As we approach the end of the year, it is the perfect time to review your business and personal tax situations. This article explores wealth planning strategies and recent legislation changes to help you plan for 2025.
Year-end is the traditional gift-giving season for many individuals and couples. If you haven’t already given gifts, it’s crucial to remember the opportunities and limitations and plan accordingly.
Currently, the annual gift tax exclusion allows each taxpayer to give up to $18,000 to an unlimited number of individuals, free of gift taxes. For married couples, the exclusion doubles to $36,000 per recipient, so long as both spouses consent to the gift, or if community property is given. Community property can be given directly to the recipient or placed in a trust that meets specific conditions.
It’s important to note that in 2025, the annual gift tax exclusion will increase to $19,000 per taxpayer and $38,000 for married couples.
For larger gifts, or gifts that exceed the annual amount or do not qualify for the exclusion, consider using the lifetime gift tax exemption. Similarly, this strategy removes future appreciation and accumulated income from the donor’s estate. Currently, the lifetime exemption is $13.61 million per person ($27.22 million for married couples) and will increase to $13.99 million in 2025.
Understanding the annual and lifetime gift limitations is the first step. Let’s explore various strategies you can leverage to maximize your gift giving whether now or in the future.
Give the gift of education and health
In addition to the annual exclusion and unified credit, individuals can make direct payments for tuition to any qualified educational organization, including nursery schools, without the imposition of a gift tax. Payments made directly to medical providers for healthcare expenses are also exempt from the gift tax.
For those looking to contribute towards an Education Savings Account (ESA), up to $2,000 per beneficiary can be contributed into a Coverdell ESA annually. Certain income limitations apply, but contributions are not limited to parents. Grandparents, aunts, uncles and cousins may also contribute to an ESA on behalf of a beneficiary, so long as contributions do not exceed $2,000 in any year, up until age 18. These distributions are tax-free, provided they are used for qualified educational expenses. However, contributions are not tax deductible.
Additionally, family members may establish a 529 plan or a Qualified Tuition Program (QTP). Earnings within a 529 plan are tax-deferred, and qualified distributions to, or for the benefit of a designated beneficiary, are tax-free if used towards eligible educational expenses. In 2024, individuals may contribute up to $18,000 per year without incurring a gift tax. A donor may elect to utilize both the current and the four subsequent years’ annual exclusions for contributions made to a 529 plan, without incurring a gift tax on the distribution of funds. 529 plans also allow for a change in beneficiaries.
However, there are a few drawbacks to a 529 plan, including the possibility of the plan disqualifying a student for financial aid eligibility and the restriction of gift discounts to only cash gifts. Additionally, if a donor dies within five years of contributions made to a 529 or QTP plan, the “unexpired amounts” are included in the donor’s estate, i.e. amounts exceeding the annual exclusion amount that would have been applicable in the preceding years due to the donor electing to accelerate the annual exclusions for a gift. If the donor made direct, nonrefundable pre-payments of tuition to the educational institution instead, then no amounts are included in the estate of the donor, regardless of when the transfers were made prior to death.
Give the gift of retirement
If your child or grandchild has earned income, consider helping them establish an IRA with contributions of up to $7,000 or the amount of their total earned income, whichever is lower. This is a gift that keeps on giving, as it offers tax-deferred growth. If the taxpayer owns a business, then the child or grandchild may be hired for summer or holiday work to ensure that he or she has at least $7,000 in earnings. The IRA may be funded from the annual gift tax exclusion, as long as the child/grandchild is the one who established the IRA, and they have the income earnings required. A ROTH IRA should be considered if the child otherwise meets the requirements for contribution to a ROTH.
Give the gift of property or cash
One way to maximize your gifts is to give property that will appreciate. The future appreciation, along with the income on the property, is removed from the donor’s estate and passes it to a younger generation.
However, what is often overlooked when dealing with gifts of appreciated property is the fact these gifts have inherent capital gains. When the property is sold by the recipient, they often receive less as a gift than intended because of the income taxes they are forced to pay. Depending on your situation, you may want to consider a cash gift instead of property, so the recipient will not have any additional income tax consequences related to the gift. This allows the donor to sell or hold the appreciated property until their death for the step-up basis.
