What Are the Tax Implications of Gifting Assets in Estate Planning?
Estate planning encompasses more than just distributing assets after death; it also involves strategies to manage taxes, mitigate liabilities, and transfer wealth efficiently. One key part of estate planning is gifting assets during your lifetime.
While gifting can lower the value of your taxable estate, it’s important to understand the tax implications before taking action. When it comes to understanding estate planning services in Simsbury, Connecticut, and its surrounding areas, we possess the experience and knowledge necessary to assist. Reach out to our firm at Watterworth Law Offices today.
Federal Gift Tax Exemptions
The federal government allows individuals to gift a set amount each year without triggering gift taxes. For 2025, the annual exclusion is $19,000 per recipient, according to Wells Fargo.
Married couples can combine their exclusions and gift up to $38,000 per person. If a person exceeds this lifetime exemption, the excess is subject to a gift tax, with rates that may reach up to 40%.
Lifetime Exemption and Its Implications
The lifetime exemption allows you to transfer a large amount of wealth without paying federal estate or gift taxes. However, this exemption is set to drop after December 31, 2025, potentially returning to around $5 million, adjusted for inflation. If you’re planning large gifts, doing so before the exemption decreases could offer significant benefits.
Gifting Appreciated Assets
When you gift appreciated assets like stocks or real estate, the recipient inherits your cost basis. If they later sell the asset, they may owe capital gains tax on the full difference between the original purchase price and the sale amount.
This is distinct from inherited assets, which receive a stepped-up basis—essentially resetting the value to what it was on the date of the decedent's death. This step-up can significantly reduce capital gains tax for beneficiaries. Gifting during life doesn’t come with that same tax advantage.
Tax-Free Gifting Strategies
There are ways to transfer wealth without using your lifetime exemption or paying gift taxes. Consider these approaches:
Direct payments for medical or education expenses: You can pay medical bills or tuition directly to the provider or institution without it being considered a taxable gift.
Contributions to 529 Plans: You can contribute up to five years’ worth of annual exclusions in one lump sum. For 2025, the limit is up to $75,000 per donor, per beneficiary ($150,000 for married couples), provided you make no further gifts to that individual for five years.
Charitable gifts: Giving to qualified charities isn’t subject to gift tax and may provide an income tax deduction.
These strategies can help you maximize the impact of your gifts while minimizing tax consequences.
Gifting Strategies to Minimize Estate Taxes
With thoughtful planning, gifting can reduce the size of your estate and lower your potential estate tax liability. Some advanced gifting tools include:
Grantor Retained Annuity Trusts (GRATs): This type of trust lets you transfer assets to heirs while keeping the right to receive income for a set period. If you outlive the trust term, the remaining assets go to your beneficiaries with minimal tax consequences.
Irrevocable Life Insurance Trusts (ILITs): Life insurance payouts can be excluded from your taxable estate if ownership is transferred to an ILIT.
Dynasty Trusts: These long-term trusts allow wealth to pass down several generations without incurring additional estate or generation-skipping transfer taxes.
By incorporating these strategies into your estate plan, you can preserve more wealth for future generations while effectively managing estate tax exposure.
State-Specific Considerations in Connecticut
Connecticut is one of the few states that imposes its estate tax. As of 2025, the threshold for taxation is $12.92 million. Unlike the federal system, Connecticut doesn't have an active gift tax.
However, gifts made within two years before death may be pulled back into the estate for tax purposes. So, while gifting may still be an effective strategy, it’s important to understand how state law treats those transfers.
Potential Pitfalls in Gifting
Despite the benefits, gifting comes with risks that should be carefully weighed.
Loss of control: Once a gift is made, it legally belongs to the recipient. If you’re not ready to give up full ownership, gifting may not be right for you.
Impact on eligibility for public benefits: Large gifts could affect a beneficiary’s ability to qualify for means-tested benefits like Medicaid.
Capital gains tax exposure: As mentioned earlier, the recipient inherits your cost basis for appreciated property. If the asset is later sold, the tax burden could be significant.
Understanding these potential pitfalls is essential to make sure your gifting strategy aligns with both your financial goals and the needs of your beneficiaries.
Timing and Valuation
Timing matters when it comes to gifts. Market fluctuations, changes in tax law, and personal financial needs can influence whether it’s a good time to transfer assets.
When gifting non-cash assets—such as business interests, artwork, or real estate—it’s also important to obtain a proper valuation. The IRS may challenge undervalued transfers, which could result in tax penalties.
Gifting to Minors and Use of Custodial Accounts
Gifting to children or grandchildren often involves additional planning. Instead of giving directly, many people use custodial accounts under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA).
According to Fidelity, these accounts allow minors to receive property without needing a trust. However, once the child reaches a certain age—usually 18 or 21—they gain full control. If you're looking for longer-term management, a trust might be a better option.
Gifting and Retirement Planning
Gifting should also be weighed against your own financial needs. While reducing your estate may be a goal, you’ll still need enough resources to cover retirement, healthcare, and unexpected expenses.
Before making large gifts, review your long-term financial outlook. Even well-intentioned gifts can create strain if they’re made without a full understanding of future needs.
When Business Interests Are Involved
Transferring shares of a family-owned business raises unique questions. Gifting interests in a company can reduce estate size while allowing the business to stay in the family.
However, valuation is key, and structured gifts—like limited partnership interests or voting shares—can help balance tax concerns with management goals. It's critical to track any control retained after the gift, as that could affect how the IRS treats the transfer.
Coordination With Other Estate Planning Tools
Gifting shouldn’t be done in isolation. Every action should be part of a broader estate planning strategy that considers wills, trusts, powers of attorney, and healthcare directives. Gifts made today affect what’s available later, both in terms of assets and tax exemptions.
If gifts are substantial or involve valuable property, they may shift the need for future revisions to the overall estate plan.
Recordkeeping and Reporting
The IRS requires that gifts exceeding the annual exclusion be reported using Form 709. Although most people won’t owe tax due to the lifetime exemption, failing to file could create issues down the line.
Accurate documentation of gifts, their value, and the date of transfer helps protect both the giver and the recipient. Good records also support any future audits or estate administration processes.
Gifting is a powerful tool in estate planning. It can reduce estate tax, support loved ones during your lifetime, and pass along wealth in thoughtful ways. Strategic gifting also allows you to witness the positive impact of your generosity, strengthen family bonds, and transfer assets efficiently while minimizing future probate complications and delays.
Experienced Legal Support
Estate planning can be confusing. Allow us to assist you along the way. We serve clients in Simsbury, Connecticut, as well as clients across Hartford County, Litchfield County, and Tolland County. For more information, reach out to our firm at Watterworth Law Offices today.
