Strategic Gift Giving to Beneficiaries

The IRS raised the gift tax allowance for 2023, up $1,000 from last year, to adjust for inflation. Individuals can provide a tax-free gift, whereby no filing is required, of $17,000 per recipient annually. While the greatest gift may be that of financial giving, the IRS wants its cut of anything over the gift tax limit. Yet, there are certain ways to avoid paying tax when the gift giving is structured correctly.


When gifting assets of cash or property to someone, be it a friend or a relative, the government might want to know more about it, and may decide to take a cut, which the IRS calls the “gift tax.” Common strategies to avoid paying a gift tax and reporting include using:

  • The Annual Gift Tax Exclusion
  • The Lifetime Estate Tax Exemption
  • Giving Non-Taxable Gifts

The Annual Gift Tax Exclusion, for 2023, requires gifts valued above $17,000 to be reported. However, taxpayers filing jointly may split a gift, which doubles the gift amount between them.


For example, Jack gives his Uncle John $34,000 as a wedding gift. If Jack is single, filing taxes individually, the IRS will require him to report this gift amount. However, if Jack is married and filing jointly with his spouse, he may split the amount between them. Now the amount is treated as two separate gifts of $17,000, and no reporting is required to Uncle Sam!


To be clear, gifts valued above $17,000 are not necessarily taxable, but every dollar over the limit will apply to the Lifetime Exclusion. Once this exclusion is exceeded, the gift tax becomes due and must be paid to the IRS.


Case in point, Jack and Jane give their daughter $200,000. This gift could be treated as $100,000 from Jack and $100,000 from Jane. However, with the limit being $17,000 per gift, both parents exceeded the gifting limit by $83,000 each. Does this mean they will pay tax on it? Not necessarily.


The Lifetime Gift Tax Exemption:


With the Lifetime Exemption, the IRS allows a certain amount of assets from an estate to be gifted within a person’s lifetime before it would be necessary to pay gift tax. In 2023, the Lifetime Exclusion is $12.92 million per taxpayer, or double this amount for taxpayers filing jointly. This exclusion allows benefactors to eliminate gift and estate tax for the combination of:

  1. Gifts given in a lifetime, and
  2. The value of the estate left to one’s beneficiaries.

Today, the total of these items exceeding the Lifetime Exclusion of $12.92 million is taxed at 40%. It’s a high bar; however, the Lifetime Exclusion amount is due to revert to the old amount of $5.49 million after 2025 (adjusted for inflation) if the current phase out is not extended. To illustrate, it’s like filling a bucket, and once it overflows, the IRS wants to tax the excess. Still, there are ways to minimize the proverbial spillage and tax paid. Annual gifting is one way to provide for beneficiaries and should be seriously considered.


Strategized gift giving, prior to death, ensures any financial transfers count as gifts and not inheritance, which enables the advantages of the Annual Gift Tax Exclusion to be paired with the Lifetime Exemption and will minimize excess taxable transfers. It also allows the opportunity to see beneficiaries enjoy the financial gifts given them today.


Gifting assets while living may help avoid potential taxation on an asset’s increased value. For instance, if an individual gives their entire estate of $12.92 million to their children today, those assets could appreciate in value. At a growth rate of 5% per year for 10 years, that $12.92 million gift might end up being worth over $19 million by 2033. This strategy provides heirs the entire inheritance amount free from gift or estate taxes. When weighed against holding those same assets until passing away 10 years later, the increase in value would be taxed at the Federal gift and estate tax rate of 40%. Should the gift and estate tax exemption revert to the lower $5.49 million amount (for dates after 2025), the result would be an even larger estate tax amount upon passing.


The Lifetime Gift Tax Exemption hits $12.92 million in 2023.


The $12.92 million exception is temporary and only applies to tax years up to 2025, at which time it will revert to the $5.49 million exemption (adjusted for inflation); although Congress may decide to make these changes permanent. Considering the exemption may expire after 2025, it might be a smart move to take advantage of the increased exemption now.


The IRS does not treat all gifts equally, and there are certain types of gifts with no taxable limits. Benefactors should strongly consider the following non-taxable gifts:

  • Tuition or medical expenses paid for someone (the educational and medical exclusions)
  • Gifts to a spouse
  • Gifts to a political organization for its use
  • Gifts to qualifying charities (which are also deductible)

One exemplary method of optimizing these rules would be to pay $50,000 tuition toward a grandchild’s educational expenses by making payments directly to the university each year. Then, in addition, gifting $17,000 tax-free to the same grandchild annually ($34,000 if split between taxpayers filing jointly).


Another important consideration for benefactors to keep in mind is whether the assets will appreciate. When the gifted assets appreciate, the cost basis in the asset’s value will transfer to the recipient. If a gifted asset significantly appreciates prior to and after the gift, the recipient could incur a substantial taxable gain when selling that asset. If, however, that same gift is part of an estate on death, it will receive a “step-up” basis, which means the beneficiary will receive the asset at its fair market value, instead of at its original cost. This means if the recipient were to sell the asset shortly after receipt, only minimal capital gains would be realized.


Cash and assets with little appreciation make the best gifts, while highly appreciated assets are best transferred as part of the estate.


A concern some benefactors have with giving assets away early is the age of the person receiving the gift. A young child or teen may not be ready to handle the responsibility of managing a large amount of money or assets. An option for gifting enormous assets and ensuring protection from misuse is to set up an irrevocable trust with the minor listed as the beneficiary.


This method allows the benefactor to establish the rules to be set for the trust, along with instructions on how to invest and distribute the assets. One example is to create a trust that stipulates the beneficiary may only have access to the income generated once the beneficiary graduates from college. It is also possible to specify criteria regarding when the trust would distribute the assets, such as by age, circumstances, etc. It’s important to note there are many options when structuring a trust, with each state having its own rules.


In summary, lifetime gifting can be an excellent strategy, provided enough remains for personal living expenses. For the gift to count, it must be a complete and irrevocable transfer. While this article focuses on the federal tax implications for gifting and estates, there might also be state tax consequences for gifts and estate assets. Take the time to meet with a tax and estate planning professional who will help ensure all gifts and estate plans are well-advised and properly implemented.


IRS FAQs on Gift Taxes


Author, Jonathan Sussman

Senior Tax Associate

Spiegel Accountancy





Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.