Step-up basis is a tax provision that adjusts the cost basis of an inherited asset to its fair market value, adjusted to the date of the previous owner’s death. For example, if someone inherits a property originally purchased for $100,000, that is worth $500,000 at the time of the owner’s death, the property value is ‘stepped-up’ to $500,000. This results in the heir to the property not having to pay capital gains tax upon the sale of the property. There are multiple exceptions to this rule, please consult a tax advisor when making personal plans.
If you would still like to give appreciated property to the next generation instead of cash, you can do so using an intentionally defective grantor trust (IDGT). The IDGT is beneficial when transferring assets like property to children or grandchildren because it allows the grantor to continue paying the income tax on the property held in the trust. This is a win-win for the beneficiary since they do not have to pay income taxes on the property and or the money earned.
Make a distribution from your retirement plans
Taxpayers reaching retirement age must plan for their minimum required distributions from an IRA (not including a Roth IRA) or other retirement plan. Depending on the type of plan and the individual's current employment status, required distributions may be able to be postponed until retirement. The IRS has issued final regulations regarding the minimum required distributions for calendar year 2025 and later years. The regulations include revised life expectancy tables. Questions on required distributions? Read more here.
Another possibility to explore is naming a charity as the beneficiary of a retirement plan. A taxpayer that is already considering a testamentary gift to a charity, as well as a gift to their heirs, will actually leave more for their heirs if the charity is designated as the beneficiary of any retirement accounts. Retirement benefits are taxable as ordinary income to whomever receives them. However, charities do not pay income taxes.
Purchase a vacation home
Vacation homes are commonly given away, but is there a way to make the most of this gift? It can be beneficial to give the gift through a qualified personal residence trust (QPRT). This allows the gift to be given at a discount.
Crummey withdrawal letter
There are many methods to consider when it comes to gift giving. Another strategy to think about is a Crummey trust, which is a type of irrevocable trust that allows the grantor to make financial gifts to beneficiaries while also taking advantage of the annual gift tax exclusion.
A Crummey withdrawal letter is a notification sent to the beneficiaries of the trust, informing them of their right to withdraw a portion of the contributions. These letters must be sent every year in order to ensure that certain transfers to trusts qualify for the annual exclusion. If they are not sent and the trust requires them, the gifts will not qualify for annual exclusions and will be fully taxable.
Please proceed with caution: Even if the gift qualifies for the gift tax annual exclusion because of withdrawal rights, it won't necessarily (and usually doesn't) qualify for the generation skipping tax annual exclusion. Therefore, a gift tax return may be necessary to allocate a portion of the donor's GST exemption to the trust even if the gift is $18,000 or less.
It is important to review trusts to coordinate gift withdrawal rights. Check all trust instruments and make sure those ‘Crummey’ letters are all sent.
Planning for 2025
As we approach year-end, it’s crucial to understand the annual and lifetime gift limitations to ensure you are establishing strategies that best fit your financial goals. It’s also important to consider the following while determining how gift-giving fits into your estate plan:
Gather tax information in January and leave enough time for valuation. Making current gifts in January as opposed to December ensures more income and future appreciation is removed from the donor’s estate.
Many states are enacting changes to their own estate tax to counter the federal elimination of the state death tax credit. State statues should be reviewed prior to filing returns or estate planning.
The 65-day rule for distributions from a trust applies to estates as well. Make sure to review all trusts and estates to see if beneficiaries would benefit from the reclassification of post-year distributions as prior-year distributions.
Retirement plan contributions made early in the year start earning deferred income sooner. In addition, compensation limits have generally been increased, making certain taxpayers eligible for additional elective deferrals. Make sure to review these rules to determine your maximum contributions.
When making gifts to a non-U.S. resident or corporation, make sure to consult a tax advisor and review all designated trustees to ensure the trust has not been classified as a foreign trust.
Taxpayers are facing the potential expiration of many TCJA provisions at the end of 2025. Though the Republican sweep of the 2024 elections increases the likelihood they will be extended, it is not guaranteed Should these provisions expire, most taxpayers may see a significant increase in their tax liabilities beginning Jan. 1, 2026.
Beyond the financial benefits towards your personal wealth, gift giving is an opportunity to establish a lasting legacy and secure the financial future of your loved ones and generations to come.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
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