Families of all shapes and sizes use estate planning to leave financial and other gifts to their heirs after they pass away. However, an unfortunate downside of traditional estate planning is that your estate may be subject to a federal estate tax if it exceeds the threshold, which must be paid before any inheritances can be paid out to your heirs.
No one wants to pay unnecessary taxes, but the good news is that by working with an estate planning attorney alongside your financial advisor or CPA, you can take advantage of lifetime gift tax strategies to pass more of your estate onto your loved ones during your lifetime, while minimizing or even eliminating estate taxes paid to the federal government.
Even estates that don’t meet the estate tax threshold can take advantage by estate planning lifetime gifts, giving their heirs and beneficiaries access to financial gifts tax free, without the lengthy and costly probate process.
At the Law Office of Vidhya Babu, we’ve helped many of our Bay Area clients develop “giving while living” estate strategies that maximize the value of their gift and reduce the amount of taxes owed.
Today, we’ll uncover how lifetime gifting works in estate planning, discuss how to gift assets during life, as well as tax‑efficient gifting strategies.
What Are Lifetime Gifting Strategies?
Lifetime gifting strategies are a subset of estate planning that offers a way to reduce the value of your taxable estate, with the added benefit of allowing you to see the difference your gift can make in your loved ones’ life during your own lifetime.
For 2026, the exclusion amount for estate taxes set by the IRS is $15,000,000. That means that any estate that has a total value greater than $15,000,000 at the time of passing will owe a federal estate tax.
Once the federal estate tax kicks in, it’s not pretty. Estate taxes can eat up as much as 40% of qualifying estates.
For estates that hold significant value, that means it is in your and your family’s best interest to try to reduce the value of your estate to below $15,000,000. How do you reduce the value of your estate? The best way is by taking advantage of the government’s special provisions that allow you to reduce the value of your estate through gifts.
So the question then becomes “how can estate planning be seen as a gift?”
Luckily, there are a number of ways to reduce your estate’s value through gifting, which we’ll discuss shortly.
But beyond the potential for tax savings, there are plenty of other reasons that more and more people are turning to “giving while living” estate strategies to strategically transfer wealth and assets to their heirs and beneficiaries within their own lifetime.
Some very real benefits of lifetime gifting strategies include:
- Avoiding the lengthy and costly process of probate
- Giving tax-free gifts to your children, grandchildren, or any other beneficiary
- Funding a college tuition savings plan for children or grandchildren
- Paying for a loved one’s medical and health care expenses
- Minimizing the likelihood of disputes arising between beneficiaries
- Keeping gifts private, unlike inheritances that pass through probate
- Seeing first hand the difference your gift makes in a loved one’s life
Think of it like this: you can let the IRS tax an axe to your estate, taking as much as 18-40% of its value, or you can use lifetime gift tax strategies to selectively prune your estate under the taxable estate threshold, while making a meaningful difference in your loved ones’ lives.
How Lifetime Gifting Works In Estate Planning: The Most Common Lifetime Gifting Strategies
So what do lifetime estate planning gifting strategies actually look like? Let’s break down the most common methods used.
Annual Gift Tax Exclusion
This is the biggie. By far the most advantageous and tax‑efficient gifting strategy is the IRS’s annual gift exclusion.
This provision in the federal tax code makes it possible for an individual to gift up to $19,000 per year to their children, grandchildren, or literally anyone they choose, with no limit to the number of people who can receive a financial gift.
For married couples this doubles to $38,000 annually, meaning you can legally shift a significant amount over time, particularly if you start when your children or grandchildren are young.
As long as the total is under the annual gift tax exclusion limit, there is no need to report the gifts on your tax return. Because California and many other states do not have an inheritance tax, this money is often tax free for both you and your beneficiaries.
Even if you choose to give more than the maximum annual gift tax exclusion, the overrun can be considered part of your lifetime gift. While you will have to report any gifts over $19,000/38,000 to the IRS, any overage is reduced from the total amount you can give during your lifetime without being subject to gift or estate taxes.
And because this gift can be given every year, it is one of the best ways for large estates to reduce their potential for estate taxes during their lifetime.
529 Savings Plan
Another great strategy for how to gift assets during your lifetime is through funding a 529 educational savings plan for your children, grandchildren, or other beneficiaries.
529 plans are tax advantaged, state-sponsored educational savings plans that allow you to transfer an amount each year up to the annual gift exclusion limit. The funds can be used to pay for tuition at undergraduate and graduate studies at accredited universities, tradeschools, and even private tuitions for K-12 schools around the country. In some cases, funds can even be used for international studies.
The funds deposited into a 529 savings account can also be used for school expenses, like text books, computers, and other supplies. Even room and board costs can be paid using funds from a 529 plan.
As part of your lifetime gift tax strategies, you can contribute a lump sum in a single year of up to 5x the annual gift exclusion into an individual 529 savings account, without impacting your lifetime gift-tax exclusion.
At the current rate of $19,000/year, that’s up to $95,000 per individual and $190,000 per married couple.
The IRS classifies this lump sum amount as a “super fund”, and treats it as if it were paid evenly over 5 years. However once these assets have been transferred into a 529 account, they are no longer part of your taxable estate.
Using this strategy, you can put money aside for your children, grandchildren, or even a friend’s education, while reducing your taxable estate. That makes funding a 529 savings plan one of the most tax‑efficient gifting strategies.
Direct Payments for Medical or Educational Expenses
Even if you have children or grandchildren who are already in the midst of their education, the IRS allows you to make an unlimited amount of direct payments to a school or university for tuition or other related costs.
These payments are not considered part of the annual gift tax exclusion, and allow you to directly pay for a loved one’s education without the need for a 529 savings account.
The same also goes for paying medical bills on behalf of a loved one or friend, making this a viable option to reduce your taxable estate, preserve your annual gift tax and lifetime exclusions, while also doing something exceedingly nice for someone, family or friend.
Create and Fund an Irrevocable Trust
Trusts have long been used as a mechanism to transfer wealth and assets to loved ones, minimizing your taxable estate, and ensuring your heirs and beneficiaries receive their gifts without the need for probate.
An irrevocable trust is often preferred because it allows the trust maker to retain control over how and when the assets can be used. For example, the grantor may leave a financial gift to their grandchild, but restrict the distribution until a milestone has been met, such as graduating from college or reaching a specific age.
Most notably, funding an irrevocable trust also allows you to move assets out of your taxable estate, while freezing their value. Assets placed into a trust are protected from creditors, divorces, and court judgments, giving beneficiaries additional protection.
The Law Office of Vidhya Babu Can Help You Build the Ideal Giving While Living Estate Strategy
Lifetime giving can not only be advantageous to your taxable estate, but can also help your loved ones buy their first home, start a business, or pay for their education. That alone makes lifetime gifting strategies worth considering.
The Law Office of Vidhya Babu is ready to help you build your own giving while living estate strategy, with honest and compassionate advice.
Contact us today for an initial consultation, and let’s explore how we can tailor lifetime gifting strategies to your family’s goals and needs.
**DISCLAIMER**
This blog post is for informational purposes only and does not constitute legal advice. Please consult with an attorney to discuss your specific circumstances.