Tax-Efficient Gifting: Strategies to Share Your Wealth with the Next Generation

Are you concerned about your estate being subject to federal estate taxes? Or perhaps you’d like to see your loved ones benefit from your wealth during your lifetime rather than after you’re gone? If so, you’re not alone. Many individuals seek ways to pass wealth efficiently to the next generation while addressing the complexities of estate taxes.

In this article, we’ll explore multiple strategies for transferring wealth in a tax-efficient way. These approaches align with current laws and exemptions and aim to preserve as much of your estate as possible for your beneficiaries.

Understanding the Current Estate Tax Landscape

Estate taxes are a significant consideration for individuals with substantial wealth. In 2017, the Tax Cuts and Jobs Act brought a major shift to estate planning. It increased the federal estate tax exemption to $13.99 million per person (indexed for inflation). This doubles to $27.98 million for married couples, allowing a substantial amount of wealth to pass to heirs tax-free.

However, this elevated exemption is set to sunset at the end of 2025, reverting to pre-2017 levels unless Congress enacts new legislation. Most experts anticipate the exemption will drop to $7 million per person or $14 million for a married couple. This potential reduction makes now an opportune moment to assess your estate plan and consider strategies to take advantage of the current exemption levels.

SEE ALSO: Financial Planning Across Generations for Legacy and Continuity

What Does the Estate Tax Exemption Mean for You?

The estate tax exemption represents the amount of wealth an individual can transfer during their lifetime or at death without incurring federal estate taxes. Transfers exceeding this exemption are subject to a federal estate tax rate of up to 40%. This rate underscores the importance of carefully planning wealth transfers to minimize tax exposure and retain more of your assets within your family.

For example, if an estate valued at $30 million is subject to estate taxes after the exemption, the taxable portion could face a significant reduction due to the 40% tax rate. Utilizing the exemption strategically while it remains elevated can reduce this burden.

Strategies to Transfer Wealth Tax Efficiently

To lower your taxable estate and effectively transfer wealth, consider implementing one or more of the following strategies:

1. Annual Gift Exclusion

One of the simplest and most accessible estate planning strategies is leveraging the annual gift exclusion. In 2025, you can gift up to $19,000 per recipient, tax-free. For married couples, this amount doubles to $38,000 per recipient. These gifts do not count against your lifetime exemption.

If you have multiple heirs, such as children and grandchildren, the potential impact of annual gifts can compound significantly. For instance:

• If you have three married children and nine grandchildren, you can gift up to $570,000 annually without affecting your lifetime exemption, assuming you are married and also gifting to your children’s spouses.
• By repeating this process over several years, you can reduce your taxable estate while providing financial support to loved ones.

2. Superfunding 529 Plans

A 529 plan is a tax-advantaged vehicle for saving for education, but it also offers unique benefits for estate planning. Through a process known as superfunding, you can contribute up to five years’ worth of annual gifts in a single year.

For example, you and your spouse could contribute $1.71 million across the 529 plans of nine grandchildren in one year, without affecting your lifetime exemption ($38,000 x 5 years x 9 grandchildren). However, to fully benefit from this strategy, you must live for at least five years after the contribution; otherwise, a prorated portion of the gift will be included in your taxable estate. In addition, this strategy uses up your gifts to those grandchildren for the next 5 years, so it’s important to take into consideration any future gifting goals, or any gifts that might have already been given in the year of superfunding.

SEE ALSO: Estate Planning for Business Owners: Fostering a Legacy Beyond Retirement

3. Paying Educational Expenses Directly

Another effective method to reduce your taxable estate is by paying tuition directly to educational institutions. Payments made directly to schools are not considered gifts and do not count against either your annual gift exclusion or lifetime exemption.

This strategy allows you to:

• Cover tuition costs for loved ones while preserving other gifting opportunities.
• Combine direct tuition payments with annual gifts to provide comprehensive financial support for beneficiaries and maximize wealth transfer opportunities.

4. Paying Medical Expenses Directly

Similar to educational expenses, paying medical bills directly to healthcare providers is an effective way to reduce your taxable estate. These payments are also excluded from both the annual gift exclusion and the lifetime exemption.

For instance, if a family member incurs significant medical costs, you can pay those expenses directly to the provider without impacting your other gifting strategies. This approach can provide meaningful assistance while optimizing the use of available exclusions.

5. Freezing the Value of Your Estate

For individuals with larger estates, advanced strategies such as freezing the value of your estate can be highly effective. This often involves transferring assets to an irrevocable trust, locking in the current value of those assets for estate tax purposes.

Here’s an example:

• You transfer $13.61 million into an irrevocable trust today, utilizing your lifetime exemption. Speaking hypothetically, assume those assets grew to $40 million over the next 25 years.
• Because the assets were transferred out of your estate when they were worth $13.61 million, their subsequent appreciation is not subject to estate taxes, potentially saving millions in potential estate taxes.

This strategy requires careful planning and collaboration with an estate planning attorney and tax advisor to ensure compliance with applicable laws.

Key Considerations When Planning Your Estate

When implementing these strategies, it’s important to keep the following in mind:

• Work with Professionals: Estate planning often involves complex legal and financial considerations. Collaborating with an experienced estate planning attorney and CPA is essential for tailoring strategies to your unique situation.
• Stay Informed About Changes in Tax Laws: With the exemption set to change in 2026, it’s important to monitor legislative developments and adapt your plans as needed.
• Understand Your Goals: Whether your priority is supporting family members, funding education, or preserving wealth across generations, clearly defining your objectives will help guide your estate planning decisions.

Take Thoughtful Steps While Exemptions Are High

The elevated lifetime exemption presents a temporary opportunity to transfer wealth efficiently. By planning thoughtfully, you can reduce your taxable estate, provide financial support to your loved ones, and preserve more of your wealth for future generations. While no plan can fully predict future tax changes, taking action now can offer flexibility and control.

If you’d like to learn more about how these strategies could apply to your situation, we encourage you to consult with your financial advisor, estate planning attorney, or tax professional. Developing a personalized plan can make a meaningful contribution to achieving your wealth transfer goals.

Ready to start planning your estate? Schedule a no-obligation consultation with us at Paces Ferry Wealth Advisors to discuss your options.