Mary Lago, CFP®, CTFA
Chief Wealth Strategist
Principal
According to the latest report by Cerulli & Associates, $124 trillion is expected to change hands by 2048. Just under 15% is expected to be given to charity and the remaining balance will go to heirs.
When it comes to transferring wealth, individuals often grapple with the decision of whether to complete significant gifts during their lifetime or transfer all assets through their estate. The most thoughtful outcomes will be shaped by assessing financial capacity, specific motivations and the potential tax ramifications. Prior to completing gifts, it is important to communicate any expectations to heirs. Building alignment sets the stage for the gift to be rewarding for both the giver and receiver.
Capacity: An advisable first step in considering lifetime gifts is to determine your capacity to gift. In other words, based on your financial circumstances, risk tolerance and lifestyle goals, what is the excess that you can afford to share with others?
Specific motivations and structure: Gifting can take a variety of forms. Examples include supporting goals such as financial freedom for beneficiaries, reducing estate taxes while not creating dependency or limiting motivations for independent successes and building financial stewardship. For instance, sharing influence over philanthropic resources may also be used to open discussions about values and our responsibility to give back. Establishing educational accounts, such as 529 accounts, communicates the value placed on educating future generations. Helping early-career family members establish Roth IRAs can engage the next generation in building investment knowledge and awareness of tax-savvy planning. Irrevocable trusts can provide a stable income source or restrict access to funds until certain ages or life goals are achieved.
Tax considerations: With a 40% federal estate tax rate and some states imposing additional estate taxes, mitigating the tax bite is a worthy consideration. Under current law, each individual can gift up to $13.99 million either during their life or upon their death without incurring the federal estate tax. The potential tax advantages of gifting this amount during your life include:
Future appreciation of the assets accrues to the beneficiary(ies) and occurs outside of your taxable estate.
Certainty as to the existing tax rules. Using the current exemption, does not reduce your access to any future higher limits but it does protect you from potentially lower future exemptions as tax policy evolves.
Avoiding most state-level taxes (only the state of Connecticut has a gift tax)
While lifetime gifting can reduce estate taxes, it may result in higher capital gains taxes for beneficiaries. When assets are gifted during the donor’s lifetime, the recipient assumes the donor’s original basis in the assets. If the recipient later sells the assets, they may owe capital gains tax on any appreciation that occurred since the donor acquired the assets. In contrast, assets retained until death benefit from the step-up in basis, potentially eliminating or significantly reducing capital gains tax liability for beneficiaries.
Separate from the lifetime exemption, each individual may gift up to the annual exclusion limit ($19,000 for 2025) to other individuals each year. For example, a couple could give $38,000 to each of their children. This lifetime gifting approach can compound to meaningfully reduce one’s taxable estate over time.
There are special rules that apply to funding 529 college savings plans that allow for up to five years of annual exclusion gifts (5 x $19,000 = $95,000) without triggering gift tax.
Perhaps less well known, in addition to the lifetime exclusion, annual exemption and (continued) superfunding of 529 accounts, benefactors can pay for medical bills and tuition. To qualify, the funds must be sent directly to the health care provider or educational institution and meet certain rules.
Depending on specific assets and circumstances, a staged approach incorporating both lifetime gifting and retaining assets for personal use that will benefit from a step-up in cost basis may be most compelling from both a personal impact and tax perspective.
Before initiating significant gifts, it is important to have a strong understanding of how the various rules would apply to your specific circumstances to determine which strategies will be most effective in accomplishing your goals.
Ferguson Wellman, Octavia Group and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. We believe the information provided is from reliable sources but should not be assumed accurate or complete. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.