, especially for larger gifts, be sure to document each transaction. Thoughtful record-keeping helps avoid potential misunderstandings and makes future planning simpler and more organized.

#2: Gifting Property and Other Assets

Property gifts can be a particularly powerful strategy for transferring wealth and managing your taxable estate.

By gifting appreciated assets like stocks, for example, you effectively pass on the potential for future growth to a recipient, who may be in a lower tax bracket and therefore subject to a lower capital gains tax when they eventually sell. This approach allows you to shift not only the asset itself but also the tax burden associated with its future appreciation.

For those with family-owned businesses, gifting minority stakes over time can be especially advantageous. Minority stakes in a closely held business are often eligible for valuation discounts because they represent a lack of control and marketability. These discounts can reduce the gift’s reported value, allowing you to pass along significant business interests while minimizing gift tax implications.

It’s important to note that non-cash gifts that exceed the annual gift tax exclusion typically require a qualified appraisal. This appraisal documents the fair market value of the gift, ensuring compliance with IRS regulations and providing a necessary record for tax reporting.

#3: Education-Related Gifts

Education expenses offer unique opportunities for strategic gifting. This is because payments you make directly to educational institutions for tuition are entirely exempt from gift tax and don’t count toward your annual gift tax exclusion.

In other words, there’s no limit on the amount you can contribute toward a loved one’s tuition without triggering gift taxes. This approach can be especially valuable for parents and grandparents who wish to cover educational costs while preserving their annual exclusion amounts for other types of gifts.

You can also contribute to a 529 college savings plan, a flexible and tax-advantaged way to fund education. A special provision allows you to “superfund” a 529 plan by front-loading up to five years’ worth of gift tax exclusions—currently up to $90,000 for individuals or $180,000 for married couples—in a single year, without incurring gift taxes.

This strategy enables you to make a significant, tax-efficient contribution toward a beneficiary’s future education expenses. Additionally, because 529 plans grow tax-free when used for qualified education costs, the account can appreciate over time without the impact of taxes.

#4: Medical Expenses

Similar to educational gifts, direct payments made to medical providers for qualified healthcare expenses are entirely exempt from gift tax and don’t count toward your annual gift tax exclusion. This can include payments for medical insurance premiums, long-term care expenses, surgeries, and other qualified healthcare costs, making it a valuable option for providing financial support to loved ones without impacting your annual exclusion limits.

To qualify for this gift tax exemption, however, the payments must go directly to the healthcare provider or medical facility. This means that if you reimburse a family member or friend for medical expenses they’ve already paid, the exemption will not apply, and the amount may count toward your annual gift tax exclusion.

Advanced Gifting Strategies

If you’re looking to take your gifting strategy to the next level, several sophisticated options can help you maximize the impact of your generosity while minimizing tax implications.

#1: Trust-Based Gifting

Trust-based gifting strategies offer highly effective tools for transferring wealth efficiently while minimizing tax exposure. Two commonly used trusts for this purpose are the Grantor Retained Annuity Trust (GRAT) and the Qualified Personal Residence Trust (QPRT), each tailored to specific asset types and tax-saving goals.

With a GRAT, you transfer assets into the trust but retain the right to receive a fixed annual payment, or annuity, for a specified term. At the end of the term, any remaining assets in the trust—after accounting for the annuity payments—pass to your beneficiaries.

If the assets in the GRAT appreciate more than the IRS-assumed interest rate, the excess growth transfers to your beneficiaries tax-free, resulting in significant gift tax savings. This strategy is often used for assets with high growth potential, such as stocks or private business interests, to effectively “freeze” the asset’s value for gift tax purposes and transfer future appreciation tax-efficiently.

A QPRT, on the other hand, is specifically designed for transferring a primary residence or vacation home to family members at a reduced gift tax value. You transfer ownership of your home into the QPRT but retain the right to live in it for a predetermined period. When this period ends, the property is transferred to your beneficiaries, typically at a substantial discount from its full market value for gift tax purposes.

#2: Family Limited Partnerships (FLPs)

Family Limited Partnerships (FLPs) can be an excellent vehicle for managing and transferring family wealth, especially for business owners or those with significant investment portfolios.

In an FLP, the parents typically act as general partners, giving them decision-making authority and control over the assets within the partnership. Meanwhile, limited partnership interests are gradually gifted to children or other family members.

For estate and gift tax purposes, limited partnership interests often qualify for valuation discounts due to their restricted control and marketability. These discounts can significantly reduce the taxable value of the interests, allowing you to transfer more wealth while using less of your gift tax exemption.

While the tax benefits of FLPs can be substantial, they must have a legitimate business purpose and maintain proper formalities to withstand IRS scrutiny. It’s essential to establish a partnership agreement, hold regular meetings, and keep accurate financial records to ensure compliance.

#3: Charitable Giving

Charitable giving can seamlessly complement your gifting strategy through tools like donor-advised funds (DAFs).

A DAF allows you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to chosen charities over time, offering flexibility and long-term impact. By setting up a DAF and involving the next generation in the grant-making process, you can foster a meaningful family tradition that instills valuable lessons about philanthropy and social responsibility.

For those seeking additional tax-efficient strategies, Charitable Lead Trusts (CLTs) can be another powerful option. With a CLT, you designate that income from the trust will be distributed to a charity for a specified period.

After that period, the remaining assets pass to family members, often at a significantly reduced gift tax value. This structure not only benefits charitable causes but also enables you to pass assets to your heirs in a tax-advantaged way, making it a win-win for families committed to both legacy-building and charitable giving.

Incorporating Strategic Gifting Into Your Financial Plan

Strategic gifting is about more than just tax savings; it’s about making thoughtful decisions that benefit both you and your loved ones. Whether you’re starting with basic annual gifts or exploring advanced trust strategies, the key is to begin with a clear plan.

While this guide provides a foundation, every family’s situation is unique. Working with an experienced financial advisor like Align Financial can help you develop a gifting strategy that aligns with your broader financial and estate planning goals while navigating complex tax rules and regulations. Contact us to learn more and see if we’re the right fit for your financial planning objectives.