Lifetime Gifting Strategies

Lifetime gifting is a powerful wealth transfer technique that allows individuals to reduce their taxable estate while helping family members during the donor's lifetime. Understanding the tax rules, strategic considerations, and potential pitfalls is essential for CFP professionals advising clients on gift planning.

Annual Gift Tax Exclusion

2025 Exclusion Amount: $19,000 per donee

The annual gift tax exclusion allows individuals to give up to $19,000 per recipient each year without:

• Paying any gift tax
• Using any lifetime exemption
• Filing a gift tax return (Form 709)

Present Interest Requirement

To qualify for the annual exclusion, the gift must be a present interest:

• Recipient has immediate, unrestricted access to the gift
• Future interests do NOT qualify for annual exclusion
• Gifts to trusts generally require special provisions (Crummey powers) to qualify

Gift Splitting for Married Couples

Married couples can elect to "split" gifts, effectively doubling the annual exclusion:

Requirements for Gift Splitting:

• Both spouses must consent to split ALL gifts made during the year
• Must file Form 709 even if no tax is due
• Both spouses must be U.S. citizens or residents
• Cannot split gifts of community property (already owned 50/50)

Lifetime Gift Tax Exemption

2025 Exemption: $13.99 million (unified with estate tax)

The lifetime exemption (also called the applicable exclusion amount or unified credit) is the total amount an individual can transfer during life and at death before owing federal transfer taxes.

Unified Credit System:

Key Point: The exemption is UNIFIED, meaning:

• Taxable gifts during life reduce the estate tax exemption
• Using $5 million in lifetime gifts leaves $8.99 million for estate tax exemption
• Optimal planning considers both lifetime and death transfers

When Lifetime Exemption is Used:

Gifts exceeding the annual exclusion reduce the lifetime exemption:

Example: In 2025, Sarah gives her daughter $100,000:

• $19,000 covered by annual exclusion (no exemption used)
• $81,000 taxable gift (uses $81,000 of lifetime exemption)
• Remaining lifetime exemption: $13,909,000
• Gift tax due: $0 (covered by exemption)
• Must file Form 709 to report taxable gift

Gifts of Appreciated Property

Carryover Basis Rule

When appreciated property is gifted, the donee receives the donor's adjusted basis plus any gift tax paid on the appreciation:

Formula: Donee's Basis = Donor's Basis + (Gift Tax Paid x Appreciation/FMV)

Strategic Advantages of Gifting Appreciated Assets:

1. Removes Future Appreciation from Estate

   • If stock worth $100,000 grows to $500,000, entire $500,000 is outside estate
   • Only the $100,000 FMV at time of gift counted as transfer

2. Shifts Income to Lower-Bracket Taxpayers

   • Dividend and interest income taxed to new owner
   • Capital gains taxed at donee's rate when sold
   • Kiddie tax rules may apply to children under 19 (or 24 if students)

3. Leverage Valuation Discounts

   • Minority interests in family businesses may qualify for discounts
   • FLP/LLC interests can transfer more value per exclusion dollar

Example - Appreciating Asset Strategy:

Robert gifts stock to his adult son:

• Robert's basis: $20,000
• FMV at gift: $100,000
• Future value (5 years): $250,000

Result:

• Gift uses: $100,000 - $19,000 = $81,000 of lifetime exemption
• Son's carryover basis: $20,000
• If son sells at $250,000: Capital gain = $230,000 (taxed at son's rate)
• Estate reduction: $250,000 removed from Robert's estate

Income-Producing Property Gifts

Gifting income-producing assets shifts future income to the donee:

Strategic Considerations:

Example - Income Shifting:

Margaret (35% tax bracket) gifts rental property to her adult daughter (22% tax bracket):

• Annual net rental income: $50,000
• Margaret's tax: $17,500 (35%)
• Daughter's tax: $11,000 (22%)
• Annual tax savings: $6,500

When NOT to Make Lifetime Gifts

1. Loss Property (FMV < Basis)

Never gift property that has declined in value:

Why:

• Donee's basis for LOSS purposes = FMV at gift date
• The loss is permanently lost to both donor AND donee
• Neither party can ever claim the capital loss

Better Strategy:

• Donor sells property and claims capital loss
• Donor gifts cash proceeds to donee
• Loss offsets donor's gains or income (up to $3,000/year against ordinary income)

2. Low-Basis Assets Near Death

Assets held until death receive a stepped-up basis:

Rule of Thumb: If donor has limited life expectancy, consider holding appreciated assets for step-up in basis.

3. Assets Donor May Need

Irrevocable gifts cannot be recovered:

• Consider donor's future financial needs (healthcare, long-term care)
• Maintain sufficient assets for retirement security
• Gift only "excess" assets not needed for donor's lifetime

4. Gifts to Minors Without Proper Structure

Direct gifts to minors create issues:

• Minors cannot legally manage assets
• Assets become theirs at age 18 or 21 (depending on state)
• Consider UTMA accounts, 529 plans, or trusts for control

Gift Tax Return (Form 709) Requirements

When Filing is Required:

Important Notes:

• Due date: April 15 following year of gift (with extensions)
• Married couples must each file separately
• Reports all taxable gifts for the year
• Tracks cumulative lifetime gifts

Comprehensive Gifting Strategy Summary