The tax benefits of lifetime gifting

Few things are as satisfying as giving a gift to a loved one. But when it comes to your assets, gift giving not only gives you the opportunity to provide for your family, it can function as an important part of your estate and legacy plan, allowing you to pass on your assets tax-efficiently and provide your heirs with some part of their inheritances now, in the present, rather than waiting until you pass away.

But there are some nuances you need to understand before you embark on this potentially powerful strategy.

Why gift?

"Gifting assets during your lifetime may help reduce your estate tax liability at death," says Matt McGinnis, an advanced planner at Fidelity Investments. “Whether you’re concerned about your state’s estate or inheritance tax or the federal estate tax, shifting assets and any appreciation out of your estate to your children or your heirs during your lifetime can serve to reduce your potential estate tax liability.”

When you pass away, any portion of the value of your estate that exceeds the federal gift and estate tax exemption will be taxed at progressive rates up to 40%. Additionally, if you live in a state that has its own estate or inheritance tax, you may be subject to further taxation. Gifting during your lifetime may help lower the value of your estate at death and reduce the amount of taxes owed.

Currently, the federal gift and estate tax exemption is historically high—$13.99 million for an individual in 2025, and $27.98 million for a married couple. That means that if you were to pass away in 2025 and the value of your estate was below the exemption amount, you would not be expected to pay federal estate tax. (State estate and inheritances taxes are often far lower.) However, just because the federal exemption amount is high today doesn’t mean it’s always going to be that way. You can’t necessarily bank on it still being there when you might need it down the road.

"We don’t know what the future holds for tax laws," says McGinnis. "It’s possible that the federal exemption amount could change several times over your lifetime—for example, back in 2017, it was only about $5.49 million per individual and may fluctuate depending on legislation from Congress. There is a possibility that a future Congress could consider reducing it."

Lifetime gifting offers the opportunity to take advantage of the current federal exemption amount immediately. Currently, individuals may transfer during their lifetime or at death up to $13.99 million without gift or estate tax implications. You can also give up to $19,000 to any individual in 2025 by using the annual gift tax exemption. Any amounts gifted in excess of that amount will consume a portion of your federal estate and gift tax exemption, resulting in a reduced amount that can be transferred estate tax-free upon your death. Additionally, if you give a gift above the annual gift exclusion, you will need to file a gift tax form (IRS Form 709) with your tax return.

What should you gift?

Which assets you choose to gift to your children or heirs will depend on what your goals are. That said, some assets may make better gifts than others.

If your intention is simply to reduce the total value of your estate and you aren’t especially concerned with what your children or heirs do with the money you give them, a gift of cash is the easiest and most straightforward option. Depending on your circumstances, you may want to gift appreciated assets, such as stock or real estate, or perhaps interest in a family business. In these cases, it’s important to consider the potential tax implications.

"When you gift an appreciated asset, such as a stock," says McGinnis, “the cost basis of that gift goes with it. This is generally referred to as 'carryover basis.' This means that in the event the recipient sells that asset, they are liable for paying the capital gains tax on the difference between the sale price and the original cost basis. In contrast, were you to pass on that asset upon death, the cost basis would be stepped up to the current fair market value, meaning the recipient could potentially sell it immediately with no capital gains liability.”

However, if the asset in question is something your child or heir is unlikely to sell—say, a cherished family home or vacation property—you may not be too worried about the loss of the step-up in basis and the potential exposure to capital gains tax. Furthermore, if your intention is to gift assets to a charitable organization that you support, gifting appreciated assets may help you maximize your charitable impact and tax savings at the same time.

How should you gift?

When determining how best to gift your assets, you should ask yourself what’s more important to you: The ease with which your children or heirs can access and utilize those assets, or your ability to protect those assets from loss or from being used in a way you didn’t intend.

Again, direct cash transfers are the most straightforward method of moving money out of your estate and into the hands of your children or heirs.

But what if you are concerned that the assets you are passing on may end up somewhere you didn’t intend—perhaps with your child or heir’s ex-spouse following a divorce proceeding, or with their creditors in the event they get into trouble with debt? Or if you are concerned that your child or heir may simply not be prepared to use the money wisely?

"In these cases," says McGinnis, "gifting your assets to a revocable trust on behalf of your child or heir instead of giving them the money directly may afford you some level of protection and control." He notes, however, that setting a up a trust can be expensive and has tax implications that may not be immediately obvious. Working with a tax attorney is essential to determining whether a trust is the best option for your circumstances.

There are other ways to exercise control over how gifted assets are used or whether your children or heirs can access them, methods that may be specifically suited to your goals. If education is a priority, you may want to consider giving to a 529 account. You can also pay for another individual’s medical or tuition bills, as well—there are no limits on how much you can pay for, and these gifts don’t count against your annual or lifetime federal exemption amounts either, as long as you pay the provider directly.

How should you get started?

Another benefit of lifetime gifting, says McGinnis, is that it gives you the chance not only to see your children or heirs enjoying their inheritances, it also provides you with information that can influence how you decide to handle subsequent gifts or bequests. If you think a gifting strategy could be helpful in achieving your long-term estate planning or legacy goals but aren’t sure how to proceed, consider starting small.

"You may want to start by utilizing your annual gift exclusion to see how your children or heirs handle the money they receive," says McGinnis. “A smaller gift can be a great starting point, and by observing how the recipient manages the gift, you can gauge what methods might make the most sense for larger gifts in the future.”