- posted: Feb. 18, 2025
- Estate Planning, Tax Planning
The federal gift and estate tax annual exclusion allows you to give away a certain amount of your property to another person each year tax-free. As of 2025, the exclusion lets individuals gift up to $19,000 per recipient. For married couples, the exclusion is up to $38,000 per recipient annually.
By strategically utilizing the annual gift and estate tax exclusion, you can incrementally reduce the size of your taxable estate. Regularly making annual gifts allows for the transfer of assets without utilizing any portion of your lifetime gift and estate tax exemption. The lifetime exemption has increased to $13.99 million per individual in 2025, up from $13.61 million in 2024. This means that over the course of your lifetime, you can transfer assets up to this amount without incurring federal estate or gift taxes.
Over time, this approach can significantly lower the value of your estate, potentially reducing or eliminating estate taxes upon your passing. However, you should be aware of potential pitfalls associated with this strategy:
Carryover basis for recipients — The gift recipient inherits your original cost basis. This means that if the asset has appreciated significantly, the recipient faces substantial capital gains taxes upon selling the asset. In contrast, assets transferred through an estate receive a "step-up" in basis to their fair market value at the time of death, potentially minimizing capital gains taxes.
Impact on lifetime exemption — While annual gifts do not count against your lifetime exemption, any gifts exceeding the annual exclusion do. This reduces the amount available to shield your estate from taxes upon your death. monitor cumulative gifts to ensure they don't inadvertently trigger gift taxes or diminish your lifetime exemption more than intended.
Loss of control over gifted assets — Once a gift is made, you relinquish control over the asset. This means you cannot dictate how the recipient uses the gift, and the asset is no longer available for your personal needs. Ensure that gifting does not compromise your financial security, especially considering potential future expenses like healthcare.
Documentation and compliance — Proper documentation of gifts is essential for larger estates that may be subject to taxes. Failing to file necessary gift tax returns or adequately document gifts can lead to complications with the IRS. Even if no tax is due, filing Form 709 for gifts exceeding the annual exclusion is required.
While the annual exclusion is a valuable tool for reducing your taxable estate, it's imperative to consider the broader implications of gifting. Consulting with a qualified estate planning attorney can help ensure that your gifting strategy aligns with your overall financial goals and estate planning objectives.
The firm of Favaro, Lavezzo, Gill, Caretti & Heppell, PC, based in Vallejo, California, offers skillful guidance in preparing, establishing and managing effective estate plans For individuals in Solano, Contra Costa and Napa counties. Call us at 707-674-6057 or contact us online to schedule a consultation.
